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Ep 189: Building an Options Portfolio from Scratch with Iron Condors

We’re going to focus on iron Condor portfolio building.

We’re doing this in conjunction with the course that we have coming out very soon, the Options mastery Iron Condors course.

I teach you all those things, and more in my new Iron Condor course -> Click here to learn more about it <-

Today, what I want to do is look at building a portfolio with iron condors. I want to show you the power behind it. I want to show you the capital the margin requirements for it. Why you can do well with iron condors when it comes to building out a portfolio.

It’s not like a stock. Where you buy a stock and a stock goes up and then if it stands still, you don’t make anything. You need that stock to head higher. With iron condors, you don’t need that. I’ll show you what a portfolio looks like because most people they don’t even understand what a portfolio means. Not to mention how to construct one.

We’ll do it in a simple version here. Compressed and condensed for a YouTube audience. But if you want to go deeper into it, we will go into those through our courses. You’ll get to learn more about that as we get into the options mastery course series.

I teach you all those things, and more in my new Iron Condor course -> Click here to learn more about it <-

Let’s take a look at building out a portfolio

A portfolio is a basket of stocks or a basket of positions. In case one position gets in trouble, you have other positions that kind of work together to help save you or not lose as badly.

You may want to watch that previous episode; I believe it’s episode number 188.

The basic construction of an Iron Condor

What you’re doing is selling two vertical spreads. I’ll show you how to do this here with Apple.

When we look at Apple, let’s say I go out about 60 days in time, and I’ll sell a vertical spread at 155 and 150. I’ll analyze that trade. You can see the white line here is the current line – today – and the green line is at expiration.

Here on this chart, what we have is our price down here below. So right now the stock price is at 185. Your profit and loss with the zero line being right here.

So basically, as long as that stock stands somewhere between 155 or higher, you make at expiration $19. That’s not too bad but remember you’re only using $481 of capital. On about $1000, you’re making about $38.

It’s pretty good percentage-wise within sixty days. Imagine just turning that every thirty to sixty days.

As we construct the next part of this, we want to do the same thing on the call side because right now we’re selling on the put side. Now we make money if the stock stands still because with time we make this theta. Premium expires with time.

Just like your car insurance premium expires. Every month you have to buy more insurance. This is what you’re doing. You’re selling insurance on stocks, so you make about a dollar six here every single day. That stock stands still or doesn’t move, with time, you can see that theta actually will continue to accelerate and then decelerate. Because with time, theta continues to pick up. There’s less time premium towards the end. These become worthless in the last couple of weeks there.

What we’ll do is we’ll construct the other side. If stock stands still, you make money. Stock goes up; you make money. Stock goes down a little bit while 2025 points, you always make money at expiration. But if it goes down a lot, you lose about a thousand dollars on that investment.

The way you protect this is you go ahead and sell about the 210. Maybe a little bit higher. So we’ll sell a vertical over here on this side to 10 to 15. We’ll make two contracts here, and you can see I’ve closed this off.

Now, as long as that stock stays in that range, I make money.

How much do I make?

I make about $94 on about $900 of investment.

Why did this $900 go down from $960?

It’s because the other side makes you some money. A stock can’t be in two places at once. They only take one side of that margin. You’re making about 10% on your money in 60 days.

You’re looking at it where you need to pick a range. It’s not that you need to choose a stock that goes up in direction, you need to select a range. Here you’re looking at 155 to 210.

The key question is can you choose a range for Apple? Let’s just pull up a chart here.

If we look at Apple, can you pick a range for this stock? You can see the range that we have. The current stock here’s the price, and we look at this we got 155 to about 210.

Do you think that stock will go between 155 and 210? That’s a pretty big range to make 10%.

So, as long as it hangs out here in the next 60 days or even up here or even sideways, you’re good to go.

Can you make this a little more bullish if you think this stock is going to pull back? Absolutely!

Can you make it more bearish? Absolutely!

How do you do that? Let’s say, stock prices are heading higher, and I want to tweak this a little. I could sell more on the put side, and I’ll sell maybe three or four over here. I’ve stacked more risk on this side, a little less risk on the upside.

Now I have a bigger Delta. For every dollar that stock moves up, you make a dollar. Keep in mind you make theta as well, and Vega as volatility decreases.

Take a look as I start stacking more and more contracts here on the put side, for every dollar that stock goes up I make 32 dollars. That’s because we’re so weighted here on the put side which means we need that stock to go up.

This is what you can do. You can skew this position kind of any way you want. If you feel like well I believe this stock will go up with time, you could go ahead and do a 5 to 2 kind of position. Meaning, you have 3 deltas, 3 to 4 Thetas, and a negative 18 Vega. Overall, you’re still kind of bullish on this position and with a time that white line will get closer to your green line or expiration line.

Then what you can do is take this position off early. If you like, you can wait until it expires as long as you’re in the safe zone. There’s a tricky kind of part behind managing and adjusting it which we go over in the course.

I teach you all those things, and more in my new Iron Condor course -> Click here to learn more about it <-

Let me show you now how to build a portfolio and what the portfolio looks like.

Let’s say I go ahead and set up this Iron Condor.

You could do it all at once or do it in verticals as I’ve done. I’ll go ahead and stack 6 contracts to 4, be a little more bullish on it. Go ahead and confirm and send these orders.

