Phil's Stock World

Iron Condor

The textbook definition of the Iron Condor:

An advanced options strategy that involves buying and holding four different options with different strike prices. The iron condor is constructed by holding a long and short position in two different strangle strategies. A strangle is created by buying or selling a call option and a put option with different strike prices, but the same expiration date. The potential for profit or loss is limited in this strategy because an offsetting strangle is positioned around the two options that make up the strangle at the middle strike prices.

This strategy is mainly used when a trader has a neutral outlook on the movement of the underlying security from which the options are derived. An iron condor is very similar in structure to an iron butterfly, but the two options located in the center of the pattern do not have the same strike prices. Having a strangle at the two middle strike prices widens the area for profit, but also lowers the profit potential.

Wow… that was a mouthful. The truth is just learning the procedures or the text book definitions of trades doesn’t help. There are a number of different strategies you should be using in order to spot when and where to apply the iron condor, things we can help show you.

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The best of the worst, to me, is P&G, and not just because they are literally throwing in the towel – selling their European towel unit, which gives me an excuse to put up another picture of Towelie, but because they’ve done an amazing job integrating Gillette already, growing net income from $1.7Bn a quarter (average) in ’05 to $2.7Bn in Q3 and $2.8Bn in Q4 and they already have a 23% market share in developing countries and the management expects to "derive $14Bn to $16B in synergies from this (Gillette) combination over time. While they may dip down and test the 200 dma at $61 (they’ve come so close, why not at least pay a visit?), we can start accumulating PG for our Long-Term Portfolio by picking up the Jan ’09 $65 calls for $5.70. We will wait to sell calls against it but if this is a real rally, these guys should come out like champs over time. On Feb 20th, these contracts were trading at $7.75!

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