Don’t look now but the top three performing sectors over the past month haven’t exactly been a motley crew of momentum names. SPDR Select Health Care (NYSE: XLV), SPDR Select Utilities (NYSE:XLU), and SPDR Select Consumer Staples (NYSE: XLP) have led the charge by registering the strongest gains over the past 30 days. The rotation into these defensive sectors could be one signal that the upward trajectory of the market may be in for some slowing in the near future. Couple that with the fact that summer is fast approaching and we may have an environment where options trading investors should be adding some neutral plays to their portfolios.
One of the more popular multi leg spreads used by savvy option traders to exploit a range-bound market and profit from time decay is the iron condor. This flying strategy consists of selling a vertical put and call spread simultaneously. The main idea behind the play is to sell out-of-the-money spreads which we expect to expire worthless or at least diminish in value over time so we can buy them back at a cheaper price. Consider the following June condor on the SPDR S&P 500 (NYSE: SPY). It closed yesterday at 135.87.
Option Trade – SPY June Iron Condor
Sell the SPY June 126 — 123 Put Spread and the SPY June 140 — 143 Call Spread. This is for the options expiring on June 18; check the option chains for the latest bid-ask spreads and prices.
Sell to open the 126 put and 140 call while buying to open the 123 put and 143 call. At current prices the trade could be entered around a $.62 net credit. Provided SPY remains between the short strike prices of the spread (126 and 140) by June expiration traders could capture the entire $.62 of potential profit.
The max risk of this spread is limited to $2.38. That is calculated by taking the difference between the strikes, in this case the sold 126 put and the purchased 123 put, and subtracting the credit of $.62. So 3.00 – .62 = $2.38.
In the chart below the serrated lines highlight the profit zone at June expiration.
(Source: MachTrader)
At the time of this writing Tyler Craig had no positions on SPY
Follow Tyler Craig on Twitter@TylersTrading.
