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Iron Condor Trading Lesson 3: Risk Management is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

In this video I go over the math of the iron condor. How to calculate the credit, the max loss, the margin, and the potential return on investment

Iron Condor Calculations – The Math Behind The 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 Condors

Iron Condor Philosophy – Lesson 2 Iron Condor Mini Course is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

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

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

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…

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

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

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

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/

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

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.

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