NEW: Live classes are posted - Click here to see the calendar!

Trading Options: How to Setup an Iron Condor

March 18th, 2014

Hey it’s Sasha Evdakov founder of Rise2Learn.com and in this video want to talk to you about trading options more specifically what the heck is an Iron Condor.

You probably are wondering what it is and you might have heard it around but when you trade options there’s some spread that you can do and Iron Condor is one of them. In this video I like to explain to you exactly what an iron condor is and show you a diagram behind the simplicity behind it and furthermore how to set one up.

We’re not going to get into adjustments of the iron condor or anything like that but I just want to show you the basics and foundation behind an iron condor.

options-trading-iron-condor.0011

Now before we get to the Iron Condor I want to show you the regular call spread along with the vertical spreads because the iron condor need some of those foundational knowledge and information behind done understanding the regular options because when you understand the foundation behind options and you know how to manipulate them and how they work that's when you can start creating more complicated spreads and things that are a little bit more advanced and I wouldn't call an Iron condor too advance but you know it could be a medium level trade.

options-trading-iron-condor.0027

In that sense let's take a look at this regular call spread so you can see that the max loss would be right around the two hundred and fifty dollar level and that would be the price that we pay for the stock. Now the good thing about this is that we have an unlimited max profit but we have a cap max loss the problem with this is that there's option deterioration and if you remember what happens when options deteriorate is they start to accelerate right around that 40, 45, 50 day mark and can really start to accelerate around 30, 35, 25 day until expiration.

Normally you don't want to buy too many options in those time frames let's say around the ten fifteen dollar or 10, 15 day to expiration unless you know what you're doing but you do want to sell some options.

options-trading-iron-condor.0046

Now when it comes to selling I’m going to use the example of the bullish called vertical spread because setting up an Iron Condor is very similar to buying a call vertical spread and also buying a put vertical spread now the difference is with the iron condor is you’re actually selling these types of trades but the profit picture looks very similar and identical.

options-trading-iron-condor.0053

I’m going to use this profit picture as an example so you can see that the max loss here is again capped partly just like the calls spread and we have a max profit that’s also cap because we sold something to protect or reduce our risk.

Now this gives us a little bit of Beta cushion and reduces our Theta and the same thing happens when we do the opposite side of that or the put vertical spread. Now again remember with the iron condor we’ll be selling these but the picture looks identical.

options-trading-iron-condor.0047

Again you have a max profit that's capped at around 350 and a max loss around 200 dollars so with that being said when we put these two together you get the Iron Condor and the Iron Condor creates this effect where if the stock is between a certain range you make money based on the premium deterioration.

Your max profit is if the stock stays in between that range that you purchased. You don’t have to hold the stock all the way to expiration most people don't. So don’t think of it that way just think of it as capturing your Theta premium or your money for those few weeks or couple days that you hold the stock from deteriorating in the premium value and then you can sell it.

Here you have the max loss of let's say two hundred dollars and max profit around three hundred dollars. They make the most of the stock is between fifty dollars and seventy dollars now you break even around that forty seven to seventy four dollar range.

Now you can set this up in more of a bullish position meaning if the stock is 55 you give a lot more room to the upside and this gives you opportunity to capture the premium from the deterioration of the option and also it gives you some upside room or you can set it up to the negative side or bearish side meaning if the stock goes at sixty-five dollars or sixty six dollars then it gives you a little more room to the downside but you're also making a lot of gains from the deterioration of the option.

The point here is you're making money if the stock doesn't move at all so that's kind of the key or the advantage behind iron condors. Let me show you what this looks like in a real example.

Looking at Amazon here we can see that we have 32 days until expiration so we can choose to go with this one or the 60 day one but personally I would do something with an Iron Condor around the 40 45 maybe 35 day range once you start getting in the 30 you start getting into on maybe not enough room for adjustments but again it depends on the strategy or the type of thing that you're trying to do and how long you plan to hold it.

Let's just say sixty-day or thirty day you know I would probably choose the 60 day one so that's the one we're going to do and here we are we're looking at Amazon so what I'm going to do is rather than just going and buying vertical we're actually selling a vertical and we'll do the put side first so we’ll sell the vertical and here it'll give us the 365 and 360 and I'm going to change it to the 355 so we have a 10 point spread.

We’ll analyze the duplicate trade and this is kind of what we get we get something that looks like this and you can see that it almost looks like a call bullish spread so again this is because we're selling it rather than buying it so and the reason for selling is because we want to collect that Theta premium and you'll see where we'll get to in a little bit why I am actually selling it rather than buying it so going back we want to do the same thing with the call side and we want to sell vertical so now it changes it to the call and again I want to do 10 points spread.

