Gaining an Edge Using Income Option Strategies

In a prior article we spoke about SPECULATIVE OPTION STRATEGIES and what they represented in the area of risk and probability. While keeping those ideas in mind we will be able to distinguish the advantages that come into play while using INCOME OPTION STRATEGIES.

In an INCOME OPTION STRATEGY the astute OPTION STRATEGIST will enter into a position where an edge can be gained. The strategist can use several methods to achieve an edge based on the observations made in the underlying stock or index. For this article we will use an IRON CONDOR to point out the differences between SPECULATIVE and INCOME OPTION STRATEGIES and talk about the EDGE that it will provide.

If we observed that ABC has been trading in a range between $50 and $60 for the past six months and is now trading at $55, we could put on an IRON CONDOR which in other words is selling two VERTICAL SPREADS that are OUT OF THE MONEY on both sides. The August 60 Calls are sold for $2.50 while simultaneously buying the August 65’s for .25. On the other side we will sell the August 50 Puts for 2.50 while simultaneously buying the August 55 Puts for .45. For illustration purposes we will base this IRON CONDOR position on 10 CONTRACTS all the way around (excluding commissions) the entry for this particular IRON CONDOR will bring us a NET CREDIT of $4,300.

We can now use the details of our ABC IRON CONDOR to point out the advantages of INCOME OPTION STRATEGIES and how they can be a good candidate for the Option Strategist’s option portfolio.



First of all we can see that this particular position has a limited profit potential of $4,300 along with a maximum loss potential of $700. With ABC trading at $55 you can see that this position has plenty of room to breathe and even with a 5 point move in either direction it will still make its maximum profit of $4300. ABC can move up to 9 points in either direction and this position will still turn a profit. As mentioned before we know that ABC has remained in a trading range between $50 and $60 for the past 6 months and we know that the probability of success in this trade is certainly in our favor.

We should be aware of what an INCOME OPTION STRATEGY provides compared to the SPECULATIVE OPTION STRATEGIES that were talked about in my prior article. Although the profit potential is limited in this particular strategy, the EDGE that is gained makes it very attractive and offers a HIGH PROBABILITY of success with an excellent amount of flexibility, not to mention an attractive risk/reward.

Frank Kneipher