How To Make 17% Return per Month With 80% Probability Trading Options

This Trading Strategy Can Be Used to Create Job Replacing Income

In this article, we will explain an options trading strategy that can generate more total return in a month than many investors make in a year. Many professional options traders use this strategy to generate consistent income, and it can be realistically accomplished following a few simple steps.

In previous articles, I discussed several options trading strategies such as credit spreads and calendar spreads that we use to generate trading income.

In this article, we discuss how the iron condor options strategy can generate income during a 30 day time period. The trade is directionally-neutral and can be profitable as long as the underlying security price does not trade in the money at expiration.

First Step: Find a Stock

The first step is to find underlying security you are familiar with that has solid liquidity. The SPY ETF is what I use most often for iron condor trades because it has plenty of volume and liquidity, and I am very familiar with it.

Second Step: Find the Expiration

The second step is to search for options with expirations about 30 days away. Most option trading platforms make it easy to see the expirations.

Third Step: Find the Strike Price

The third step involves finding a strike price with an 80% probability of closing out of the money at expiration for both calls and puts. Many options trading platforms give the users the ability to estimate the probability of a strike price closing in the money at expiration.

The probability estimate calculation is based on each option’s implied volatility. Therefore traders can see which strike prices are 80% likely to close out of money. This allows options traders to develop strategies that can generate 15%-20% monthly income with an 80% probability.

Fourth Step: Set Up the Trade

The fourth step is to set up an iron condor trade. An iron condor is essentially a put credit spread and a call credit spread at the same expiration in one trade.

The credit spread strategy involves selling a call or put option and buying a call or put option with the same expiration but with a different strike price.

Below is a profit graph at expiration for an 80% probability of profit iron condor trade we recently did.

Example:

On February 2, 2022, the SPY closed at 457.35.

Sell SPY March 4, 2022, 430 Put to open

Buy SPY March 4, 2022, 425 Put to open

Sell SPY March 4, 2022, 488 Call to open

Buy SPY March 4, 2022, 493 Call to open

As of February 3, 2022, this trade generated a credit of $74, and the option requirement was $500 per contract. Therefore the maximum loss was $426.

If the trade expired out of the money in 30 days, the investment return would be 17%.

According to the profit graph above, the SPY would need to decline 28.06 points (6.1%) to 429.29 points or rise 31.39 points (6.9%) to 488.74 in 30 days to break-even and expiration. This leaves investors over 6% room-for-error on the upside or downside over the 30 day time period to expiration. According to Stockanalysis.com, the average monthly returns for the S&P 500 from 1980 through 2019 is 0.7%.

According to OptionStrat, there is an 80% probability the SPY will close out of the money. However, there is a 20% chance the trade will lose money at expiration.

The Critical Step: Manage Risk

Despite the 80% probability of profit, it is essential for traders to remember that losses can occur. The downside risk is much larger than the upside when trading iron condors; therefore, risk management is critical. In our example, the maximum loss was $426, and the maximum profit was $74.

So it is always important to manage risk with appropriate sizing and be prepared to close out or adjust the trade if losses exceed your comfort level. Never trade more than you are comfortable with.

Final Thoughts

The iron condor strategy in this article could generate $4250 per month at 17% with $25,000 in capital, which for many is job-replacing income. I know many professional option traders that have left their jobs years ago and have successfully traded iron condors, credit spreads, calendar spreads, and several other option income trades.

But it is very important to manage risk effectively because I also know several option traders that had to go back to work because they lost too much money trading options and could no longer support themselves or their families with trading.

I encourage you to learn more about options trading and how you can generate income from strategies such as iron condors. Dan Sheridan has the best options trading training program on the market, in my opinion. If you want to learn more about options trading, check out Dan Sheridan’s training program. Thanks for reading.

Past performance is not an indicator of future performance. This is not financial advice. Please consult a financial advisor.