CHAPTER 16
Iron Condors
Imagine for a moment you were asked for your opinion about the future price of a gallon of gasoline. That would be a tough request. First, you would have to make a guess about the direction of the price. Second, you would need to know how far out in the future you were expected to predict. Like weather forecasting, tomorrow's weather might not be tough but six months away is nothing more than a guess. It's likely that you would end up missing the mark. The real question is by how much?
The fact is, if you did get the price right, it was probably more a result of luck than knowledge. Now let's change the scenario just a bit. You are again asked to predict the price of gasoline but instead of an exact price, you are asked to choose a range for the price of a gallon of gasoline in the next three months. If you saw local gas at $3.75 and in the past year it had ranged from $2.89 to $4.45, you might be inclined to build your range around the observed price behavior. With that information, you might choose a range from $3.25 to $4.25. People are more comfortable with predicting a range, because a range is adjustable and allows for some lack of precision. If you were more conservative, you would typically increase the range of your estimate; perhaps between $3.00 and $4.50. If you were more confident, then you might feel comfortable with a tighter range and guess $3.65 to $3.85. This is the general idea behind one of the favorite strategies of many traders, the ...
