There are as many iron condor trading strategies as there are iron condor traders. Everyone has their own preferences and style.

To create your own iron condor strategy you have to first choose the underlying. You don’t really need an iron condor screener or software program to find suitable candidates for you. Stick to Indexes and ETFs at first. As you become more experienced you can move into stocks.

Indexes and ETFs have the benefit of being composed of several companies and so the news, good or bad, of any one company will not affect the price as much. Pick one that you feel is relatively stable. Some good candidates are: SPX, SPY, RUT, IWM, DIA, QQQQ, NDX, MNX, XLE, XLF, and RTH.

Step two in creating your own iron condor strategy is to decide how far out from the money do you want to go. The farther out, the greater the probability of profit but the lower the return. You have to offset this by going out farther from expiration.

So let’s say you are looking to sell an iron condor on SPY that has an 80% probability of success. If you sell it at 60 days from expiration your max gain can be 18%, but if you sell it 30% from expiration you can get only 11%. Which do you go for? With experience you will be able to determine which is the best time to get into a condor that is best suited to your risk tolerance and trading style.

Step three in creating your iron condor trading strategy is creating your trading plan. How many spreads will you trade? How much money will you put at risk? Will you get into both the puts and call at one time, or will you leg in? Will you use all your capital or keep some in reserve for adjustments? Will you adjust or not? Will you enter all the spreads at one time, or will you enter some today and more a few days later to try to diversify the trade? What will be the max loss you are willing to accept? Will you take the trade off for a profit before expiration? If yes, then when, and under what circumstances?

As you can see there are a lot of things to think about when trading iron condors. The better your trading plan, the less you have to worry about when you are in a trade that goes bad.

Let’s finish up with Part Five

Post from: Option Selling To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Iron Condor Option Trading Course Part Four

So far we have talked about how the iron condor has great probability of success and can generate a decent return month after month.

In this section we are going to talk about what happens when things go wrong.

Most traders say that iron condor options trading is a conservative strategy. Others say it is very risky because you can lose a lot more than you can make.

It all depends on how you set up the condor spread. You can choose strikes that are way out of the money and that give you a 95% probability of success or you can choose strikes that are close to the money and give you a 40% chance of success. The closer your short strikes are to the money, the more your iron condor becomes a butterfly. A butterfly is also two credit spreads like a condor but close to the money.

As an example, let’s look at a condor spread that has an 80% probability of success. In our example we get a credit of $1.00 and the max we can lose is $9.0. So we can make $100 per spread or lose $900. As you can see you don’t have to lose too many times to lose all your money. Even if you win 9 times and lose once, you will be negative. And since the odds are saying you will win 8 times and 2 two times for every ten trades this is a losing proposition.

But no one said you have to lose the whole amount.

By using money management you can limit your losses in the months your condor spread is not going to make money. And yes, there are several months like that where no matter your adjustments, you are still going to lose unless you are willing to throw an endless supply and money at it and are willing to roll into other months.

Instead of letting our condor spreads go all the way to the max loss; let’s say we decide to limit our loss to 20%. For simplicity sake we will limit our loss in the example to $2. Once we enter the trade, we get $1. But if we are ever down $2 or $200 per spread then we exit the trade.

What about Stop Loss Orders?

You can use them. Place orders to buy back your spreads at whatever you decide as an acceptable max loss. That should help you sleep at night.

What about another 9/11 event?

The iron condor does well when the markets are flat. Or if they go in one direction then it works if the move is a slow on. A major event like a 9/11 event that makes the market move huge in one day can kill an iron condor trader.

Normally, these types of moves happen to the downside. If there is a nuclear explosion, or war, or earthquake, or anything similar, the markets will drop. As is the common phrase “Bulls go up the stairs. Bears go out the window.”

An iron condor trader can protect herself from such an event by buying Put insurance. You simply take some of the credit you get and buy enough put protection to protect yourself in case the word ends. With this insurance, if the markets go down enough you can still make money even if you lose the max on the condor spread.

Let’s recap our lesson on iron condor risk.

