Josip Causic

Flying High With Iron Condors

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In this article, I will go over an "iron condor" trade that I did a while ago. I've chosen to do this now because, honestly, the last part of 2008 was not the correct environment for the iron condor strategy.

The iron condor is a strategy that works well in sideways markets. In the last half of 2008, we had a "trending" market, and every owner of a 401(k) or an IRA account knows which direction the equity market was trending: way south.

Anyhow, let's define an iron condor as a complex spread trade used in the directionless market environment.

More specifically, an iron condor is an option strategy composed of two vertical credit spreads, namely a bear call and a bull put. Both of these two verticals are credit strategies , and those who wish to review the basic concept of a bull put, can go back to my article, "Credit Spreads versus Debit Spreads."

How I Got In

When searching for an iron condor candidate, one should look for the chart that shows price fluctuations within a certain range over a period of time. Professional "Condor-ians" do them explicitly on the indices, mostly due to the tax advantage. In my case, I selected the ETF that tracks the Russell 2000 as the best suited at the time of the entry.

The chart below shows the iShares Trust Russell 2000 Index Fund (IWM) that I was looking at June 3, 2008, the time of entry. I noticed that the 75 area had acted in the past as a resistance level; while as a possible short-term support I noticed the 70 area.

(Click here to see a larger version of this chart.)

I marked a channel on the IWM chart in yellow, and one can observe that the price action did not penetrate either the support (70) or resistance (75) for the previous six weeks. This brings us to the point of month selection.