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This month in our Options Income Trading Lab we had the opportunity to use one of our favorite iron condor Adjustments. We don’t have a name for this one yet, but we’ve bribed our class to help us come up with one so stay tuned to see what they come up with.

At this point in the trade (see risk graph below), this position has a ‘guaranteed profit’ locked in at the profit target we initially set at entry of the trade: $550.

If you look at the risk graph below, the straight horizontal red lines on the right and left sides of the graph represent our ‘worse case scenario’ at expiration – and it is a profit of $550.00 – which was our initial profit target we set when we first placed the trade.

In other words, no matter what happens from this point forward – the worst thing that could happen is that we walk away with our initial profit target of $550. Not too shabby.

And since this trade is placed on a cash settled index – we don’t need to worry ourselves with having the underlying put to us either before or at expiration for any options that are trading in the money. It’s cash settled. So this is truly a ‘set it and forget it’ walk away trade where we could climb into our 1970s Pinto and drive down into the Amazon jungle for the next three weeks and not have a care in the word what happens to this trade. We know that worse case scenario we are going to bank our initial profit target of $550 – and best case scenario (see the tip top of the triangle) we could wind up with a profit of around $990 – close to double our initial profit target.

On the other hand, if we decided to watch this trade through to expiration, we could simply exit the trade anytime we want to with a profit that could range anywhere from our initial $550 profit target all the way up to that $990 – as the white current profit and loss line will begin to bend and bow up to meet the top of that triangle.

And again, as already mentioned – the tip top of the triangle represents our ‘lottery ticket’ – although this lottery ticket is the best kind – where there is absolutely no risk of loss – in fact at the minimum there is a $550 profit.

If the underlying winds up at 775 on expiration day we win that jackpot and bank our max profit potential: $990.

If the underlying winds up somewhere between 770 and 780 at expiration – we stand to profit anywhere from our initial $550 profit target all the way to that $990 max amount.

And finally – once again – if the underlying winds up anywhere else – we bank the $550 profit we set out to make at the start of the trade.

This type of iron condor adjustment is one of my favorites and is part of the reason I love trading option strategies so much and find them so much fun.

For more info on how to learn more about this type of iron condor / options trading be sure to join our free iron condor option income trading newsletter by clicking here. IT’S FREE!

Technorati Tags: adjust iron condor, Credit Spread, Iron Condor, Iron Condor Adjustments, iron condors, weekly options

Iron Condor – Part 2

In this post we re-visit an iron condor trade / iron condor adjustments from one of the more difficult months for iron condor traders in 2011…

August 8, 2011

The stock market continued it’s wild dive today in response to the S&P down grade – with the SPX index losing an amazing 75 points and the RUT index plunging another 63 points. The VIX shot up to around 48.

Here is a current 2 year look at the RUT index chart…

RUT Chart

And here is how our Iron Condor trade is making out….

There are two things to mention here:

1. First, take a look at how far the index is trading OUTSIDE of the iron condor ‘profit tent’ – at this point it is almost EIGHTY POINTS PAST the iron condors sold put strike.

2. Second, take a look at the profit that is showing in the trade: $2,447.00 profit – which is  right around a +26.3% return – and more than DOUBLE the maximum profit potential available in the profit tent area – or another way to put it – more than DOUBLE what was the expected best case scenario when this trade was first put on.

And once again, this was accomplished through using just 1 very easy to implement iron condor adjustment that was made to this trade DAYS before.  Nothing else was needed.

For more info on how to learn to trade and adjust iron condors like this, join our free iron condor / options income trading email newsletter by clicking here

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, Iron Condor Adjustments, iron condors, options trading, weekly options

As we all know the market has taken a major hit over the last 10 days.

The RUT, one of our favorite trading vehicles, dropped a total of 136 points during that 10 day time period – or about -16.3%.

On average, we iron condor traders know (and PLAN FOR) several of these problem type months to come along every year . However, a move this big in this short of a time frame is even more that what we normally expect.

EVEN SO – as you’ll see in the case study below – as long as we educate ourselves on how these strategies work and apply proper trade management to them – these wild gigantic moves don’t need to be something we should fear.

IN FACT – with proper trade management – not only is it possible to survive these huge moves WITHOUT experiencing big losses – it’s actually possible to wind up seeing a pretty decent PROFIT.

Here’s a look at the trade…

As luck would have it, we placed this RUT iron condor on 7-22 – the DAY BEFORE the market started it’s huge drop. Below is a chart of the RUT showing the huge move that was made…

Below is a screen shot of the trade shortly before we placed the one and only adjustment made to this trade – which was based on the management and adjustment rules / criteria that you can learn more about by joining our free newsletter by Clicking Here…

After the adjustment was made, the RUT – along with the rest of the market – continued to make it’s huge drop.

