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I'm going to share with you some
- insights of doing an Iron Condor,
- the basics of an Iron Condor, and
- why you may want to set one up.
There's a lot of option strategies out there. We're going to focus on iron condors here over the next month. We've already done a handful of things on verticals because we do have the vertical course out already. If you don't have that one and you want to get it, I would highly recommend you go for it before trading iron condors.
You can get that at our website at https://rise2learn.com/.
With that in mind, let's take a look at a couple of quick stocks and then:
- choose an iron Condor and
- look to create an Iron Condor and
- why we may do this Iron Condor
When we go ahead and look at a couple of handful of stocks, you typically want to trade options on stocks that are 50, 60, 80 dollars or more. That's just because you have more strike prices there that you can play with.
Apple is a trendy one; it's very liquid. Having a liquid stock to trading options with would be helpful. Anything like Apple, a Tesla, a Netflix, they all will do just fine for trading and options.
If you look for a small stock, like a penny stock, usually will not work out well in trading an option contract on them or an iron condor.
Why would you put on an Iron Condor?
An Iron Condor is a pleasant situation where you don't expect that stock price to move that much. What it does is it sets up a price box or a bracket.
I'm looking at Apple right here. You can see we've had this huge move or spike up in prices recently. Now, we're just isolating slowly. It might be an excellent time to do an Iron Condor.
You could do it when the VIX or the volatility is higher because you can get more premium. You could still do it lower, but you might do it may be a little bit differently
What you're trying to do is box in this strategy. An Iron Condor sets you up for making money from the upside and the downside. You let time decay work in your favor.
When you buy a stock, there's entirely nothing wrong with buying stocks; you only make money when that stock goes up. With an Iron Condor, the stock can go up or down, as long it stays in this range that you choose, then you make money. You make money every single day, and that continues to ramp up.
Think about that for a minute. You make money as that stock moves up or the stock moves down, or it moves sideways. The time that you lose money is if it moves outside of your defined range within your time. You need it to stay within your range.
The key to Iron Condors is choosing that range.
You could make it a little more weight on the downside or a little more weight on the upside. Meaning, more risk or you think it's a bit more bullish. You could do it that way.
There's nothing wrong with that. It's just creating an unbalanced iron Condor.
Let's take a look at setting up an Iron Condor with Apple
You might want to do this here - 40 to 60 to 80 days out. You could even go a little bit longer.
You're looking at the premium here. When we look at some of the strike prices here, I don't think this stock will get to 200 because it's already fairly stretched. I believe 170/175 might be an excellent range for the bottom because we know that stocks fall faster than they go up and now with the Fed just raising interest rates a little bit, we could have a slight pullback if I had a lot of green days.
I need to be very careful about this downside area, and I might do a little tighter there on the topside area or above.
What I do to create this Iron Condor is we're going to sell call verticals, and we're going to sell put verticals. If you don't understand what those are, I highly recommend you look at just some basic option videos that I have available or take a look at the options foundation course to get some insight. But basically what you do is when you buy a call, you look for that stock to kind of go to the upside.
What we do is we go ahead and hedge this. You sell a single call further out, you analyze the trait, and now this creates a vertical. In this case, we're buying a vertical.
Let's say I do the opposite, and now I'll go ahead and sell this one, and I'll buy that one. That gives me a whole flipped profit picture.
What did I do?
What I'm doing is I'm selling the 210, which gives me a naked option. So the whole strategy behind selling Iron Condors is you're selling at the 210. Basically, if you had a stock and you're selling calls on it, you lose your stock. In this case, since we don't have stock and you don't need the stock to trade Iron Condors, you go ahead, and you buy that additional vertical for protection because what if it goes against you?
Think of it as your you're playing that downside move when you're selling a call vertical.
Let me go ahead and position this as a particular kind of vertical on its own or batch together. We'll go ahead and analyze.
There you can see the 210 to 215 will make 50 cents or in other words $50 at expiration. We're risking about $450 for the trade, so you make 50 on 450. If I did two of these, you make a 100 on about 1000. About 9% there on your money maybe 10/11%. You're making a little bit more there.
If you look at this profit picture, here's our strike prices, our profit and loss and our zero line. With time, this white line which is the current or today line gets closer to the Green Line.
As I go ahead and stretch this out a little bit with time, that white line gets closer and closer which is our theta decay. That white line decays which means we get into profitable territory right there, $26 if that stock doesn't move.
If the stock doesn't move you make money, if it moves down you make money, if it moves up you make money. But if it gets to 210, you're losing quite a bit. About $300. You still make money but you must make sure it stays under that 210.
One of the ways to combat this is to sell a vertical which is creating our Iron Condor.
We'll go to 165. We'll sell this vertical, analyze the trade.
The way you make money in this one is if it stays above 165. Remember we talked about boxing it in. So this one you build again, let's go to 170. The premium is a little weak there, so you make about 38 cents. You need it to go up; you make money; go down, you make money; up until that 170, you make money.
If it stands, still goes up and goes down; up until 170. Combining these allows you to create this box effect. It boxes in that stock from 170 to about 210 and you make about $2.70 every single day that stock stands still.
As time moves forward, you can see right here this continues to step up and up and up and up with time. Now, volatility can be a problem because you are short Vega. If volatility spikes, meaning stocks go down, you lose money. This can be a problem.
Frequently, what people recommend is you go a little wider on that downside to give you a bit more room. In other words, have a little extra negative Delta when you have negative Vega.
You could create a little unbalanced. Let's say you are bullish overall on the stock but you're worried about it going down, all I could say is well I'll go ahead and put three puts to two calls. Meaning, I'm a little more bullish. I could say okay well let's do six to two. You can see I stacked more risk on the left side and a lot less risk here on the right side. Meaning, we have fewer calls than we do puts and we're selling.
If you want a balanced approach though, you could create a position like this two or three or two to two. Now you're selling two puts and two calls and you got a vertical setup right here where you're making $146 on your investment of $854. About 10% give or take.
As we go in this Iron Condor, you'll make $360 on $2000 investment. That's about a lot better, whereas if you go ahead and buy that stock, to make $200, how much money do you have to put in? If you're paying a $190 a share, how many shares can you get on $2000? You can get about ten/eleven shares.
That stock needs to go up about 32 points. That's where you'll make that money. It's a pretty big move.
Whereas here, no matter what as long as it stays between this range of 165 and 210, you make your $360 at expiration on August. That is about 64 days out.
You just put this in as separate orders right here send to order in and that could go ahead and submit this order in. You could do it as one order, for example putting it in as an Iron Condor, and now we're in that position. You can see we're moving here left and right.
You'll start out a little bit negative just due to the bid-ask spread. But that's how an iron Condor works.
We have these positions right there, whereas if that stock continues moving a little higher, we're still okay because remember in one or two days if that gets a nasty drop you'll be back to kind of standard.
This is how Iron Condors work.