If you’ve been trading options only on stocks, it’s time to branch out a little and learn how to make money in the futures market. This article will show you how to sell a four-leg option strategy on natural gas futures.
The Short Iron Condor
The iron condor strategy consists of four legs, which can be considered as two distinct strategies: one is a put spread, and the other is a call spread. The put spread consists of one long put and one short one; while the call spread has one long call and one short. Here’s what the short iron condor looks like in summary form:
Buy 1 NG 2.65 put
Sell 1 NG 2.70 put
Sell 1 NG 2.85 call
Buy 1 NG 2.90 call
If you wanted the long version, you would just switch the trade action (buy becomes sell and vice versa) for each contract. The price of the underlying asset should be between the two middle strike prices. Because you’re selling the iron condor, you will receive a net credit at the start of the trade.
You should only enter the short iron condor spread when you’re neutral on the underlying asset. Your net credit will remain a profit if the futures contract moves sideways. But if it moves either up or down too much, the credit will turn into a loss at the expiration of the options.
Let’s take a look at a hypothetical short iron condor play on natural gas futures. The November 2018 futures contract expires in three months. It’s trading at $2.985, and there’s a lot of options activity on this contract. You need to make sure that the market price of the futures contract is in the middle of the four options you’re going to trade. Here’s the result:
Buy 1 NGX18 2.90 put @ -0.087 -$870
Sell 1 NGX18 2.95 put @ 0.108 $1,080
Sell 1 NGX18 3.00 call @ 0.118 $1,180
Buy 1 NGX18 3.05 call @ -0.096 -$960
Net Credit $430
It’s a nice $430 profit before commissions take a bite out of it. During the next three months, the price of natural gas is fairly stable, and you don’t see much change in the price of the futures contract. In the last week of the trade, natural gas rises to $3.00, but this isn’t enough to send the short call ITM, and the options expire leaving you with a nice gain.