Trade For Steady Income Despite Market Mayhem

Markets continue to roil as tariff news hit the headlines and economic numbers fall below expectations. In times like these, I look for the strongest performers in the most resilient sectors and build trades that generate revenue around them.

Today, I’m looking at an oil company that’s held fairly steady amid all this turmoil. It’s a perfect target for a short iron condor, which would squeeze out some income while the rest of the market flies about.

Here’s how to do it.

Expand Energy Corp EXE has been holding support in a market that is seeing a fair bit of rotation out of tech and into energy. Resistance sits just above $115 in an expanding wedge pattern. Support sits near $100 which is an important number in general for prices to hold. Although it has dropped below that number, it quickly recovers as buyers wait for key levels to engage. 

This is the perfect situation for a short iron condor. This type of option trade consists of a short call spread and a short put spread combined to deliver higher income generation while the stock sits in a channel. 

When we position with short iron condors, we attempt to collect time decay while a chart bases or settles into a new direction. As always, we assume that we don't know the direction but can estimate the magnitude of the move using the ATR (average true range, measured on the weekly chart) and the implied moves that the market makers have priced into the move over the months ahead. 

Here are Thursday’s trades:

• Sell to open 1 EXE 16 May 115 calls 
• Buy to open 1 EXE 16 May 120 calls 
• Sell to open 1 EXE 16 May 100 puts 
• Buy to open 1 EXE 16 May 95 puts 

At the time of this writing, the credit received is $1.88. This represents the maximum profit we can collect. With this kind of position, we collect a premium, and as this premium erodes, we cement revenue from the position. 

Our maximum exposure is calculated as follows: the distance between the spreads ($5) less the collected premium ($1.88) = $3.12 (less commissions).

I often get asked why I take a trade where the risk is higher than the size of the reward, as in this case. The answer is that the probability of the short iron condor with strikes far out of the money (meaning far away from where the stock is currently trading) returning a profit is often as much as nine times higher than for a less “risky” trade, like a long iron condor.

In this case, we are looking at the probability that the short iron condor will deliver gains more than five times as likely. So, we trade on the side of probabilities rather than the possibility of outsized gains. 

The strategy provides three choices to exit the trade:

1. Buy back the short iron condor once it reaches an acceptable profit margin for you. I customarily look for 50% to 70% profit for these types of trades. 
2. Buy back the iron condor once it hits your loss threshold as determined by personal risk – this will happen with extreme movement. I customarily look at about 30%, though depending on my size, I will choose 50% 
3. Hold the iron condor into expiration week before covering – this is a choice I would rarely recommend as prices can move quickly against you. And with earnings scheduled for 3/20, I would prefer to exit prior to the news if for this kind of trade.

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