The entire time, this iron condor position was NEVER in any serious danger – NEVER exceeded our pre-determined stop loss point – and in fact – actually began to show an INCREASE IN VALUE as the market continued dropping.

The screen shot below shows the iron condor position on 8-5 with the RUT near it’s low point of 698.

2 THINGS TO NOTICE HERE:

1. Look how far the RUT is trading OUTSIDE of our iron condor profit tent – almost 30 points PAST our short strike.

2. Look at the current profit shown in the trade – $742.00 profit – or about a +7.9% return.

And again, this was accomplished with just 1 ‘stupid simple’ adjustment that was made to the trade DAYS before. Nothing else was done or needed.

For more info on how to learn to trade, manage, and adjust iron condors like this, join our free iron condor / option income trading newsletter by CLICKING HERE

Technorati Tags: adjust iron condor, Credit Spread, credit spreads, Iron Condor, Iron Condor Adjustments, iron condors, options trading, Vertical Spread, vertical spreads

Over the next several posts, we’ll be going over the top 10 Iron Condor / Option Trading mistakes we’ve made ourselves and we’ve seen our students and others make. Experiencing and then learning from these ourselves and/or watching other traders make these classic mistakes has helped us save thousands of dollars in losses and hopefully can help you learn from and save money too…

IRON CONDOR / OPTIONS TRADING MISTAKE #1

Believing In A ‘Magic’ Can’t Lose Options Trading Strategy (like the iron condor)

When I was first introduced to the iron condor it was presented to me as a ‘magic, holy grail’ type of trade where it was nearly impossible to lose. And the argument and reasoning I was given to prove it was certainly strong. Enough so that I swallowed it hook, line and sinker.

Now of course don’t get me wrong – the iron condor IS an amazing trade – and is one that CAN win MOST of the time. But it’s not magic. It’s not ‘sure fire’ It’s not a ‘holy grail’…

Like every other strategy it does have it’s flaws – and if you don’t know what you are doing it’s possible to get banged up pretty darn good.

On the other hand – if you DO know what you are doing with the iron condor – and you fully understand how the trade works and how to correctly manage and adjust it – it CAN come pretty close (at least as close as you’ll be able to find).

So don’t fall for the idea of the perfect ‘can’t lose’ trade – and if you are out there searching for it, I recommend you stop wasting your time. It doesn’t exist.

However, there ARE trades – like our iron condor and our butterfly spread – that when combined with a good solid understanding of what’s going on beneath the hood – and our easy step by step formula to manage and adjust them – it can come pretty close – or at least let’s say – about as close as you are going to get.

For more info on how to learn more about our ‘consistent iron condor strategy’ and our ‘resilient butterfly spread’, join our FREE Options Income Trading Newsletter by Clicking Here

Technorati Tags: Butterfly Spread, Credit Spread, credit spreads, Iron Condor, iron condors, options trading, Vertical Spread, vertical spreads

New video covers the pros and cons of the iron condor as it is becoming a popular option trading strategy. While this strategy can produce impressive, passive results, it’s important not to forget that along with this trade come some potential pitfalls that every trader should get to know and understand.

Even though the iron condor might sound like a complicated strategy – it is actually quite basic and simple. The iron condor is just two separate spread trades – a bull put spread placed below where the underlying is currently trading at – and a bear call spread placed above.

Iron Condor – For Beginners?

When asked if the iron condor is a suggested trade for beginning options traders to be putting on, the answer is both ‘yes and no’ – however the strategy really is not recommend if the rookie option trader hasn’t had good, basic training in how options work and how to correctly and effectively manage risk with these types of trades.

A well known potential hazard of the iron condor strategy is it’s risk to reward set up. The potential loss that comes with this trade can be so much greater than the possible reward.

For example, lets say we place an iron condor trade where the maximum possible gain is $5,000. With this trade, it is entirely possible that our maximum possible loss could be around $25,000 – or more.

And while the above example may really open the eyes of newer iron condor traders to the real risks that is involved with this trade – it is IMPORTANT to understand that while the risk might be there – with the proper training, tools, and use of risk management techniques and adjustment methods – this risk doesn’t necessarily need to be such a frightening issue as it can be very much controlled.

Iron Condor – How To Adjust

The bottom line is that the iron condor options strategy is a great way to trade the market for consistent profits – however, like everything else, before running out and just getting started – make sure that you get good training and understand the real ‘key’ or ‘secret’ to making this strategy work – which is to have a full grasp and understanding on how to properly control the risk with this trade – and how to properly manage and adjust the position when things start to go wrong with your position.

