Part Four: Iron Condor Trading Strategy

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 [...]

Part Three: The Risk of the Iron Condor Spread and How to Mitigate it.

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 [...]

Part Two: Philosophy of the Iron Condor

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, [...]

Iron Condor Option Trading

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 [...]

By strict definition, this term basically means the transfer of a person’s rights to another person or business.  In terms of stock options, it refers to a notice given to an option writer that states the option (that was sold to a buyer) has officially been exercised.  Exercised as in executed, not exorcised, which would have an entirely different meaning.  Whenever a seller has been assigned then he or she is obligated to finish the requirements as stated in the option.  For instance, if the option was a call then the writer/seller of the option would have to sell the security at the agreed upon price.

 When the holder of an option wants to exercise the option he/she notifies his/her broker. The broker will notify the Options Clearing Corporation (OCC) of the event.  After this, OCC fulfills the rest of the contract and then selects a firm that happened to be [...]

Question:

In your lesson you said that volatility is not good for options trading since you trade within  a statistical mean. If you do condor trades don’t you need volatility?  Won’t you make more money or will out of the money be the same at any price?

My answer:

The higher the volatility, the higher the option prices.
But in a condor, volatility is not as important as price action.
If volatility drops, we can exit the condor trade faster. But if it rises it just means we have to be in the trade longer. Volatility is more important in trades like calendars where it can destroy the trade if it drops too much.

What are Some Good Books on Option Selling?

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 [...]

A little over a year ago I went to one of those free trading seminars provided by companies that want you to sign up for their coaching or training.

The concept they were teaching was day trading and so it did not interest me very much, but a couple things the speaker said were very interesting. The guy’s name was Tom Busby.

He said that once a stock breaks a hundred $ level for the first time it zooms up 10%.  For example, once a stock breaks through $100 it is going to $110. When it breaks through $200 it is going to $220, etc.

I had heard this before somewhere so I started looking it up. It turns out that Jesse Livermore mentioned this in one of his books. Livermore was probably the best trader of all time.

So now with two reference points I decided this was something worthy of looking into. [...]

LEAPS refers to Long Term Equity AnticiPation Security.  These are options that consist of longer terms than average, as in the date of expiration.  LEAPS are not as common as other options but are still available on roughly 2,500 equities and 20 indexes.  However, like short-term options, LEAPS are also available for calls or puts. 

Options for LEAPS are traditionally created with expiration cycles of three months, six months or nine months, with no option term exceeding a year’s worth of time.  While there might be some exceptions now, traditional LEAPS are still the majority.  LEAPS are relatively new to the market and may extend as long as 2-3 years out.  As is the general rule, the farther away the expiration date, the more expensive the option is.  LEAPS are also available for indices now, as opposed to merely equities.

LEAPS are popular tools of investors who hope to reduce their risks.  [...]

Are you wondering which is better: option trades that result in a credit or trades that result in a debit?  Simply put, you’re asking whether you should choose a credit spread or debit spread strategy.  Let’s consider both options in more detail. 

A credit spread (also called a net credit spread) involves the investor selling one option then buying another option.  The second option is in the same class and also shares the same expiry date.  However, there are different strike prices between the two options.  In this instance, the new investor gets a net credit for entering this position.  He is looking forward to the spreads either narrowing or expiring in order to get a profit.  A credit spread is basically a conservative strategy in investment.  It is designed to earn a moderate level of income while also limiting your potential loss.  In this circumstance, you are buying and selling [...]