Iron Condor - Got Pepto Bismol?
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My plan for trading the iron condor when I first got started trading this strategy was to put them and keep them on all the way until expiration.
Then - if everything went well and the trade stayed beneath my profit tent - I'd just them expire worthless and keep all that sold premium in my account.
Back then I believed this was the best way to play the trade, because not only would I not have to pay my broker to take the trades off - I would also be able to keep the entire amount.
But that was a long time ago - and since then - things have changed.
After a lot of sleepless nights, too many close calls, a couple painful ulcers and one near hernia, I've changed the way I run my Iron Condor business.
Now - as soon as I place the trade, I set a contingent order with my broker to buy back the call spread - as well as the put spread - once I've made the majority of the profit in each spread.
Here's an example: Let's say I sold an iron condor on the index XYZ for a total of one dollar - or around fifty cents each side.
Then I would set up a contingent order to buy back the put spread of my iron condor for.05 or.10 (or at the very most.20).
Now perhaps some of you out there might be scratching your head wondering why I'd do something this. I know when I first started trading these - if someone told me this was their game plan, I'd be scratching my head. Seems like a futile and even sort of dumb thing to do.
Personally I don't think so.
Okay, maybe it's true that doing this will cause me to make less profit than if I were to just hold the trade through expiration and let the options expire worthless.
But as you will see - that's not necessarily correct.
Let's take a second look at the amount of money we are talking about here. Ten cents per side - or twenty cents total. Okay - sure - it's nothing to sneeze at - but when you step back, get a broader look, and start to take a few other things into consideration - it can actually start to look quite miniscule.
What is significant - at least to me - is that by taking off those positions, I've LOCKED IN the lions share of the profit available in the trade.
AND - I've reduced my risk.
AND - I also now have the ability to generate ADDITIONAL profits from this iron condor position - more than what was possible when I originally placed the trade. And I can generate this additional profit in the trade WITHOUT an increase in the trades original risk.
Let me show you what I am talking about here:
I've found that many times during a trade, the premiums in options can drain quite rapidly. In fact, its possible for a spread to drain the majority of its premium in a matter of days.
Going back to our example - let's pretend that I put an iron condor on about 40 days until expiration. For the trade I receive around a 1.00 credit. Fifty cents for each credit spread on either end of the position.
Then, as soon as I put the trade on, our underlying starts to move down and continues doing so for a couple trading sessions.
On the fifth day (just 4 days after I put the trade on), I look at my position and see that I can now buy back the vertical spread on the call side of my iron condor for just .10.
If I do nothing, I am choosing to risk that CALL spread margin for the next 36 DAYS for a measly $10.00 of remaining profit (per spread).
However, if I decide to just take it off for ten cents - I will have LOCKED IN the lions share of the available profit in that call side credit - guaranteeing that return on investment in just four days.
Another thing to consider, is if the stock or index we are using abruptly changes direction and heads back up (which of course DOES happen all the time) we really have nothing to be alarmed about since we've removed those upper options and eliminated all upside risk.
Even better, if our underlying continues to retrace back up - it's possible that I could RESELL the exact same credit spread that was sold when the trade was first initiated - perhaps for around the same credit amount - or MORE - allowing me to actually get a BETTER return on investment than I was originally hoping for - WITHOUT increasing any risk in the trade.
And even if I don't resell any spreads - but just buy them back at.10 to close out the entire trade - it reduces my risk, frees up my capital sooner, increases my ROI over number of days, and gets me out of the trade MUCH more quickly than if I were to try and hold on all the way until expiration.
Trading this way lets me take a 'vacation' away from the markets until it's time to put on another trade. It allows me to peel myself away from my trading monitor and get out and enjoy all the other things in my life I'm interested in - without always thinking about how my iron condor is performing - or fretting about what I'll do if there is a sudden stock market crash.
Getting this 'trading break' - this freedom to go out and do things without always feeling the need to check quotes on my phone - not having to worry about always being 'on game' and strategizing in my head about what adjustments I might have to make - just being able to sleep in mornings for as long as I please without stressing out about whether the market is going to make an opening gap...
That's priceless.
Or - at the very least, it's DEFINITELY worth the.20 or so it costs me to exit early out of the trade...for what is STILL a remarkable monthly profit.
Article Source: Articlelogy.com
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