Questions on a Strategy

[jasesmit]

Howdy,
I have a strategy I am looking at and would like some advice from people in the know... I would use the QQQQ... Let's say QQQQ is around 39... Then I would buy the 41 call and sell the 40 call... but I would also cover the other side as I would buy the 37 put and sell the 38 put... I have been paper trading for a while and it seems to work in a perfect world... The only problem I see is that commisions would be horrible... I'm probably wrong so I thought I would ask before I do anything stupid... Thanks for any info....

Jason

 

[MTE]

The strategy you're talking about is called an Iron Condor. That is, you're selling an Iron Condor. It consists of a OTM short call vertical and an OTM short put vertical. You maximum profit is limited to the intial net credit received and is achieved if the stock is between the short strikes at expiry, and you maximum loss is limited to the difference between the call or put strikes (i.e. in your example, 1 point) less intial credit and is achieved if the stock is either above the long call strike or below the long put strike at expiry. For example, if you sell a 37/38/40/41 Iron Condor for 0.3 then your max profit is 0.3 is achieved if QQQQ is between 38 and 40 at expiry, and max loss is 0.7 happens if QQQQ is above 41 or below 37 at expiry.

It is a fairly popular strategy for range-bound markets.

Have a look at this thread, although it talks about selling verticals, most of the time the guy ends up with Iron Condors:www.elitetrader.com/vb/showthread.php?s=&threadid=49586