- he use RUT, but any index can be used
- he puts every month
- the main Iron Condor I use is a trade that I believe has around an 80% probability of success.
- So every month – at some point between 30 and 40 days from expiration - I place a new Iron Condor Trade – on the same underlying.
- I don’t want to put the trade on LESS than 30 days from expiration because I feel I will not be able to receive enough premium
- And I don’t want to put the trade on MORE than 40 days from expiration because I feel it begins to give the underlying too much time to actually move
- If I choose to place trades between 35 and 40 days out, I need to have at least double the
amount of capital I plan to use in each Iron Condor trade – as the separate monthly trades
might overlap with each other.
- If I plan to use my allotted capital only in one Iron Condor trade at a time – I will need to
place my trades 35 days out or less – so the trade will be closed out – or near closing out -
by the time the next months entry time rolls around.
he speaks about calendar days, 35 days are calendar days
- When it comes time to select strike prices for my Iron Condor, there are 3 things I take
into account.
They are: Standard Deviation, Delta, and Support / Resistance Levels.
-What is an acceptable credit?
For myself, its no less than 5% of my total risk amount for each side credit spread – or no
less than 10% of my total risk amount for the entire iron condor.
- at least 1 standard deviation away from the underlyings current price.
- I would choose to sell a short put with a
delta of -.10 or under and sell my short call with a delta of .10 or under.
- when possible I want to try and sell the short strikes of my Iron Condor
beyond strong areas of Support and Resistance - as I feel these areas can assist in keeping
the underlying from reaching my shorts.
- My broker allows me to place all four legs of my Iron Condor together as one trade.
- Now – as soon as I place the trade, I set a contingent order to buy back the call spread - as
well as the put spread - once I’ve made the majority of the profit in each spread.
- For example, if I sold a RUT Iron Condor for a total credit of $1.00 – or .50 each side – I
would set up a contingent order to buy back the call spread for .05 or .10 (or at the very
most .20). Then I would set up a contingent order to buy back the put spread for .05 or
.10 (or at the very most .20).
- 3 days after I put the trade on, I see that I can buy back my CALL side of the Iron Condor
for .10.
If I do nothing, I am choosing to risk my CALL spread margin for the next 37 DAYS for
a measly $10.00 of remaining profit (per spread).
On the other hand, if I buy it back for .10, I lock in the bulk of the profit for the CALL
side – making that ROI in just 3 days.
- Then if RUT bounces back up – which it will often do after a drop - I no longer have any
risk on the upside.
- It can also totally eliminate my exposure to ‘Expiration Week Hyjinks’, where options
can start to act funny during expiration week via the Greeks.
- Here is an Iron Condor Trade for example:
10 point strikes on the RUT, about one and a half standard deviations away from current
price, between 30 and 40 days away from expiration.
Now, using the above RUT Iron Condor example – I could expect to take in a credit of
around 1.00 on an average month. My risk would be 9.00.
Or, if I were to put on the above trade using 10 contracts, I would bring in a credit of
around $1000.00 and be risking $9000.00
- I could afford to absorb a loss of $4000.00, 2 trades out of 10.
- On the other hand, if I CAN’T afford to have made say less then $5000.00 during a 10
month span – then the most I can afford to lose on a trade would be $1500.00
- In the above example, $1500.00 equals about 1 and 1/2 times my original credit I
received for the trade – or my expected monthly profit for the 8 good months.
- I may even tighten it up to 1 times my original credit. But NEVER more than 2 times my
original credit
- Anything more than 2 times my initial credit, I risk losing too much for my total income
goal. And it could wind up putting me in a position where it would take me MORE than 2
winning months just to make up for the loss – which could be hard to deal with
psychologically.
- What this does is change the Iron Condors awful 9 to 1 Risk / Reward Ratio to a much
more acceptable 2 to 1 – or 1 to 1 Ratio.
- But when it does (and it eventually WILL, believe me) – that’s my cue its either time to
get out of the trade entirely - or adjust.
- I feel that this Risk Management Concept might be the MOST IMPORTANT part of the
Iron Condor Strategy for me to fully understand and follow - religiously.
- If the trade moves against me and my Current Loss nears my Max Pain Point ($1000.00
in this example) –its time I adjust.
- ADJUSTEMENT 1: What I’d do with this adjustment is take off the spreads on the losing side of the trade.
Then, depending on market conditions, I would consider placing new spreads higher /
lower than where they previously were.
- If I am within a week of expiration day I would NOT attempt to make an adjustment as I
feel there is not enough time left to effectively do so
- If I DO find myself in a situation where I am in the market during expiration week I
would close out my entire position at the very latest by Wednesday of expiration week
regardless of where it is at profit / loss – wise – so I am NEVER in a trade on expiration
day.
- ADJUSTEMENT 2: For example, if my call spread is the spread that is in trouble, I would buy back some of
my call spreads. Then I might consider selling new call spreads higher up using the same
criteria I used when I originally entered into the trade.
- ADJUSTEMENT 3: When a trades Current Loss nears my Max Pain Point dollar loss amount, I would buy
back just SOME of the short strikes (the strikes I have sold).
	Once I had bought back spreads, depending on market conditions, I might consider
selling new spreads higher / lower choosing short strikes using the same criteria I used
when I originally entered into the trade.
- ADJUSTMENT #4: ADDING A CALL / PUT
This adjustment consists of simply buying additional Call(s) /Put(s) on the losing side of
my trade.