To mitigate the risk of getting to the max loss, you simply decide on an exit point. “When I am down ____ % or $_____ I will exit the trade and live to trade another day.”

And to protect yourself from the end of the world, simply buy some Put(s) as insurance. How many puts and which puts is a matter of personal preference and depends on your trade size.

Onwards to Part Four…

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Iron Condor Spread Mini Course Part Three

Incase you missed Part One: http://optiongenius.com/blog/iron-condor-option-trading-mini-course/

Stocks move up and they move down. Very rarely do they move in only one direction for an extended period of time. Since most of the time, stocks trade in a range, why don’t we make money from the range, instead of trying to determine if they are going up or down?

That in essence is the philosophy of the iron condor spread. No need to determine which way the market will move, because within a 30-50 day time period chances are that the market will stay in a range. Over time, it may move in one direction. But in a short period of time it probably won’t.

So let’s sell options that are far out of the money, which have very little probability of hurting us, and make money by selling time. As days go by, the options lose value, the markets go up and down, and we profit.

Iron condor spread trading is non-directional trading. An iron condor trader does not need to know which way the market is going. It helps if he does know, but my opinion is that no one can accurately predict over and over which way the market is going or where it will go to.

So when people ask me what I think of the market, I tell them “I don’t know”. And as an iron condor spread trader I don’t really need to know. As long as it gets to wherever it is going slowly, my iron condor spread trades will make money.

Two Types of Condor Traders

There are two major schools of thought when it comes to the Iron Condor spread. The first school says that the condor spread trade is a strategy that works on its own. In other words, no adjustments are needed. If you let it do its thing, over time the trade will make money.

The other school of thought says that you should adjust your condor spread trades when they get into trouble.

I fall into the second school. I don’t like losing money and taking a max loss on a condor trade by not adjusting it can be a depressing event.

By adjusting a condor, I mean to make changes to the original position to impact the trade. There are many different adjustments possible, and I will cover them later in this mini-course. By adjusting the trade, you give yourself an even better chance to make money. But every time you do an adjustment, you reduce the maximum yield you can make on the trade.

What Probability Do You Want?

Once an iron condor trader has decided if he will adjust or not, he must decide what probability of profit he wants to aim for. Does he want 60%, 70%, 80% or more? Based on this number he will pick his strikes (options to sell). The further away from the money, the greater the chance that the iron condor spread will make money, but the lower the yield and the greater the max loss.

I like to be in the 80% probability range.

Another way to influence the probability is the amount of time to be in the trade.  A trader can be far from the money, with a high probability of profit, and a higher than normal yield, but only if he stays in the trade longer.

For example, an iron condor that is entered 50 days to expiration has more yield and option premium than one entered 25 days to expiration.  But those extra 25 days add risk that something could happen in the market to hurt the position during that time.

How to Determine Strikes

When it comes to strikes, again we have two schools of thought.

One group of traders uses technical analysis to determine which strikes to sell. They look at the charts, find the support and resistance levels and whatever other technical indicators they use and sell strikes that they feel give them the best chance of making money.

The other group, of which I belong, use statistics and math to determine which strikes to sell. By using statistics you can set your strikes to have a high degree of confidence that your strikes will be safe. For example, you can set your strikes one standard deviation away from the money, or two standard deviations away. These deviations are calculated, using option prices, the volatility of the underlying, the time left to expiration, and several other factors.

Whichever of these two methods you use, keep in mind that there is no guarantee that the market will not violate your short options. So even with a high probability of profit, you can still lose money.

Let’s move on to Part Three

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Iron Condor Option Trading Mini Course Part Two

In this multi-part mini course, I plan on explaining the major facets of the Iron Condor Option Trade. First I will go over the basics of the trade, the philosophy, the risk, putting the trade on, and possible adjustments

Part 1: Iron Condor Spread Basics

The iron condor is an option trading strategy that uses two credit spreads.

The strategy is simple: Sell credit spreads out of the money: both puts and calls thus creating a “box”. As long as the underlying, stock, etf, or index stays within this box, the trade makes money.  Since you are selling options the trade results in a credit, and this credit is the maximum amount you can make on your iron condor trade.

