In the past three lessons we looked at how to bring in income from ETFs with covered calls, credit spreads, and ratio spreads. Today we’ll look at how to bring in income when ETFs are moving sideways.
One of the best strategies for traders to bring in income in sideways markets is to use Iron Condors.
What are Iron Condors? They’re simply credit spreads on both sides of a security.
Let’s go back to our example using the SPY. Let’s say the SPY is trading at 80 and you believe the market will move sideways for awhile. In order to profit from this, you can sell for example the 82 calls and buy an equal amount of 84 calls. At the same time you can sell the 78 puts and buy an equal amount of 76 puts. Therefore you will be taking in a credit on each side. Should the ETF stay within 78 and 82, it will remain out of the money on both sides and you’ll likely profitable once you close it. Your risk is the credit you took in minus the difference from the furthest strike you bought (in this case 4 points). Many professional traders use Iron Condors when they believe that volatility will be dropping in a security and they want to take advantage of that situation. It’s considered a low risk trade, especially when you the volatility of the ETF is going to decline and the ETF is going to be range bound.
In a future lesson, I’ll teach you how to find these times.
For more information on how to construct an Iron Condor, you can find it here:
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.