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

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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/

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Iron Condor Option Trading Mini Course

 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 short the same contract.  After notifying the firm, this group will then carry out the obligation as specified by contract.  They will choose a customer who was short the option for the official assignment.  (The customer can be anyone from a random person, to a first-come or even first out basis)  The customer is then assigned the exercise, which requires that he or she complete the obligation.  Remember that the person is not actually buying the call—on the contrary he is buying the stock at the stated strike price. 

 Take a moment to consider who the OCC really is.  The Options Clearing Corporation (OCC) was first opened in 1973 and is currently the largest equity derivative clearing organization worldwide.  It is a clearing firm that works with commodities, commodity options and security futures.  They play the part as guarantor to each of these contracts, and try and make sure that all contractual obligations are completely fulfilled, as they are essentially clearing these deals and taking responsibility.

 This organization operates under the watchful eye of the Securities and Exchange Commission (SEC) as well as the Commodity Futures Trading Commission (CFTC).  The OCC clears put and call options on regular stocks, stock indexes, foreign currencies, interest rate composites and single-stock futures, as well as other types of equities.  It also works with futures contracts.  This organization is controlled by a board of directors.  Most of the revenue is made from clearing fees that come straight from its members.  The OCC cooperates with all of the top exchanges in the United States, including the American Stock Exchange, International Securities Exchange, NYSE Arca, Chicago Board Options Exchange, the Boston Stock Exchange and the Philadelphia Stock Exchange.

 With American style options, assignment can happen at anytime. With European style options, assignment can only take place when the option is about to expire. Many traders, especially newer ones are afraid of getting assigned stock when they sell options.

 Unless the option is in the money and there are only a few days left to expiration assignment is not something to worry about. Even if a trader is assigned stock, either long or short, the trader can turn around and exit that position in the market.

If you sell a covered call, you own the stock and sell a call against it. In this case, you want your stock to be called away (sold at the stock price) since that results in the highest percentage profit.

 On the other hand if you are interested in buying stock at a certain price, you can sell a naked put option at the price you would be happy buying the stock and if the stock gets to your price, you will be “put’ the stock – which means you will have to buy it at that price. You also get a credit in the amount you sold the option for. So you get a discount on the stock as well.

 When trading index options, it is good to know that these are cash based and so there is no stock involved. If you are “assigned” your broker will just take the money out of your account.

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How Does Option Assignment Work?

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.

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Iron Condors and Volatility

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.

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Option Trading Books Reading List

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. So I started doing some research.  It turns out, that this theory/rule is true.

I checked with over 40 companies that broke through either $100, $200, or $300 and  84% of then did eventually hit $110, $220, or $330. The average time it took was 4 months. Some did it much faster and the slowest took 8 months, but it got there.

One thing I noticed is that this does not work all the time. It works only in bull markets. And this was also a limited sample.

If this theory holds, then Google (GOOG) is poised to hit $660, and Apple (AAPL) is going to hit $220. As I write this, Apple (AAPL) is already above $209 so $220 is not much of a stretch.

How should you play this?

1. You can buy the stock and wait.

2. You can buy a call option on Google (GOOG) at 660 with at least 4 months of time left to expiration.

3. You can sell puts month after month until Google (GOOG) starts to decline.

All 3 methods have their pluses and minuses. I am already long the stock, and have sold the Jan 560/570 put spread. As long as the bull market stays intact, I can sell more puts.  When Google (GOOG) breaks below the 50 day moving average, I plan on selling my stock and looking for another company to play.

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Google (GOOG) Going to $600

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.  The LEAPS strategy makes it possible for investors to manage risk and protect pricing by buying out put protection.  Obviously, using LEAPS does not guarantee success, as nothing in the market is ever 100% sure.  However, having more time on your contract for the position to work is a positive.