When you place an iron condor trade, you will be selling the condor. In most circles this is considered a short iron condor. I myself do not know too many traders that trade long iron condors, mainly because in a long iron condor you want the stock to move a lot and if you feel a stock is going to make a large move, there are other option strategies that can make you more money. So I will focus on the short iron condor.

When you trade an iron condor, you want the underlying not to move very much. The biggest threat of the iron condor is a large move in one direction, especially if it is early in the trade. The condor is a slow trade, meaning that it takes time for the options to decay and lose value.

The iron condor is also considered a very conservative trade because you can set it up to have a very high probability of profit. The iron condors I trade are in the 75-80% probability of profit range. And since the underlyings that I choose do not move much, I do not need to spend much time monitoring my position.

Let’s look at an iron condor example. Let’s say I trade a condor spread on IBM. If IBM stock is selling at 100, I might short the following iron condor:

• Sell the 115 Calls, Buy the 120 Calls.
• Sell the 85 Puts, Buy the 80 Puts.

This trade creates a box that puts my expiration breakeven points at roughly 85 and 115. As long as IBM stays within those prices, my iron condor example will make money.

If I have this trade on, I can check IBM’s price movement 1-3 times a day. As long as it is not near an adjustment point, I don’t have to do anything. 

The Lazy Trade

Put it on, watch it once or twice during the day, and that’s it. Entering the trade takes less than ten minutes when you know what you are doing, adjusting it takes just as long if you have a trading plan, and exiting the trade can be as easy as doing nothing and letting the options expire worthless or exiting the trade (which is the same as entering but easier).

The Benefits of the Iron Condor

• High Probability of Profit
• High monthly return on investment: 8-15% a month
• You can do the same trade month after month on the same underlying. You do not need to “wait for a set-up”.
• Easily adjusted so you can save your trade if it goes against you.
• Takes very little of your time.
• Can be done anywhere in the world with access to the internet.

The Negatives of the Iron Condor

• Since the reward is high, the risk can also be high. An iron condor trader can risk $9 to make $1. He will win most months. But even one loss of $9 will wipe out several months of gains.
• The trade takes time and patience. A trader has to wait for the options to lose value.
• The iron condor is not the best trade in very volatile markets.

 Let’s continue to Part Two: http://optiongenius.com/blog/iron-condor-option-trading-mini-course-part-two/

Post from: Option Selling To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Iron Condor Option Trading Mini Course

Do you have any questions I can answer for you?

I was wondering if you had any questions about options, option trading, or other related topics that you have not been able to find answers to either on my site or anywhere else. If you do, great! I am ready to answer (if I can). But please read this entire post to find out how to submit your question.

I had an idea to make myself available to answer any and all questions as well as I could. No question is out of bounds and I will try to answer all questions submitted whether you are a member of the OptionGenius site or not. There is no charge for this.

But I do ask the following:

• Please give me enough time to answer.
• Please do not ask me anything that would require a specific answer. I am not a licensed investment advisor and cannot give you specific investment advice. It is aagainst the law.
• Please do not ask me to reveal all my trading rules. They have taken years and years to develop and I am not going to give them away.
• Put some thought into your questions. I don’t want to write a book to answer one question.

Here’s how this will work:

You can ask your question or questions by asking it from the site’s Contact Us Page. Please include your full name, email address, and if you are a member or not. (It does not matter but I would just like to know)

You will NOT receive an answer via email. I am going to gather all the questions, combine them, eliminate the duplicates, and then start working on them. Once I am done I will put them all together into a report and email the entire report to anyone who asked a question.

Yes, you will get a copy of all the questions and all the answers. But I will only email the report to those that asked a question. No question – No report.

DO NOT ask questions like these:

• I am 54 years old, making $100k a year and $85k in my IRA. What do I do with my money?   (not enough info and I cannot answer such personal questions)
• How do I make 20% a month? (Try to be realistic in your expectations)



DO ASK questions like these:

1. When should I use a Calendar Spread vs a Butterfly Spread?
2. How do I find good covered call candidates?
3. How can I tell if option selling is for me?

