Iron Condor Option: Sample Iron Condor Trade
Iron Condor Option: Sample Iron Condor Trade
Here is an iron condor option trade I am looking at today.
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.
Options iron condor
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 option 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.
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I am no expert, but a studious learner. I would be reluctant to make this trade for the following reasons:
1. As you said, there is no room for adjustment. So there’s a potential of a $900 loss here. If you trade further out it’s easier to exit due to adverse price action.
2. I don’t think 65.15% probability with potential 90% loss and no ability to adjust is very good. Many condors have 90%+ probability of success.
3. Risk of surprise with a single stock. Anything could happen on news. Indices are less volatile.
4. Momentum is up, and YUM just made annual highs. This would make at least the bear call spread part of the trade questionable, since you’d be betting against the trend on what is supposed to be a non-directional trade.
Although 9.8% ROI for 9 days looks great, especially if you annualize it, the dollar value is too risky at only $108 (less commissions, of course) on a risk that is 10 times that high, on a position that has only a 65% potential to expire worthless, on a stock that is too volatile, in my estimation. Moreover, looking at the chart, YUM seems to be at the top of its range (in fact, higher), which suggests that a Bear Call Spread might be a more profitable situation right now, rather than the full Iron Condor. I’d be a bit nervous.
I show the breakevens to be 43.60 and 44.41. What am I missing?
I would not take the trade.
John Spann
I wouldn’t take the trade. It is too close to expiration, the gamma risk is too big, the potential reward is too small to justify the risk and the credits are too small so you cannot close the trade before expiration.
I prefer to trade condors at least 5-7 weeks before expiration.
I would not take this trade just because you are not sure about it. I trust your judgement.
I wouldn’t take the trade. Even with $1.50 a contract commissions, if you had to bail, there goes all your profit. The 43 support looks good but with the stock trading at an all time high, should the market make a covering rally the stock would too.
I would not take this trade as 65.15% probability of not touching one of the short strikes is too low for my trading plan. I only trade credit spread or condor setups with 85% or higher probability. Most of my positions have probabilty of 90% or higher. –Yes the returns are lower—3% to 7%– but I almost never have to manage the position.
With the probability on 46 for Sep expiration at 13.6% and 42 at 14.6%, I’m tempted by the trade. And I like the chart with the breakout above 43.
But I’m passing on the trade for two reasons, commissions being the first. Second, the average daily range on the stock right now is about $0.60-0.70. With that kind of daily movement and no ability to adjust, the gut feel says it would be easy to find yourself in trouble on one side or the other of this trade.
I followed with Thinkorswim paper trading
65% probability is too low for an actual trade. I will paper trade just to see what happens. THX.
Allen;
Thanks for the Iron Condor, I paper traded it. The problem is my numbers arn’t the same.
$108-46comm.=$62-another $46comm.=$16 profit.
With a 1200 Margin (according to my price slices) it gives me a 1.3% profit. You have 9.8% profit. Needless to say I want you to be right. Where is my mistake?
Thanks, Jerry
PS If you don’t have time for this it is OK it is only paper.
Jerry,
You are paying way too much in commissions. The 9.8% I listed was before commissions but even at $1.50 per commission it should be $36 to get in for the whole trade. If you are at a broker like eoption or optionhouse you can do the trade for less since they charge per spread and not per option. Looks like you are paying a minimum charge and a per option charge.
I got killed on the CME bull put spread the option genius sugested I’ll just stick to trades on ETFs. Less chance of a big move
I wouldn’t take the trade for most of the same reasons indicated by others. There are too many better trades at much greater premium. The stock is breaking-out and I wouldn’t make a play against it. I don’t know that I would make any trade for net .18. If you want a better risk/reward trade-off look at LULU where you could probably get almost a $1 for a Bear call spread.
Would not trade more risk than potential reward. Low trade volume.
Will follow.
Forget the probability, this is just a plain stupid idea. I checked the option prices after business on 9/7. YUM 46 calls are about .13 and 48 calls about .04, that gives you a maximum profit of $54. It would cost me over $50 to trade 12 contracts, so its a guaranteed loser. Then if YUM spikes to 48 or higher you take a $1,200 loss plus commissions. Same results on the put side if the stock goes to 40 or below. Not even Gomer Pyle would make this trade.
