A Great Options Strategy to Generate Income

NYSE: SPY | SPDR S&P 500 ETF Trust News, Ratings, and Charts

SPY – Working on the assumption of a range-bound or consolidating market, here’s a quick-and-easy options play to generate 35% return over the next 3 days!.

After a couple of wild weeks and a surge in volatility, it appears the S&P 500 Index and SPY might take a rest and consolidate over the next few days.  Earnings are winding down, trade talks on hold until at least after Labor Day and traders are anxious to take a much-needed end of summer break.

The only known potential market-moving event is the big Central Bankers pow wow in Jackson Hole this Thursday and Friday.  I have a feeling their primary goal will cause as few waves as possible.

Against this backdrop, I think the SPY Trust could stay within a range, specifically, with this box between 282 and 294 levels and consolidate for the remainder of the week.

Working on the assumption of a range-bound or consolidating market, here’s a quick-and-easy options play to generate 35% return over the next 3 days.

The strategy is called an iron condor, which is a combination of selling a put spread and call spread, both for credit.  The position profits if the underlying shares remain within the range until expiration, whereupon all options expire worthlessly and the seller keeps the premium collected.

Here’s the setup and trade I took for my Options360 Service.


-Buy to open 4 contracts Aug (8/23) 281 Puts

-Sell to open 4 contracts Aug (8/23) 284 Puts

-Sell to open 4 contracts Aug (8/23) 296 Calls

-Buy to open 4 contracts Aug (8/23) 298 Calls

For a Net Credit of $0.53  (+/-0.05)

Here is the risk/reward profile for the position:

 You can see as long as SPY remains in the given range, until Friday’s expiration, that the maximum profit will be realized.

This is a great strategy to employ to take advantage of time decay while the market is set to take a breather before the final quarter of insanity kicks in.

SPY shares were trading at $290.74 per share on Tuesday afternoon, down $1.59 (-0.54%). Year-to-date, SPY has gained 17.41%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Option Sensei

Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...

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