Setting Alerts for Iron Condors – What Percentage to Look At? #HungryForReturns 9

October 9th, 2018

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Hey, this is Sasha. Welcome to another episode of "Hungry for Returns" where I answer your trading and investing questions on video because sometimes the written word is not enough and video is much more detailed.

Another question regarding Iron Condor

"Hi, Sasha. This is Jim. My question for today is regarding how to manage iron condors while I'm working a nine-to-five job. This is what I've been doing, and I would like to know if I'm making any mistakes. I will be using $200 and $150 as the wings of this Iron Condor. What I do is I calculate 5% below the call price, in this example $200 times 5 percent is 10 dollars. So, I set alerts $10 away from each side which would be $190 on the call side and 160 on the put side. I would then make any adjustments if these alerts were reached. Is this a good strategy? Also, when I set up these alerts, I also write a good to cancel cell order to capture 50% of the original premium received. If I received $250, my position would be closed out at $125. Is this a good strategy for me? Thank you so much."

This one's a little more difficult of a question even to answer think about the numbers here.

Looking at the overall question, I have an Iron Condor setup basically what Jim was saying was that he's looking at a $200 strike and then he goes 5% below that which is $10 putting it at 190.

I think the better approach for me to answer this question is to look at where to set the alerts. You're looking at where to set the alerts, how to set those alerts, and if that's an excellent approach to making adjustments.

The problem with putting an alert in with options -- you have to take into account as the software is not set up to handle option alerts as well as it could most software is not.

Main issue

The issue here is it doesn't take into account the volatility issue. For example, if a stock is moving especially with Iron Condors, you are a negative Vega. So, with a negative Vega, you have a volatility problem as stock heads lower.

What you would probably want to do is let's say you usually set a 5% alert on the downside. You might want to set it three percent alert on the downside because you want that alert sooner because you have the volatility that's in play.

To the upside, you might want to set that alert even beyond 5%. You could say 6% or 7%. If you're going to use 5%, that's fine too. That's because the volatility will help you a bit.

This is how these works take a look if I pop out the volatility here and let's say I pop up 5% volatility going higher -- which means stock prices are going lower. You can see, I'm down $592 on this position, which is on Apple about a $200 stock here now.

If I have a negative 5%, you can see if volatility contracts, I'm up $400. Now, granted the price would be at higher levels but I'm up way up there because volatility has contracted.

You can see that you need an alert that takes volatility into account which means on Iron Condors, with negative Vega. You want that alert a little bit sooner on the downside and you can make it a little later as if the stock is climbing up.

Going back to the alert system and when to look at setting an alert or a mental trigger, the mental trigger that I see at typically is not necessarily a pricing trigger. Instead, what I would prefer to look at is probabilities, and that's how most options traders look at.

When they look at putting on or selling contracts is they look at not this open interest but this column -- is the probability of in the money okay?

When you look at the probability of in the money, at this 190 right here, what happens is that 190 -- that's a nine percent probability that if you buy this option, you're going to have a 9% chance it'll work out for you in the money.

Which means, if you're a seller, you have an about a 90% chance of success.

You could switch this to the probability of out of the money if you like seeing this and as you can see right here, the closer you are to the strike price, at 210 let's say, well 65% chance of success if you're a seller.

Whereas, all the way down here, if you're buying a put while chances are a $90 puts going to expire worthlessly. You only have a less than 0.3% chance of success, if you're a buyer. But if your seller, you got a 99.78% chance of success. But the premium is you only make three cents because you have a 99.78% chance of success.

Final Word

Anyways, typically when we look at triggers and alerts, probabilities are what we use in the options world — looking at it that way, with Iron Condors because they're a probability spread.

But if you want to do pricing, that's easier. You could do it that way. Just understand that for the downside move, you have to take Vega or volatility into account because it's going to create a more significant loss. It's going to generate a loss for you quicker than it will on the upside.

Author: Jorge Diaz

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

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