Fri Aug 24, 2007: Another IOC Iron Condor?

As mentioned in a previous commentary about selling a July "iron condor" combination of a call spread and a put spread, InterOil Corporation (AMEX-IOC, 36.08) is an extremely volatile stock with high option premiums.

Chart of IOC Stock

Profit from the previous example turned out to be 44% for three weeks, minus commissions, as the combination sold for $165 was worth only $15 at expiration, leaving a profit of $150 per combination on margin of $335 each.

September 40-45 call spreads are currently at $100 each while September 30-25 put spreads are at $90 each for a total income of $190 versus a total margin requirement of $1000 - $190 = $810 per combination.

This would be a potential income of approximately $190 / $810 = 23% for four weeks, not as lucrative as the previous example, but the advantage this time is a 10-point maximum profitabilty window versus only a 5-point window last time.

Calculate the break-even points:

40 + 1.90 = 41.90, and 30 - 1.90 = 28.10.

The maximum (negative) value of the combination at expiration would be $500, for a net loss of $500 - $190 = $310 per combination. This would apply if the stock finished either above 45 or below 25. As mentioned in the previous example, 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!