There are also other advantages to using LEAPS.  LEAPS lets you take an alternative route to stock ownership.  It allows you to benefit from price rises, while also risking less capital, as opposed to ordinary share-purchasing.  If the stock price increases to a level that is higher than the exercise price stated by the LEAPS contract, then the buyer has the right to purchase shares below the market price.  Then the investor can turn around and sell back the LEAPS calls for a much higher profit.

The buyer is also able to use these calls to diversify his or her portfolio.  Historically speaking, the market tends to reward investors in the long-term.  Most investors do not purchase shares in every single company they follow.  They carefully select according to market performance and research.  What’s nice about a LEAPS call is that once bought you have the right to purchase shares of stock at a specified period of time—or even up to three years into the future. 

LEAPS contracts also allow investors the opportunity to hedge their current stock holdings.  So if you are thinking about potential price drops on stock that you own, know that LEAPS options let you sell the underlying product at the strike price.  You can also do this at any time, up to the expiration date.

Are there any negatives to using LEAPS options?  Risks are limited, but still existent.  You have to invest the price you paid for the position.  If you are an uncovered seller of LEAPS calls or puts there is actually unlimited risk.  The risk generally varies according to what strategy you take.

It is important for investors to fully understand fully the risk of LEAPS as well as how this financial tool can work in your favor.  If you are willing to stick around for the long-haul, you may find LEAPS very beneficial.

One way to use LEAPS is in a covered call in exchange for stock. You can buy a LEAPS online for expiration in Jan a year or two away and sell current month options against it. The current month option will provide monthly income while the stock may appreciate in value. Thus, the value of the LEAPS will go up, while you make money month after month.

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What is a LEAPS Option?

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 options on the same index in the same month.  Remember, the only thing different is the strike price.  The most common credit spreads are the Bull Put Spread and the Bear Call Spread.

What about debit spreads?  First of all, investors have to pay to enter a debit spread (or net debit spread).  This option is when the investor buys an option with a higher premium but must sell the option for a lower premium.  How will this bring profit?  Because the investor is hoping that the premium of his two options will widen due to the market.

Another issue to consider is that of what type of strategy you are going for with credit or debit spreads; as in bull or bear?  The bull or bear strategy involves doing what you’re doing—selecting selling two options, but choosing both call or put options, and with the same expiration dates.  (The strike prices can be different)  The basic philosophy of bullish in stocks is that you buy low and sell high, which can be called an optimistic outlook, or bearish, buy high and sell low, which is a pessimistic approach.  Both of these may work with any given strategy.

When you bring credit/debit into the equation, there are more issues to resolve.  First know that with a credit spread, the required margin will be the same as the difference between both strike prices.  This is the most you can lose.  Your capital requirement will be reduced since you can apply the credit of premium to the margin.  Now let’s consider debit spreads on the opposite end of the spectrum.  These are called debit spreads because your broker is actually going to debit your account for the net premium, as opposed to giving you credit.  The most you lose with the debit spread is the premium net.  Gains are limited and this option does not require a margin.

In deciding which works better for you consider the time value involved.  If you know a stock or underlying is going to move in a certain direction and you know to what price a debit spread can result in more profit. On the other hand, if all you know is a stock is going to move in one direction or not much, than you can place your trade in the other direction.

Let’s look at an example. If you use technical analysis, you can determine support and resistance lines, as well as trendlines. Say a stock is trending up and has support at $50 and is trading at $54.39 right now.

You feel the stock is going to go higher but you do not know by when. Your best bet is to sell a 50/45 Put spread. You sell the 50 put and buy the 45 put in the same month. For the sake of the example, you will trade the current month with the fewest days to expiration. As long as this stock stays above $50 you make the full amount of the credit.

If you think the stock is going to go to $60 in 2 weeks, you can use a debit spread. You would buy the 55 call and sell the 60 call in the same month. You would get the max profit if the stock is above $60 at expiration. But if the stock does not move up, your options will lose value everyday and eventually expire worthless.

With a credit spread, if the stock does not move, you still make money.

Basically we are talking about two sides of the same coin. A debit spread for one trader is a credit spread for another.

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Credit vs Debit Spread—Which is Better?