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

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

“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.

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Another Way To Play The Volatility

 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.

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 Assignment Work?

I am a newer subscriber. I paper traded  DIA using the exact recommended prices.  I was filled right away on the 1st and 3rd leg. The 2nd leg is at $1.71. Using a limit order of $1.79, I haven’t been filled.  Can you suggest what I should do in cases like this?

My short answer:

I would have entered the trade as one, instead of three options separately.
Sounds like you will have to adjust your price to get filled. my software is showing a price of 1.76 right now. Try that, and if not, reduce it penny by penny until you get it.
 
It’s a good thing you are papertrading. It is exactly problems like there we want to overcome before we use real money.

This situation is exactly why I advise all members to start with papertrading. Look, the market is not going anywhere. I know that you are anxious and eager to start making money but patience is very important. My trades are waiting trades. I mean that you put them on and then wait for time decay to do its thing. You need patience to trade these.

But when you start there are many things that can trip you up. Not knowing how to place an order correctly or misunderstanding your broker’s platform can cause a winning trade to turn into a big loser. I have seen it happen to members many times.

I am in the process of coming up with a papertrading manual that will give exercises on entering and exiting trades plus help you see how options work on a more advanced scale than what is normally discussed. This manual is in the works and will be posted on the members section of the site.

But to anyone who is starting out in options or selling options, or trading in general: Papertrade first, for as long as it takes for you to get comfortable with your broker platform, until you understand what all the order types are, until you understand which trades are debit trades and which are credit trades, until you can execute a trade like a condor (4 legged) in less than 1 minute.

Once you have these basics down, then and only then should real money be brought into the picture, because if you have real money on the line, and you need to move quickly to exit a trade, if you are not experienced you will screw up and cost yourself more money.

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

Start With Papertrading

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.

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

Iron Condors and Volatility

Let’s first review what futures contracts are as opposed to stock options. Futures contracts are standardized contracts that guarantee to buy or sell a specific commodity of standard quality, at a particular date in the future. This sum will be at market price. Contracts are traded on what are called future exchanges. So right away we can tell that futures contracts are not direct like stocks or bonds. They are still considered securities, but with a different type of contract.

Price for futures contracts is determined by what is referred to as instantaneous equilibrium, that takes into account basic supply and demand as well as competitive buy and sell orders on the market. The asset here may not necessarily be commodities; it can be anything from securities to intangible assets or even stock indexes. The future date is referred to as the delivery date. The settlement price refers to the official price of the contract at the end of a trading day.

1. One significant difference between futures contracts and stock options is that futures give buyers an obligation to fulfill delivery according to the contract’s terms, and the obligation for the seller to deliver the asset as agreed. The only escape here is if the holder’s position is closed before the expiration date. Whereas stock options are flexible by their nature, futures contracts require obligation. Futures are known as exchange-traded derivatives, as the exchange company’s clearinghouse plays the part of counterparty on all of the futures contracts.

2. Another major difference in these two contracts is the way in which gains are received. In options trading, a gain can be realized by exercising when the option is deep ITM, or by going to the market and taking an opposing position, or by waiting until the expiration and then collecting the difference in prices (in this case asset price and strike price). However, when it’s time to collect gains on futures positions, you will notice that these gains are “marked to market”, which means the change in the value of positions will be automatically handled at the end of every trading day.

3. Volatility is also traded differently. With equity options volatility makes the price of the option go up, in the futures it is the opposite.

4. Futures options also have many more strike prices than normal equity options.

5. Volume can also vary from option to option just generally many more equity options are traded than futures options.

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

Difference Between Stock Options and Futures Options