To discover how to learn a very simple, easy to follow, step by step system for trading the iron condor strategy – as well as how to properly manage and adjust – join our FREE Iron Condor Options Trading Newsletter by CLICKING HERE

Technorati Tags: Credit Spread, credit spreads, Iron Condor, iron condors, options trading, Vertical Spread

While looking to create the ‘perfect’ iron condor, we want to search for a ‘boring’ stock, index, or underlying to trade. This is a trading strategy that thrives in calm, range bound markets. We want an underlying that is sleepy, barely moving around, caught in a range.

Some things that can throw a wrench into our ideal and perfect iron condor position set up include….

1. Earnings Announcements
2. News on the underlying
3. A related government report

And even the dang fed holding a fed meeting with a decision being made on interest rates, QE’s, or the like.

This is one reason why a lot of iron condor traders prefer to trade this strategy using an index like the RUT or SPX or an ETF like SPY, IWM, or DIA. Since these trading vehicles represent a basket of many different stocks, for the most part they are immune to big swings and sudden movements as a result of a particular earnings report or news story on one or even several stocks.

The potential problem with trading iron condors on the more ‘boring’ stocks or indexes/ETFs is that the really boring and slow moving underlyings can have much smaller premiums to work with – which can decrease returns while increasing the risk.

But there are the ‘gems’ out there where we can find the ‘best of both worlds’ – and some of these underlyings are surprisingly consistent where it is possible to continually trade them over and over again – month after month – which can allow the iron condor trade to NOT have to spend time every month doing mind numbing ‘research’ looking for appropriate stocks that fit the proper criteria for an ideal iron condor set up.

To learn more about our ridiculously simple ‘paint by the numbers’ method for trading the iron condor strategy month in and month out – be sure to join our free iron condor option income trading newsletter by CLICKING HERE

Technorati Tags: Credit Spread, credit spreads, Iron Condor, iron condors, options trading, Vertical Spread

The iron condor trade can be an extremely basic and simple trade to put on. In fact, it is possible to profitably play this trade just by following a super easy ‘stupid simple’ set of rules month after month after month.

However, for those of you who might grow bored of such a super simple system – or for those of you who wish to mix it up a bit, get more involved, perhaps with the goal of gaining a bit more of an ‘edge’ – there are several tweaks you can apply that when done properly actually CAN give you an edge with these trades – potentially helping you realize more profits faster.

One way to do this is by adding vega into the mix.

By taking a look at the implied volatility level of the underlying you are trading and comparing with the historical volatility, one can get an idea if the options are ‘expensive’ or ‘cheap’. Ideally we want to sell options (and our iron condors) when they are ‘expensive’ – and we want to buy them when they are ‘cheap’.

Since rising volatility levels can hurt iron condor trades from a vol standpoint – and sinking vol levels and help them (help them realize profit sooner) – in a best case scenario we would like to place our iron condor trades when the implied volatility levels of the underlying we are using are ‘higher’ than where they historically trade – with the thought being that these levels will revert – or ‘lower’ back to the norm – which in turn will benefit our iron condor position.

So rather than just blindly placing your iron condor trade at a preset ‘automated’ days to expiration time frame – an iron condor trader who wishes to be more involved with the trade – or who is looking to get that ‘slight edge’ – might want to consider monitoring the volatility levels on the underlying over a period of days before and after their normal ‘iron condor entry date’ – looking for the ideal place to enter the trade based on where the volatility levels are trading at.

This little iron condor tweak – when done correctly – can actually produce a nice ‘boost’ in profits to the trade trade – and in our own experience can MORE than make up for the cost of commissions in the trade. In other words, not only do we walk away with our normal monthly expected profit – but by implementing this additional ‘vega boost’ strategy – we can INCREASE our normal walk away monthly profit AND cover the cost of all commissions in the trade.

Using this iron condor ‘vega boost’ technique is actually really simple to do – and seeing exactly where the implied volatility levels of an underlying are trading at compared to where the historical volatility levels are trading at – and then using that info to determine WHEN and WHERE to enter the trade – this also is extremely easy.

For more info on how to learn to properly trade the iron condor as well as other option income trades, join our free option income trading newsletter by clicking here.

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Technorati Tags: Credit Spread, Iron Condor, iron condors, options trading, Vertical Spread, weekly options

About six months ago we were working on a new trade in our iron condor butterfly spread trading lab that was meant to try and take advantage of the big volatility.

Right around that time we read an email (I think it was an email – it might have been an iron condor article) that basically said that the iron condor trade was dead – that the market had changed and since the market was swinging around so wildly that iron condor traders should basically pack things up and put the strategy to bed.