Terrible Trade Idea. Too close to exp, and it is much smarter to spread the risk to an index like doing the Iron Condor on the RUT or SPX. Bad recommendation and far from an Option Genius 🙂
Ty,
This was not a recommendation. This was a sample trade that can be papertraded. You learn more by getting your trades into trouble than on the trades that work perfectly. I do think that this trade will work out fine, but as I mentioned, after commissions this trade does not fit what I look for.
What most people who are commenting are failing to see is that this is a 9 day trade. Is YUM going to move that much in 9 days? The odds are against it. But we will see.
This is really interesting! Because I did my own paper trade on YUM last week (see below) to test putting some of what I learned here (great site, BTW!) into action on my own. Mine is sort of the opposite of OG’s, though. Here’s mine:
8/28/10
Yum! Brands Inc. close at 42.32 (NYSE: YUM)
Buy to open 2 x Oct 43 Call -1.37
Sell to open 2 x Oct 45 Call +0.59
Total -0.78
Buy to open 2 x Oct 42 Put -1.69
Sell to open 2 x Oct 40 Put +0.93
Total -0.76
Total Debit = -1.54 x 200 = $308.00 initial investment
Max potential profit = 400.00 – 308.00 = $92.00
92/308 ~ 30% potential profit if stock ends up at = 45
YUM closed at 44.28 today (Tues.) with the 43 calls worth 1.48 (bid). 1.48 x 2 x 100x = $296.00, so I’m near my breakeven point. Another point up and I’m good! If I’d just done the calls (because YUM is in a slight uptrend), I’d be doing really well!
This trade will probably work out fine but I have found that trading iron condors a few months out are more forgiving and don’t come with the stress. I thought it was for October and was thinking this is a nice trade with nice risk reward but would most likely have to be managed.
We get hit with commission on both sides right? So potentially $72. I understand that there is a chance that some or all of the legs will expire worthless without a commission charge, but we are getting screwed. It takes no more effort or cost to process 1 contract vs 100 contracts.
Don’t mean to rant, but I find a lot of great trades in some of the less volatile ETFs and indexes, but to make it worthwhile, you have to trade 5to 10 times the contracts of say SPX or RUT, and commissions kill you.
The theoretical value of the 46 call, according to the Black/Scholes formula, is about 18 cents. But it is trading at 12 to 14 cents. Therefore I would avoid the bear call spread, since it would seem to be too risky given the small (undervalued, according to Black/Scholes) reward.
The theoretical value, according to the Black/Scholes formula, of the 42 put is 8.5 cents, so this makes that put a good deal to sell, since it is trading at 11 to 14 cents. I would consider doing this part of the trade, but the problem is that, after you buy the 40 put, which is overpriced as well, your net credit might be only 5 cents. You’d need to trade a lot of contracts to overcome the commission issue.
Another thing that bothers me is that while YUM’s current implied volatility is only 25.19, its action over the last 4 days or so seems like its been quite a bit more volatile than that.
I think, on the whole, I’d avoid this trade.
This looks to be a fairly risky spread.
The Put spread seem to be firm with 50 day support at about 42 and new a support level for stock ‘might be’ about 44 since that was the old resistance.
The Call side is what would concern me the most 1)because of the new possible support level about 44 and 2)the stock is in an uptrend.
It does look like momentum and RSI are flattening though.
IV appears to be increasing and that could be another problem.
Overall I would avoid the Iron Condor and focus on the Put spread.
Something is bothering me about the paper trade approach. We’ve all posted good reasons why we we think this is a bad trade, has poor risk/reward, doesn’t meet criteria, etc.
So if it is paper traded and turns out to be a successful trade, what is a trader to do with that? Based on a somewhat random outcome, if it’s a profitable trade, what is the take away? That as traders we should be tempted to do this kind of trade (because it worked out this time)? I think that would be a dangerous and wrong conclusion. We have trading plans and rules just for the purpose of keeping us out of high risk trades. Do we change that based on the outcome of one paper trade? I wouldn’t.
That said, I appreciate Alan starting this little conversation. It’s been stimulating and educational.
I would say that if something happens over and over, even if you dont think it will, then perhaps, just maybe, you might be mistaken and might want to reexamine your thought process.
That’s why we papertrade. We dont do it just once. We look for what works over and over with consistency so that we can do the same with real money once we find what works.