I'll go to the 395 and I have 385 we’ll analyze the duplicate trade and this is what we get so you can see we have a pretty tight profit picture right here and we have two different spreads setup if I take one of these off you can see there's my call spread that I'm selling and if I take the other one off you can say see that there's my put side that I'm selling.

Now we can choose to do this actually as well by just going to hit sell and then go to an iron condor if you're using the Think or Swim platform and analyze the duplicate trade. You'll get something like this and then you'll have to make the adjustments from here by changing and manipulating your strike prices.

Here you can see as I manipulate and make my adjustment it slowly starts to shift the iron condor into kind of wider range so here what I'm doing is I'm playing around and looking at the figures right here to see what profit picture do I like and what is appealing to me visually in terms of the risk and reward graph.

Here as a stretch it you can see that right here in the middle is the stock price at 375 so if the stock doesn't move I collect every single day $2.55. Now remember we have 60 days to go so if i start moving this up in terms of days you can start to see that after a few days it starts to accelerate to four dollars you know seven dollars.

It starts to move up in the in the realm of my profit so every single day I start making more and more money and this is just with one contract if I had three or four contracts it would be you know forty five dollars a day you know so right here you can see that if the stock doesn't move by 5-2-2014 I would make eight hundred dollars without the stock even moving.

options-trading-iron-condor.0134

You can set these up to be a little bit more bullish or a little bit more bearish so if I actually move the strike prices to 405 and let's say maybe 400 or 410 you can see that as I start making these adjustments and start moving things around you can see that now I have more room to the upside.

Now of course I can make it very tight and go to 355 and 365 and give myself more room on the upside or I can do the same thing on the opposite side and here we have equally distant strike prices meaning 10 on the call side spread and we have 10 on the put side spread but if we start making a change and we go tell me five on one side you can see how it slowly starts to shift the graph and how that makes it look.

I'm a little more bullish with kind of looks like a vertical spread if you compare it to a vertical spread however this allows the stock to not move or even go down about ten-point and I’ll still make my max profit and it gives me a lot of room to the upside.

Now the downside is that there is more Commission so that's kind of how the iron condor works and again I'm selling both for those on that side. If we were to actually buy and iron condor this is what it looks like meaning if the stock doesn't move and over time what happens is you would lose money.

options-trading-iron-condor.0112

If you have large range swings and you know it'll go all the way to the left or all the way to the right you know you can have a price move then you could buy an iron condor but typically you'd want to sell an iron condor because due to your profit picture this is kind of what it would look like and that the stock doesn't have to move.

Again as far as where to put the strike prices that’s something that you know goes in detail into a little bit of another video are but this is how you set one up and you know normally I would say you can do a 50-50 spread  meaning that okay half is here half is there and you’re about half here half there but stocks don’t stay still.

You will have to make some adjustments maybe take one side off then shift it over or take the other side and shift it over. You will have to manage your risk accordingly but in terms of setting one up this is how you do it and overtime this white line starts to reach the top of this red line and that's what happens with an iron condor and you can set these trades up on pretty much any stock and just let it go for even a week.

It doesn't have to go all the way to expiration even if it just goes for one or two weeks you could make three hundred dollars on two contracts if it doesn't move or even if it moves to down the 360 you're still up two hundred dollars or if it goes up to 390 you're still up to 235 dollars.

options-trading-iron-condor.0176

This white line is the real line of your profit and loss up but most people live in this Disney world of this red line so don't live there just understand that that's the expiration graph but you want to pay attention to this white line but you can see that it slowly starts to climb fairly quickly and you're able to reap in the benefits and the rewards by holding your position and managing your risk.

That's how an iron condor looks and that's how you set one up.

Thanks for listening to me and I hope you enjoyed this video.

Remember to go out and to do what you love, contribute to others, and most importantly live life abundantly.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

Join over 31,258 regular people who are bettering themselves in the stock market.

Click Here to Sign Up

This is a community that is motivated to learn & improve their skills.
Join us and get free training lessons, freebies, and exclusive promotions.

want some helpful advice?

pay per minute coaching

I am scheduling helpful coaching sessions for people who are interested in real-world advice & guidance where you only pay per session. No long term commitment required.

Learn more
This website and content is for information purposes only as Rise2Learn, TradersFly, and Sasha Evdakov are NOT registered as a securities broker-dealer nor an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Rise2Learn, TradersFly, and Sasha Evdakov cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Rise2Learn, TradersFly, and Sasha Evdakov in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Rise2Learn, TradersFly, and Sasha Evdakov accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.