Just in case you are wondering why I am doing this, it is to create a report I can use as a giveaway that has real value, and to generate ideas to write about on my blog.

Remember, only those asking questions will get the report. Make sure to ask your question soon. I do not have a deadline in mind but I will have to cut it off in a week or so depending on how many questions I get.

Oh, and I will not be using your name in the report. So you don’t have to worry about having your name published anywhere.

Looking forward to seeing what you come up with.

Allen

Post from: Option Selling To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Get Your Option Questions Answered

The first of these enhancements is Autotrading.

We are pleased to announce that starting today, we will be autotrading with Eoption.com ( a registered broker/dealer).

Autotrading is a great concept where members have the ability to have their broker execute the OptionGenius.com trades for them in their account.

Best of all, there is no extra charge for this service.

What this means for members:

Once we send out an email trade alert, your broker will automatically enter that order for you in your account. Chances are your order will be filled faster than you could do it yourself. Eoption.com has an autotrade desk where they have people who just sit and wait for these alerts all day. Once it comes in, they enter the order for you at the price listed in the email alert.

This is great for those who can’t get to the computer as soon as I send out a trade alert. If you have ever missed a trade because the market moved too fast, this service should help solve that problem.

• You will always have full control of your account.
• You can cancel the autotrading at any time.
• OptionGenius.com has no access to your account or your money. We actually have nothing to do with this – it is an agreement between you and your broker.
• If there is a trade that is entered for you that you do not like, you can exit the trade.
• Eoption.com has the lowest commissions we have seen.
• We are not affiliated with Eoption.com in any way. After researching several brokers, they were the easiest to work with.

The only requirement is that you have an account at Eoption.com and an active membership with OptionGenius.com. Currently Eoption.com is the only broker we are autotrading with. If you use another broker and would like us to autotrade with them, please email them and let them know of your desire.

Here’s how it works:

Once you have an account with Eoption.com, you fill out and sign an Autotrade Agreement. You get to choose how you want OptionGenius trades executed. You can use a percentage of your account for each trade, or you can choose a number of contracts for each trade. What we recommend is that you tell them to use a percentage of recommendation. So for example, since I use $10,000 as my account size and base all the trades on this amount, if you are also trading a $10,000 account and want your account to match mine 100%, then you would instruct them to use 100% of recommendation. If I send out a trade using 10% of the account, it will be the same in your account. If you have an account with $20,000 you can tell them to use 200% of recommendation. That way if I use $2,000 for a trade, you will be using $4,000 for the same trade.

Many of you have been asking for autotrading for a while. I want you to know that I have thoroughly tested Eoption.com and their order fulfillment capabilities. I opened a real money account with them and for two months had them autotrade that account. They did a wonderful job getting the trades executed. I do not forsee any problems, but if there are we will quickly address them.

Keep in mind that this is between you and the broker and things can go wrong. It is your money and you should be watching it like a hawk. Just because this service makes it easier to follow OptionGenius does not mean you have any less responsibility in managing your money.  Also, there is no guarantee that all trades will be executed.

Post from: Option Selling To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Autotrading

“Allen,
 
I had a wonderful two days with this volatility, by changing your procedure slightly.
 
The changes I implemented are:
 
1. When it looks like we are in a bearish market, do only the bearish call spread and NOT the bullish put spread. Do the converse when in a bullish market.
 
2. In a volailte market that whipsaws, do not close out both the high and low strikes simultaneously. Rather close out the short position first, since that is the one costing us the maintenance requirement. The long position has no impact on the maintenace margin requirement.
 
This is what happened:
 
On Thursday May 06, being my birthday, I wanted to try my luck at Day Trading with options, since the market looked quite volatile!
 
Did a RUT May 720/730 bearish call spread. Bought the 730 call at 2.39 and sold the 720 call at 3.99 for a $1.60 credit.
 
