Not sure what the difference is between a butterfly, a condor, or a mouse?

(Hint: there is no strategy called “mouse”)

In this video I open up one of my personal trading accounts to show you 4 trades that are all of a different strategy. We have a naked put in oil futures options, a butterfly in Berkshire Hathaway, an iron condor in LVS, and a straddle in LVS. All four trades are doing well.

Watch the video to see how they look on the risk graphs as well as how they are made up and work.

In the optiongenius portfolio we do not do naked puts or straddles, but we do a lot of iron condors and some butterflies. In times of low volatility with the VIX below 30 these non directional strategies work wonderfully. In high volatility markets, they can work as well but with adjustments and a quicker trigger finger to take profits quickly.

Click here to view the embedded video.

Option Strategies – 4 Strategies You Can Trade is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

It’s an iron condor on Apple. It has a 77.43% Probability of profit with 22 days left to expiration.

Sell to Open June 355 Calls, But to Open June 360 Calls

Sell to Open June 310 Puts, Buy to Open June 305 Puts

For a credit of .63

For each contract you do, you get a credit of $63 which is the max gain on the trade. The max loss is $437. So the potential ROI is 14.41%.

My plan for this trade is to keep it super simple. Let it ride until expiration. Look at exiting when up 10% or more. If I get down 15% or so I am going to exit. This is a small position and one I put on because my wife made me. I am teaching her how to trade options and she is coming up with her own trades. This is one she really feels good about and forced me to put it on with real money. Up until now she has been papertrading, and so I decided to share it with all of you as well.

Apple (AAPL) Iron Condor is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Iron Condor in YUM:

Sell 6 Sept 46 Calls,   Buy 6 Sept 48 Calls

Sell 6 Sept 42 Puts, Buy 6 Sept 40 Puts

Thinkorswim is showing the mid price to be .18 cents. So the credit would be $108 and the margin would be $1092. That means the potential ROI is 9.8%. There are 9 days left to expiration. With so little time left, there is no room for adjustments so the trade would be to ride it to expiration.

The breakevens are 41.86 and 46.20. As long as YUM expires within these two breakevens, the trade is profitable. The trade has a 65.15% probability of making money.

This one would be a good one to papertrade. The one downside on this iron condor is the commissions. If you are paying too much for commissions, this trade does not have the proper risk/reward. In your case you would have to get into trades with more time/premium left to offset the commission charges. But the good thing is that hopefuly this trade expires and you don’t have to pay commissions when exiting the trade.

The trade is centered right now with YUM trading at $44.16. Not sure how it will trade over the next two weeks but there does seem to be some support at $43.45. My feeling is that the overall markets will pull back this week and YUM should pull back in sympathy.

You could trade just one side of this iron condor – either the puts or the calls, but then again the risk/reward is horrible and not worth the risk (in my opinion). Thanks to the iron condor we are collecting premium on both sides – the calls and the puts – and that is how we get .18 cents.

Sample Iron Condor Trade is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

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:

How Wide Should Your Strikes Be In A Credit Spread? is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Hi, I just went through the course.  I have a question on the iron condor.  I had subscribed to another site that did those.  They said they picked strike prices far away from the current price so that the odds were better than 90% that they would make money.  Of course the market started to gyrate 100s of points per day and everyone was holding their breath for days. So I learned that these spread trades are not boring at all but can be extremely stressful.  I was glad to see that you weren’t just touting you make money 90% of the time.  I see that all the time but they fail to explain that you can lose 100% of your money up to 10% of the time.  That makes the strategy not conservative at all.  So my question is how much capital would you allocate to iron condors?  Also, in your example, when the price dropped near the lower strike price you closed out the options on that side and then entered into new options just farther down in price.  I can’t figure out why that couldn’t be done all the time so you really could have entered into this trade even when the market was swinging wildly in Oct.  I guess a follow up to that is how did you end up losing 30+% in that one month?  It would be great to learn what can go wrong.  Thanks.

First you have to limit your loss. 100% loss is not acceptable. I am out of a trade when I am down around 20%. The month I lost was a very large, sharp, quick, move. That is the worst enemy of the condor.
 
Most months you have no problems, like this month. i though it would be wild, but even with earnings I have not had to adjust my condors at all. Both are doing nicely.
 
If the price moves towards my strikes, at a certain point I will roll the options away from the money. That is a simple adjustment and one of the ways that help me to stay in the trade and profit even when the market does move. But last September, it was just too much too fast and i just got out of the market instead of try to play with it. I took my loss and exited. Which saved me because Oct was another horrible month for the condor. Through experience I felt that the market was not acting correctly and stayed out of the market.

“The Iron Condor is not boring.” is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

When you say, to buy back the option before, the expiration date, don’t you incur additional costs, that reduce your profits even further ?

Good question. In some trades like the Calendar spread you have to buy them back because you don’t want to get long the option. But in an iron condor or credit spread, you can wait and let the options expire. If you buy them back you incur commissions plus whatever you are buying it back for.
 
In many cases it is a question of risk vs cost.  if there is a lot of time left before expiration, you are probably best buying the trade back in case there is a move against you and you end up losing money. On the other hand if you let it expire you can save a few dollars and maybe 1 or 2% points on the trade. 
 
So lets say you it will cost you $20 to buy back a trade, but if the trade moves against you, you could lose $1,000. Do you take your profits or hope for that last $20. Even if the trade moves just once against you in 4 years, you still lose money.
 
Make sense?

Here is a real life example.

On October 12, 2009  I did a credit spread on AAPL. I Sold the Nov 165 Puts and Bought the Nov 160 Puts as protection for a credit of .50 on each spread. There were about 40 days to expiration.

On this trade if the puts expired worthless I would make 11.11% before commissions. (Credit of $50 divided by max loss of $450 per spread = potential return of 11.11%) 

Well AAPL just had earnings yesterday and the stock shot up to about 200 today. This morning, I was able to buy back the credit spreads at .07 each.

So I made .43 per credit spread in 8 days.  That is 9.5%

Why did I buy the spreads back? I could have let them expire worthless. If I did i would make another .07 per spread. But there is still 31 days left to expiration. So I decided to make my profit and money and look for another trade.

Who knows? Maybe AAPL will settle down and I will sell another credit spread on it this month for more credit. Or maybe I will do something else. All I know is that I don’t want to risk losing $450 per spread (anything can happen and APPL could drop in price) to make another $7 per spread.

Yes I did pay the commissions by buying the spreads back. But on each spread I paid $2.50 in commissions.  $2.50 going in and $2.50 coming out which is a total of $5 in commission per spread. So instead of mkaing $43 per spread I made $38 per spread which is still 8.44%.

(That’s why having an option friendly broker is so important. I pay $1.25 per option with no trip charge. If you are paying $10 plus $1 per option or some other crazy commissions then you ae playing a game that is stacked against you. Get a better broker.) 

In my opinion, take off your spreads when they are close to worthless if there is alot of time left. Take your profits. Everyday your money is out of the market is a day you cannot lose it.

This is not to say I never let my spreads go to expiration. Sometimes I do, but not too often on a highly volatile stock.

When Do I Buy Back A Credit Spread? is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com