This is a terrible trade. Yes, it has only 9 days to expiration, but if the stock makes a big move, you don’t have time to adjust due to high gamma and the loss will be big and quick. Due to low credit it doesn’t make sense to close early, so you have to wait till expiration which makes the gamma risk even higher. The stock is only 4% above the short put strike, it moved from 41.5 to 44.5 in 3 days, what makes you think that it cannot go back to 41.5 in 9 days, especially if the market pullbacks? The fact that it “might” work doesn’t matter – it’s all about risk/reward.
I understand that this is not an official recommendation, but the fact that Allen still defends the trade and thinks it “will work out fine” doesn’t give me any confidence in this service. The official recommended trades might be better, but since I cannot see the track record and/or history of trades, it makes it very difficult to join the service or recommend it.
Hey Kim,
I am not telling you to recommend my service. Since you are not a member your opinion is not valid anyway. Only someone with first hand experience of something should be recommending for or against.
I already answered your email and explained to you that only paying members get to see past trades and the month to month performance figures. No need to be bitter about it. If you don’t like the policy, feel free to move on.
Writing an iron condor is a possible way of earning a monthly ( or 45 days ) income.We set short striking targets far enough while killing time values.This is what basically all of us want, and we don’t want to be too risky , because the max loss far surpasses max gain plus a commission issue.I know a lot of full time traders have shown their professional skills by trading this type of Yum thing,but for we less professional guys,shall we really do that? Maybe most of members will not disagree with me that this short term paper trades are fun,but not at all educational.What we intend is to sell option for monthly income in a more relaxing way.It’s our goal,nothing else.
Thomas, I love you but I wish you would be more open to other trades and trading styles as well. Sticking to just one trading style is eventually going to hurt you or anyone for that matter. The markets keep changing and we need to adapt to them.
I enjoy paper trading and do it every month along with back testing new strategies or adaptations on existing strategies. It’s the only way to push the envelope and continue to learn.
Even with this YUM trade, every one made good arguments, but do you know who I would listen to most? Someone who has been trading YUM for the past several months and knows and understands how it behaves. I would put my trust in that person a lot more than someone simplying looking at it from a risk/reward standpoint.
I would place more importance on experience than on indicators or an option pricing model.
Allen,Yum was 45.75,so this condor was expired worthless.That’s how good the professional traders have been doing.It’s wonderful to follow it.I am not a full time option player,but I do agree with you that to have more experiences,we need to be open mind.My style is quite conservative,trying to take the advantage of time decay by setting targets a little far away with more time ( 30 to 45 days),so that I can feel relaxing.
Your suggestion trades as well as paper trades are targeting different people with different opinions,but one thing that has convinces me is that you are very eager to help members.I definitely recommend OG letter from my side,because I profited handsomely.
The fact that the trade expired worthless proves nothing. It’s probability was 65%, so it is expected to make money in 2 cases of 3. The big question is what happens if it goes against you. Since the strikes are only ~4% OTM, the loss will be very quick and there is not much you can do about it. I assume that 15-20% might be a typical loss when it goes against you and 40-50% is also possible in some cases. So you make 9-10% in two winning trades and lose 20% in the losing trade. After three trades, you are about breakeven, and this is before commissions (2-3% per trade even with cheaper brokers). The overall long term expectancy of this trade is negative.
Compare this with opening 65% probability RUT condor (example only) 6-8 weeks before expiration for $2.00-2.20 credit. Using current prices and November expiration, the short strikes will be 13-14% OTM. If it works, you can close it 1-2 weeks before expiration for $0.50-0.70 and have 18-20% return on margin in 5-6 weeks. If it goes against you, you have plenty of caution and time to adjust, and in most cases, it would be possible to contain the loss to 7-10%. So you have two 18-20% winners and one 7-10% loser. Even if you occasionally have 15-20% loser, it is still a good deal.
For me, a condor is attractive if 1) the probability is at least 65-70% and 2) there is a reasonable chance to keep the size of average loser equal or less to the size of average winner.
Of course 9-10% in one week looks better than 18-20% in 5-6 weeks, but the risk is much higher as well. It’s matter of personal style. For me, the decision is obvious.
Hi all of you,
Long time ago since you wrote the article and the replys.
Wondering if KIM should explain us the way he keep losses in the range of 7-10% of his Iron Condor.
¿Do you roll or close the atacket spread?
Thankalot
Antonio,
Sometimes I roll both spreads, sometimes close, sometimes convert to butterfly. It depends on market conditions, time to expiration etc. I’m not saying I always keep the losses to 7-10% but that’s the goal. When I stick to my discipline, the loss is never more than 20-25%.