At about 2:30 I tried to buy the 720 call back to close. The screen went bonkers with ask prices lower than bid prices! Then all I got was the dreaded hour glass image!! This is when the market went crazy!!
 
Around 3:45 EDT, I gave up and entered a buy order good till cancelled for the the 720 call at a price of $2.00 and then went away from the computer.
 
Around 4:30 to my surprise, I found this was executed at 4:03pm, for a profit of 1.99 !!
 
Today, Friday after hearing the super jobs report, I entered an order to sell the 730 Call at $2.00 each. It had was bid at < 50 cents depending on where you looked!!  To my shock, this order got executed by 11:00 am EDT!!  It closed at 1.15 today! My loss 0.39. So the net profit was (1.99-0.39) or 1.60. Or I got to keep 100% of the credit received without waiting for expiration!
 
On a 100 contract spread, with the commission included, the profit was $15,679 or 18.6% in two days!!
 
While I do not quite follow your exact steps you suggest, I would not have had the guts to do this without reading your material.
 
Thank you”

I am posting this email for educational purposes only. I am glad this member did well but it could just as easily turned out badly. I agree with his strategy #1, where you only sell options on the side that is away from where the market is going. But I am not smart enough to always be able to tell which way the market is going. If I was, I would just buy puts or calls and ride them.

Ever since March 2009, the market has pretty much gone straight up. But every day there is someone somewhere saying there will be a correction and the market will come back down. I myself expected the market to go up until after 1st quarter earnings. But the rally sustained until 2nd quarter earnings.

Now with the increase in volatility and fears of Eupore the markets seems to be taking a breather before they pick the direction. It might be back up, it might be down, or it might be flat.  To me it doesn’t matter as long as the move happens slowly.  An option seller can make a ton of money when the market moves less than 1% each day.

As for strategy #2, this is a bit moe re risky because if you buy back the short option and the market rebounds you can lose money very quickly. But this is an adjustment I have read about so there are traders who use it. Never used it myself though.

Post from: Option Selling To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Another Way To Play The Volatility

First, thank you for providing a great service. I have been trading options for about a year and have learned a lot from your tips and alerts.

Now, I have a question about position sizing.  I am trading $100k of my funds using your alerts. When you send out an alert I multiply the number of contracts by 10 when putting on the trade. My question is: instead of just multiplying the contracts, can I use a combination of increasing the contracts and/or increasing the width of the strikes?

 

For example, if the alert was to sell 2 SPX 1200/1210 Calls, instead of selling 20 10 point spreads, could I sell 10 20 point spreads? What would be the pros/cons of doing something like this?

It seems to me, if I widen the strikes, then when I need to make an adjustment, I could sell the near strike and buy the next strike as opposed to rolling the whole spread. Is there any advantage to this other than lower commissions and (possibly) better fills? More risk? I feel like I am missing something or not really thinking the strategy all the way through.

Thanks,
Adam

My reply:

Post from: Option Selling To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

How Wide Should Your Strikes Be In A Credit Spread?

Options are a decaying asset. Option time decay is a feature of all options that basically means that an option will lose value as time goes on and it gets closer to expiration. So when you are looking to buy an option, the more time until expiration means the more the option will cost versus an option that has less time to expiration in which the underlying can move.

Theta specifically measures the sensitivity of an option’s value according to the passing of time.  Another way of saying this is that theta is the ratio of change in an option price according to the fleetingness of time before the expiration.  An easy way to remember this principle is to think of options as living assets that are wasting away as they age.  The value of an option naturally declines as time goes on.  If an option is fast-approaching the expiration date and is not ITM (In-The-Money) then its value will quickly decline, since it’s highly unlikely it will turn out to be profitable. 

Option time decay really starts to pick up speed in the last 30 days before expiration, assuming that the option isn’t already OTM or Out-of-The-Money).  How about options that are deep In-The-Money?  Ironically, in this case time value actually decays even more rapidly.  Why?  Probably because the market thinks these options are too expensive to hold especially when compared to other strike prices.  Therefore, holders of deep ITM options are wise to discount the time value (for a contract quickly approaching expiry) in order to attract new buyers.  The best way to remember this principle is this: the more certainty about an option’s expiry value you have, then the lower the time value is.  Likewise, the more uncertainty as to the option’s expiry value, then the greater the time value you get. 

