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We closed out our July trade for just under 9 percent gain.
See risk graph of position right before closing it out below…
Our trade with profit target hit and right before closing it out.
We launched our July trade this last week and so far so good. We’ve put some curbs in place for any big moves that might occur short term and even though we’ve flattened this trade out considerably our theta is still really rich and expect to hit our profit goal in just a couple days - knock on wood…
In our previous post (May 18) we showed a risk graph of our flattened out iron condor / butterfly position right after we ‘tied it off’ with several adjustments including one of our ‘magic puts’ - in an effort to maintain some control while the markets swing around here wildly.
Today on the 20th - with another big down day - our ‘magic put’ kicked in once again pushing our current P&L line up nicely into profit where we did wind up closing. See risk graphs below…
Above: Our ‘Magic Put’ Adjustment kicks in as the market tanks again
Above: After one of our downside hedges have been removed as
we begin to unwind this position for a closed profit
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We’ve pretty much tied off our current butterfly position with the 2 adjustments shown in the graph below while the market continues to whip around here with fairly big moves. This current position with adjustments will hold up well regardless what the market throws at us over the next week or so - while at the same time still allowing us to make some profit between now and then.
Plan to include a video clip here shortly showing a bit of trouble we ran into while initially moving into this adjustment. Usually the bid / ask prices on the RUT are filled quickly and easily right at the mid point - however for some period of time there after the ‘flash crash’ it was unusually difficult to get fills on these types of adjustment spreads on the RUT - and we were forced to move to a plan B to adjust our iron condor / butterfly positions instead of being able to hedge the way we normally do.
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One of the fastest and easiest ways to hedge / adjust the type of option income trades we do (like iron condors, butterflies) is to simply purchase a cheap extra long call or put in the direction that the market is heading.
While some traders discount this technique, the power it can have was proven with a live butterfly trade we had on during Thursdays meltdown.
About 2 hours before Thursdays big sell off started, we purchased an OTM put as a way to ‘adjust’ and ‘hedge’ our iron butterfly we had on. This was just a normal adjustment we make when our position hits certain criteria. Of course we had no idea was about to happen to the market a few hours later.
When you look at the graph below, realize that before the craziness started, while this position was still within - or ‘under’ the profit tent area, it was a losing position - underwater to the tune of about -$100.00 - or about -2.5%
When the market started crashing, that OTM put we had purchased earlier in the morning really kicked in.
In the screen shot below (taken at 11:40 PST) you can see how suddenly we are way outside our profit tent, however, thanks to that extra OTM put, our -$100.00 loss has now become a -$10.00 loss - basically break even….
Screen Shot Above Taken at 11:40 am
Then, in the screen grab below - which was taken at 12:09 PM PST (about 30 minutes later) - our trade is now at a profit of over +$1000.00 - or over +20% - thanks to the purchase of that extra OTM put…
Screen Shot Above Taken at 12:09 pm
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Interesting article recently found online detailing a particular ‘Put Condor’ trade that is quite similar to our Condor-Fly’s we’ve been trading. Take a look at the risk graph on this condor trade
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The iron condor strategy is used by option traders ideally in non trending situations. The spread takes advantage of theta decay in options – as the day progress moving towards expiration day, all options are losing value – and in the case of the iron condor strategy – as long as the ‘sold’ strikes of the trade are placed well out of harms way (of the underlying reaching or ‘breaching’ them) these trades can usually expire worthless allowing the iron condor trader to keep the entire premium received.
Iron Condors are built from 2 individual credit spreads – one on either side – once again, placed as far out of harms reach (of the underlying touching or moving through them) as possible while still bringing in a respectable credit.
Placed above the stocks current price is a bear call credit spread – usually positioned at least one standard deviation away from the underlyings current value. Below the iron condor investor places a bull put spread credit spread – also usually at least one standard deviation away from the stocks current trading price.
During the duration of the trade, the underlying can fluctuate around just as long as it doesn’t do so too wildly – and just as long as it remains within the predetermined ‘range’ created by the sold credit spreads on either side.
This type of option spread can carry with it an extremely high probability of winning as in most months the underlying, if chosen correctly, should not too far away from it’s current position. In the months where the underlying DOES begin to move too far, too fast – the trader managing these positions should have an adjustment plan in place to contain and cut short losses – which can be significant with these types of trades due to the high probability of winning / poor risk to reward set ups. However, if one does understand the proper way to manage and adjust the iron condor trade during it’s few seldom months per year – this type of trading can be extremely rewarding.
There are a number of different ways to trade the iron condor options strategy.
It seems as though many option traders prefer the wider and higher probability condor. This options spread usually has wings on either side, spread wide apart on the risk graph screen. The wider the two credit spreads are placed apart from each other - the higher the probability that either one won’t be touched or penetrated by expiration day - however the downside is that the wider these two vertical spreads are placed apart, the less credit that will be brought in - which in turn increases the risk on trade.
Lower probability iron condors of course have the two credit spreads closer to one another. These trades bring in more premium, however the probability of not touching is lowered the closer the two credit spreads come towards each other. These lower probability iron condors can bring in higher returns, however because the two verticals are both closer to the current at the money position, they will most likely require more adjustments and management. But to help offset that fact, remember, there is more premium brought in at the beginning of the trade which can assist in funding adjustments.
Finally, the iron butterfly, which is technically an iron condor (a put credit spread and a call credit spread). The shorts on this trade are both sold at the same strike - usually At The Money (where the underlying is currently trading at on the price chart). This is the lowest probability iron condor and will require the most management - but again, like the intermediate condor described above, this is offset due to the fact the a larger amount of premium is initially brought in which can help a lot in the funding of adjustments.
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The iron condor option strategy is an option spread that allows the option trader placing the trade to realize a good return on investment in a relatively short amount of time by ‘betting’ on where the stock or index being used WON’T go within a specified period of time.
Instead of trying to guess which way a stock is headed, which is how ninety plus percent of investors trade - with this trading strategy, the iron condor seller instead attempts to make an ‘educated guess’ where the stock won’t go - or a general area to which the stock will be confined over the next so many days to expiration.
A tool that the iron condor trader has to help in determining this is the standard deviation calculation. The standard deviation is a mathematical calculation that specifies how far up or down an underlying SHOULD move within a period of time based on past / current performance of the underlying.
While of course the ’safe’ range that is given by the standard deviation calculation is certainly not guaranteed to be one hundred percent accurate in all situations - it does provide a very good starting point for iron condor traders in helping to determine at which strikes and how many days from expiration to place their trades.
photo credit: quinn.anya
Upon first learning about iron condors, many new option traders will just put them on without having a full plan in place for how to manage the trade if it goes against them - or how and when to close the trade once it is profitable - or if they will even close it at all.
I was guilty of this myself when I first discovered this option selling strategy. I was so stunned and excited at the concept - that I didn’t do what more likely would have been the more responsible thing to do - which is step back, take some time, start studying and learning more about all the ins and outs of the strategy and then start paper trading it.
Instead, I was so ’sold’ on the pitch given to me by this strategy that I simply just logged into my broker account and slapped one on. And I think this is the exact same thing that happens to a lot of ‘rookie’ iron condor traders when they first learn of this trade.
Unfortunately what inevitably happens is that eventually at some time the stock or underlying being used will go a little wild and the position will start to get into some trouble and losing some serious money and then it is at THAT point that the new iron condor trader will try and get serious about properly educating themselves on how to manage and adjust these trades. The problem is that at this point it is usually too late.
photo credit: A. www.viajar24h.com
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