Yeah right. Okay, whatever.

Ridiculous of course.

This trade isn’t dead – nor will it ever be – unless someone suddenly decides to take options and option trading away from the market place altogether.

And I don’t think that will be happening anytime soon.

However, at the same it was true that with increased volatility came an increased ‘challenge’ in managing the iron condor  trade. More monitoring of the positions were needed and potentially more adjustments – and for some of the months the big movements could threaten our short strikes in the trade – and many times when we put the trade on we did so realizing that not only was it possible for the underlying to reach or breach our short strikes we were setting – some months it seemed as though it could be a ‘given’ that they would.

Or at the very least, we felt VERY confident that where the underlying was trading at when the trade was first put on – would NOT be the spot it would be trading at a week or two later. And probably nowhere even close.

Which then lead us to think – ‘well then, if we can feel this confident that the underlying won’t be trading at this spot in a week or two from now – but then on the other hand we also don’t know – or don’t want to try and predict – which way it will have moved – what is the best trade we can do to take advantage of that’?

And while several trades came up in the discussion – one in particular arose that I hadn’t seen or heard of before – which was the ‘upside down super narrow iron condor / iron butterfly’.

This trade is unique and has some definite advantages – and after trading and testing this new spread position out – and exploring the different ways to tweak, manage and adjust them – I think this is a trade you WILL want to consider adding to your iron condor / option income trading ‘toolbox’ – especially for the more volatile months that will always come along.

For more info on how to learn more about this type of trading – join our free option income newsletter by CLICKING HERE.

Technorati Tags: Butterfly Spread, Credit Spread, credit spreads, Iron Condor, iron condors, options trading, Vertical Spread

While one can find some good info on how to go about adjusting the iron condor strategy – there is very little – if ANY info – on how to properly adjust plain credit spreads.

Adjustments are an important and vital part of successfully trading iron condor, the butterfly spread, diagonals, credit spreads – or any option income strategy for that matter – and the way we approach most of these trades are to go into the trade with the understanding that adjustments will most likely be necessary. We just understand and embrace the fact that it is going to be part of the management process – and in the rare cases where they aren’t necessary - well, we just consider that a blessing and gift from the good option gods above.

Once you start to look at these trades (the iron condor, butterfly spread, diagonals, and even credit spreads) in this way – with the expectation that adjustments will be part of the game plan rather than a last ditch emergency technique to try and save a losing trade – it actually frees things up and allows you the opportunity to now view these trades in a whole new manner. It turns this game into sport where you now have much more control – where you are no longer at the mercy of the market. Trading options for income no longer have a heavy ‘probability’ factor tied into it. Instead, it now becomes a game where all you need to do to win – or more importantly – keep from losing money – is to know how to ‘keep the dang profit tent over the underlying’.

Some would way that makes it sound too simple – or ‘yeah right – easier said than done’.

But I can assure you, it really is that simple.

Or, I should say – it really CAN be that simple to those who are willing to take the time to ‘put in the time’, educate themselves, and learn how to ‘get it done’.

Learn the ins and outs to trading the iron condor, butterfly spreads, and credit spreads in this way – where you are in control – with the understanding and expectation that adjustments and management techniques WILL be necessary – and in fact when done correctly can create a trading environment where it’s possible for you to be even MORE profitable and profitable MORE quickly – and with way less risk.

To learn more about how to trade options like this join our free options income trading newsletter by CLICKING HERE

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, iron condors, options trading, Vertical Spread

We found a good little video this week on using volatility to find bargains on options. Once one has been trading the iron condor strategy for awhile and has gotten the ‘hang’ of it – the next step seem to always be finding tools and tricks to help in gaining an advantage in regards to when and where to get in – or ‘leg into’ the trade. This isn’t something that we necessarily recommend for those just learning this trade as it is much easier to just come up with a simple step by step game plan to get into the trade at certain number of days until expiration and sticking with that regardless what the market is doing.

However, for those who have been playing the iron condor trade for awhile – and who might actually getting ‘bored’ with entering and exiting using automatic rules – volatility levels can be a good way to notch things up a bit. Reading the vix – or the rvx – and using levels to help determine when to get into the whole iron condor trade – or step into it one leg at a time.

In our free newsletter we get into some lessons on some cool tricks and tools you can use to help get into these types of option trades at what could be considered ‘better’ or ‘more ideal’ entry points. If you haven’t joined our free newsletter yet – you can do so here.

Until then, here is the link to the video on ‘Using Volatility to help find ‘Option Bargains’.

Technorati Tags: Iron Condor, iron condor spread, iron condor strategy, iron condors