This is an important part of choosing when and where to buy selling options.  Theta or option time decay is not precisely the same thing as Time Value, though they are related in thought.  The meaning to take home is basically that the time to expiration will have a major impact on the price of the option.  As the option comes closer to expiry then its chances of becoming more profitable are actually decreasing, and counting against it. 

Besides, predicting a stock price eventually becomes easier as every day passes and seems to resemble the last.  Therefore, it’s the time value that is decreasing as maturity approaches (and particularly so once past the 30 day mark). As the option ages, it loses what is called extrinsic value.

For an OTM contract, the option is made up of extrinsic value anyway, so understanding this time principle is paramount.

When trading options, the amount of time left for an option is what can make or break you. Look at a chart of a stock moving in an uptrend and you can tell it is going higher, but you cannot tell how high it will go and by when. If buying options, buy yourself enough time to be right on your bet.

When selling options, selling close to expiration limits your risk. The farther away from expiration you sell, the more premium you get but you do not get the quick decay benefits of option time decay until there are less than 40 days to expiration.

This is why I like to refer to selling options as “Selling Time”. As time passes, the options you have sold lose value. Making money while sitting around. Not a bad job if you can get it. And you can, if you sign up for my service.

Post from: Option Selling To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

How Does Option Time Decay Work?

What should you do if you are interesting in learning more about option selling?

The best way to get started is to read a few good books on the subject.

When I first got started I went to an expensive seminar. After two days I knew enough about options to be dangerous – to my myself. After trying to trade options based on what I had learned at the seminar I realized, after losing a lot of money, that there was more to it.

So I started researching books on options, videos online, websites, etc. Here are some of the best books I found on options and trading in general.

Options Books

One of the most advertised books is The Complete Guide to Options Selling: How Selling Options Can Lead to Stellar Returns in Bull and Bear Markets by James Cordier and Michael Gross. It goes into detail about option writing strategies that can improve your profit. It reviews all of the basic mechanics of selling options and profiting as well as strategies that are insider-quality, easy to follow, and that have a high-probability approach. The book is written to appeal to the new investor, not a mathematician. In this book you can look forward to learning why selling options is more profitable than buying, and specific strategies for selecting various types of markets. Keep in mind that this book is about futures options, not equity options.

One of the first books I got was Options As A Strategic Investment by Lawrence Mcmillan. I would say this is the “bible” of options books. Why? Because it is huge and covers all the basics of option trading and then some.

Most option books cover the basic strategies but they leave out when you should use these strategies and what to do when the trade goes bad. Very few books talk about adjusting trades. The best one I found that does is The Option Trader’s Handbook – Strategies and Trade Adjustments by George Jabbour and Philip Budwick.

My favorite book on Option Selling is Generate Thousands In Cash On Your Stocks Before Buying or Selling Them, by Samir Elias. I myself have only used a couple chapters of this book but it was a very interesting with good ideas.

Wall Street Money Machine by Wade Cook is also a good read. But read this book for motivation only. Most of the examples and numbers in this book were over exaggerated but still, I liked it and enjoyed it when I was starting out so you might too. Most of the book was on covered calls.

A couple other “should” read book on option volatility are Option Volatility and Pricing by Sheldon Natenberg, and The Volatility Edge in Options Trading by Jeff Augen. Both are technical and for advanced options traders.

Books On Trading

How To Trade In Stocks by Jesse Livermore is a must read. Livermore was the best stock trader of all time and his strategies are now copied by just about every firm on Wall Street.

Trade Your Way To Financial Freedom by Van Tharp is good to give you some basic guidelines on trading.

Trading For A Living by Alexander Elder is also very good. I have all of Elder’s books even though they focus a lot on technical investing, he does show how traders with different styles can all make money if they get the basics right.

Post from: Option Selling To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Option Trading Books Reading List