Fri Jun 29, 2007: IOC Iron Condor (Double Spread)

InterOil Corporation (AMEX-IOC) is an extremely volatile stock with high option premiums.

Chart of IOC Stock

Is there any way to capture some of that high option writing income potential with limited risk?

One way would be to sell an "iron condor" combination of a call spread and a put spread.

July 22.50-25.00 call spreads are currently at $75 each while July 17.50-15.00 put spreads are at $90 each for a total income of $165 versus a total margin requirement of $500 - $165 = $335 per combination.

This would be a potential income of approximately $165 / $335 = 49% for three weeks. These options expire Friday July 20th. This ignores commissions, which would decrease your return substantially.

To realize the maximum income, IOC would have to finish between 22.50 and 17.50 on July 20th. Possible, but certainly not guaranteed. If it didn't, the position still could return a net profit depending on how far it was outside those limits.

Calculate the break-even points:

22.50 + 1.65 = 24.15, and 17.50 - 1.65 = 15.85.

That's a pretty wide profitability range, but again, IOC is a volatile stock.

The maximum (negative) value of the combination at expiration would be $250, for a net loss of $250 - $165 = $85 per combination. This would apply if the stock finished either above 25.00 or below 15.00. How far above or below would not matter, that's the limited risk advantage of this strategy.

Until next time, best of luck with your option investments!