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BHP Short Iron Condor

Whilst the market and many stocks are starting to struggle for direction we look for strategies that can profit by not needing to get the direction 100% correct. Exchange traded options gives you the ability to profit from time decay and changes in implied volatility.

The short Iron Condor is an options strategy that both can profit from time decaying and a fall in Implied Volatility. Today I have set up this strategy on BHP as it has been ranged bound for a long period of time and implied volatility is high and is starting to fall again.

You can see by the above chart that BHP has very strong support at 30.75 and strong resistance at 34.50. BHP has been channelling for quite some time and with uncertainty around crude oil holding them back, but positive news around a special dividend and share buyback to hold them up so we suspect the channel will likely hold in the short term.

To make the maximum profit of $2,250 (pre costs) on this trade we will need BHP to stay between 31.01 and 34.51 until the 29th of November, which is only three and a half weeks away. Additionally, if this were to happen there would be no charge in brokerage to close the trade, as the options expire worthless.

The loss on the trade is capped at $5,250 which will only occur if BHP closed below 30.01 or above 35.51 on the 29th November. Keep in mind you can close before this occurs if the channel breaks.

You can see from the above payoff matrix how much profit or loss the trade can occur until the 29th November expiry, over different share prices. If 34.50 were to break you closed quickly you may only lose between $1,613 – $825 depending on timing. Also, if 30.75 broke the loss may only be around $1,500 – $1,800.  The above doesn’t take into consideration changes in implied volatility.

I use a combination of ETOs and Mini Warrants. Options give me access to strategies both in reporting season and when the market goes sideways. Minis are a great way to trade a directional view having an embedded stop loss feature.

Using a combination of Options and Mini Warrants gives me access to over 200 shares, indices locally and offshore, and a selection of commodities, all traded through the ASX. This is important to have peace of mind that my trading bank is safe, and the other side of my trade is guaranteed once filled.

We run courses face to face on both Mini Warrants and Exchange Traded Options. This gives you the chance to learn from experienced traders and get to meet the traders and advisors on the desk.

Happy Trading

Tim Michaelides

Head Trader