Iron Condor

Posted on May 9, 2010, 1:39 pm, by Iron Condor, under Butterfly Spread, Credit Spread, Iron Condor, Vertical Spread.

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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….

picture-6 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…

iron condor Screen Shot Above Taken at 12:09 pm