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Adjusting Iron Condors and Credit Spreads

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Versatility of Iron Condor Spreads

Here is a study of a variation on the Iron Condor spread trade – a skewed, or unbalanced put condor spread.

This trade which was constructed using put options on GS early this year shows how these spread trades can be tweaked and manipulated in a variety of ways to capture profits.

The condor trade has a similar risk graph to the iron condor, however these trades are made up of all put options or all call options.

Iron Condor Trading

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Iron condor trading can be somewhat challenging for us option traders simply because we are only given a limited amount of times to ‘play’ every year.

These trades are monthly income trades – we put them on ONCE every month. For many – myself included – that’s the beauty of these trades. I only have to worry about one trade per month – and it’s a low maintenance trade with high probabilities that usually only throws us a curveball one or two times per year.

That is what is so great about these trades.

It’s also what makes these trades so challenging.

Let me explain.

A couple years ago decided to learn forex trading. I had no knowledge of forex what so ever going into it – I just saw everyone else around talking about it like it was the next big thing so I decided to jump in, see what it was all about, and if it might be something for me.

However, the way I approach anything similar is to totally immerse myself in it – run as many tests as possible – as quickly as possible – so I don’t waste a bunch of time that ultimately doesn’t turn out to work for me.

So with this forex example, I purchased the best course I could find and dove in. Then, after going through it a couple times, I immediately began paper trading the system that was taught in the course – using real time data – from about 6am to 1pm every day.

And luckily for me, the system that was taught in the course included a 30 minute time frame system as well as a 60 minute time trade system. By the end of two weeks trading this system every day – I had enough ‘real life data’ to help me determine if the system actually worked – as well if it was a way of trading that was in align with me.

The thing with iron condors is that these also should be approached and ‘tested’ in the same way – the only thing is – there are only 12 times through out the year to place them – and for most of those months there will be very little if anything to actually do other than just let the trade run and collect your money.

Usually there are a couple months when things can get hairy with iron condors – forcing a trader to make adjustments – which means – there are actually only a couple times per year for a new iron condor trader to actually get any real ‘experience’ trading – and I imagine most traders might not have the patience for that.

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Best Option Strategy

BMW Oracle Racing Team Honored Aboard USS Midway Museum

What is the ‘best option strategy’?

Of course this could be viewed as a silly question as the ‘best option strategy’ is purely a matter of opinion as one trader will no doubt have a favorite option trading strategy over another.

However, one not so silly answer to that question could have to do with current market conditions as well as where the option trader believes the asset being traded will be moving over the next couple days to couple weeks of time.

For example, if a trader believed that Stock ABC was going to be range bound over the next four weeks of time and the volatility levels on ABC were a bit higher than average, the best option strategy might be an iron condor spread – or a butterfly spread.

Or, if the same trader believed that ABC would be turning bearish and moving slightly down and the vols were lower than average – the best option strategy might be a calendar spread to take advantage of the rising vols if in fact the underlying did move down.

If the same trader was convinced beyond a shadow of a doubt the the stock being used was about to blast off into the stratosphere – the option option strategy might be to sell a put credit spread – or a bull put spread.

Finally – if the trader was sure that the market was going to crash like it had  never crashed before and the world would come to a fiery end before morning – the best option strategy would probably be for him to try and withdraw all his money from his option brokerage account and then head on down to the local Home Town Buffet and pig out one last time.

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IRON CONDORS- Whats an Iron condor ?

Iron condor is an income generation strategy consisting of 2 credit spreads. Mainly used in neutral markets.

Bull Call Spread

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The bull call spread is an option spread designed to benefit from a bullish market (as the name of this strategy does imply).

There are different types of vertical spreads – the credit spread – and the debit spread.

The credit spread is a spread trade where the trader placing the trade ‘sells’ an option closer to the money (where the stock being used currently resides) and then purchases another option behind it – or further away from the money than the one being sold. The purpose of the the purchased option is to provide ‘covererage’ or ‘insurance’ from a move against the the position – and by having this ‘coverage’ in place, the trader can create a limited loss position.

On the other side of the coin is the debit spread. With this trade the non directional trader putting this position on ‘buys’ an option closer to the money from where the stock being used currently resides – then sells another option behind it – or further out of the money. The option that is sold is done so to help reduce the risk presented by the option being bought – as it brings some credit into the account to off set the debit made by the trade.

In the same say as the additional option in the credit spread helped to keep that position one which had ‘limited’ losses – the additional option in the debit spread keeps that position from the potential of unlimited gains – making it a limited gain position.

The bull call spread is a debit spread – placed by an option trader who is bullish on whatever underlying is being used for the position.

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Iron Condor Strategy

to fat to fly?

The iron condor strategy is the perfect trade for range bound mostly trend-less markets. This is an option spread strategy that allows the option trader to take advantage of the passing of time as the the iron condor spread generates it’s profits from theta decay – or – the out of the money options which were bought / sold losing their value over time.

The iron condor is created by placing two credit spreads – or vertical spreads – on the outer ranges of the area on the underlying chart where the underlying is not expected to move to during the timeframe of the trade. On the upper end of the trade a bear call spread credit spread is placed – a trade which benefits from a slightly bullish to neutral to bearish movement on the stock or underlying. On the lower end we can find a bull put spread – a credit spread position that makes it’s profits from a slightly bearish to neutral to bullish market scenario.

While the trade is in progress, as long as the stock from which the iron condor was built from does not move too far too fast – and remains within the area on the chart between the two sold vertical spreads – this trade will be profitable.

Many of these trades can be place with very high probabilities of success – some in the range of 80% or so. However, what is often not talked about and overlooked by novice traders are the few times in the year when these trades can potentially bring about serious losses due to high volatility and whippy movements – which is why many seasoned iron condor traders warn those new to the game to learn this strategy thoroughly including the proper ways to manage them and adjust.

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Options Selling

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One of the most fashionable options selling strategies of non directional trading investors is the iron condor strategy.

The iron condor spread is a theta positive option strategy option traders use when they feel the underlying being used will stay within a range on the price chart over the next however many days are left until expiration day.

Iron condors are actualy two credit spreads – a call vertical spread above the current price – and a put vertical spread below the current price.

As long as these trades are placed correctly and the underlying being used doesn’t swing around too wildly during the duration of the trade (usually iron condor traders use time frames between 30 days and 90 days with the majority of them using shorter time frames) the trader can expect to win with these trades a majority of the time.

Iron Condors are attractive to option spread traders because they provide good probabilities of winning and they can be a very hands off trade requiring little time actually ‘trading’.

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Credit Spread Option Strategy

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Adjust Iron Condor

Learning how to correctly adjust iron condor is possibly the most important skill iron condor traders can learn.

While yes it is true that the iron condor spread has a high probability of winning (sometimes as high as 80 percent or even 90 percent) – the manner in which these spreads are constructed when they get into trouble – they can get into BIG trouble – due to the fact that this option spread strategy has an extremely challenging risk to reward ratio.

Many iron condors that non directional trading sellers utilize are of the 10 delta or less style – and these trades usually risk far more in dollar amount then they can ever give off. If a spread trader isn’t careful – and they let one of these trades ‘get away’ from them in a volatile month – it certainly is possible that a trader can at a loss point on just one of these trades that would take many winning months just to get back.

Whether a option seller is skilled at adjusting iron condors as they move against them – or simply has a risk management plan that will get them out of the trade at a predetermined loss point – in order to have long term success with the iron condor proper risk management is key.

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