The Modidor: A Higher Profit Probability Trade

Focus: OPTIONS

Most traders are familiar with "winged" option strategies. Here, the staff of Investopedia.com detail a variation on the iron condor that can put the odds more firmly in a trader's favor.

There are many reasons to consider trading options. One use is to obtain leverage when making a directional play. Another is to hedge an existing position. One other use is to take advantage of opportunities that are simply not available to those who only trade the underlying stock, index, or futures security. This last possibility typically involves the use of option spreads whereby one option or set of options is sold while another option or set of options is bought. One approach to above-average probability spread trading that is relatively new to the mainstream is known as the "modidor," which is a modified version of a popular strategy typically know as the iron condor.

The Starting Point: The Iron Condor
As a quick review, an iron condor involves selling an out-of-the-money call and an out-of-the-money put option while simultaneously buying a further out-of-the-money call and put. In a "classic" iron condor, the options sold are a roughly equal distance from the underlying price. Likewise, the difference in the strike prices between the two call options is the same as the difference between the strike prices for the two put options. Ideally, an iron condor will be entered when the implied volatility of the options is high.