Collecting premium in a choppy stock market

With the market remaining choppy in December, many traders are concerned over the shakiness markets have shown on these new highs. Uncertainty at these levels has increased volatility, but with increased volatility comes opportunity.

As volatility increases options premiums increase with it. While it is very difficult to profit in sideways markets using futures or equities, it is much easier to set up strategies using options that will profit in a sideways or range bound market. There are a number of strategies a trader can employ that will have them short volatility and long time decay in a directionally neutral set up. 

We will look at options on E-mini S&P 500 futures (CME:ESZ13) as these are the most liquid and heavily traded options on futures.  To set up a trade, we first must calculate our implied move. With March E-mini S&P 500 futures trading around 1,770 we can look at the January 1770 strike straddle and use it to calculate an expected move by January expiration. With the straddle trading at 60 points we can now calculate an upside and downside target of 1,830 and 1,710 respectively. With our implied targets in place we can now look to set up a strategy that will profit should the market close within this range on January expiration.

The strategy we will employ is known as an iron condor. It is the same as selling two out-of-the-money vertical spreads and profits in a sideways market. In this trade a trader can profit in a very wide rage and will profit more than 50% on their risk anywhere in that range.

Trade: The ES Jan 1705-1710-1830-1835 Iron Condor for $1.75 Net Credit
Risk: $162.50 per 1 lot
Reward: $87.50 per 1 lot
Breakeven: 1708.25 and 1831.75

About the Author
James Ramelli

James Ramelli is the Moderator of the Live Futures Options Trading Room at KeeneOnTheMarket.com where he actively trades futures and options on futures while educating members on strategies, setups and risk management. He has a degree in Finance with a focus in Derivatives Trading and Financial Engineering from The University of Illinois and has been trading for five years. James appears regularly on Bloomberg T.V. and BNN and writes a weekly column for Futures Magazine.

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