This is a paper trading account, to show you for example purposes, what the portfolio is going to look like here.

Once we get filled here, I’m going to show you how this all works together because we need multiple positions to kind of build out our portfolio.

So, I have one that’s a little more neutral, little bullish position. The next one, let’s say you have a couple of other stocks you want to trade or you have some things in mind, I’ll go ahead and look at McDonald’s.

As we pull up a chart, this one is starting to break this upward trending line. You can see we’ve had a major downward bar possibly an ABCD pattern. We could say this one might get into lower prices and it’s acting kind of weak. We can do the same thing with McDonald’s but do it a little more bearish.

What I’ll do is I’ll sell an unbalanced Iron Condor. Analyze the trade, and I manipulate my strike prices. Let me get rid of these slices, so you’re not confused. The current price is 159.84 mainly around 160. I want to hug this or surround this, so we have our calls. We’ll probably need to bring those in and where will we bring those in. Perhaps about 170/175 will be the call side and the put side will need to go under that, probably about 130/135. We’ll drop these down quite a bit about 135 and that’ll be about 140.

Now you can see I’ve set up this iron Condor right here. It’s still a little bullish because remember we have more weight on the left side or the put side but what I could do is stack more weight on the call side because you’re looking at this as a bearish position.

So what I’ll do is take a look at this. I’m stacking about $755 of risk on the left or the put side and about 1200 on the call side to make 246 potentially. That’s a pretty good percentage, and again this is about sixty days out.

I could go ahead, if I’m a little concerned about the upside, move these out a little bit, but I think we’re okay.

Let’s stack a little bit more contracts here because this one is not as large as Apple. So I’ll need to stack a bit more contracts here. Let’s do again kind of 6 and 4 on a bearish note, or we could do sort of 6 and 5.

We don’t have to make it too strong because remember your short Vega here. It’s a little more complicated beyond the scope of this video. You’ll want to take a look at the course to learn more about these Greeks.

I teach you all those things, and more in my new Iron Condor course -> Click here to learn more about it <-

But what’s going to end up happening here is that if volatility increases, this white line will drop a little bit because we have a Vega risk problem here. We want always to be a bit short Delta, to be a bit more neutral. So definitely you’ll want to keep an eye on that so you’ll play with it.

We’ll go with 6 and 4. I’ll go ahead and put this position in and to show you how this all plays out. We’ve done one kind of bullish and one a little more bearish position. Let’s say I do one that’s a little more neutral. We’ll put on Caterpillar. I’ll go ahead and sell an Iron Condor. We’ll make this one a little bit quicker since you’ve gone through the process.

Caterpillar currently is 141.03 so on the call side. When I look at this, I’ll probably want to be around 160/165 and the put side maybe 115/110.

Now again start stacking some of these contracts. Let’s say we go with 4 or 5 contracts right here. You could have the spreads a little different, 10 points on one and 5 points on the other. I’ll bring in the call side just a little bit, and we’ll do something like that to have a bit extra negative Delta there. And again five contracts. Put that in and go ahead see if we can get that order filled. I’ll try to make sure we get it loaded pretty quickly so that you can see.

Now, what you can see is we have these positions. We have a caterpillar, an apple and McDonald’s. You can see they’re all skewed a little bit different. McDonald’s is already up at $2.71; Apple is down about $10 and Caterpillar here we just placed it on down about $10.

Let’s say we move this 3 or 4 days forward. Time value decays. Now what you can do is take a look at this position. Beta-weighted on Caterpillar. Again we’re going to keep all the caterpillar prices here on our chart, but now we’ll go instead of single symbol view, we’ll take a look at things in a portfolio view.

What this does now is it averages all these positions together and kind of composites it based on the Caterpillar price.

You can see I have Apple, Caterpillar, and McDonald’s. There are all my positions.

As I look at this spread, it now gives me an overall picture. You can see the perspective of this expiration curve and how we’re positioned.

You can see within a few days. We’re still going to be about negative 48 Delta. We’re going to be about positive 21 Theta. And negative 102 Vega. And we’ll be up about $47 if prices kind of hold stable.

If prices go down a bit, what’s going to happen?

Take a look at Apple. Apple will be down about $80, Caterpillar will be up about $80, and McDonald’s will be up about $156. Overall, we’ll still be up about 150, but you can see one position doesn’t hurt you as much when it goes into trouble. Like Apple here would be in a little trouble because we’re bullish on that position.

This is what a portfolio does. It allows you to spread and mix the risk around depending on where stock prices go because you don’t know where the prices go. That’s why trading iron condors can be very beneficial.

As you can see, I can overlay two/three positions, four positions. I can make them a little bullish, a little bearish, or a little neutral. Now, you have this portfolio basis that if things are moving against me, I can hedge this position based on the cues.

If prices started to move up on me, what you can do you? You can go ahead and hedge this by just getting the Q’s 20 shares of that now you could do 50 shares if you are looking for a faster movement.

You’re adjusting your portfolio, and this is really what a portfolio is. Keep in mind now you have 50 shares of QQQ which is a little tech-heavy, but you’re also still getting and collecting that theta premium every day. This is the beauty and the power of trading iron condors because now you can continue to stack more and more of that theta the time value.

What you’ll see happens here, as time moves forward, o we’d make about $20 every single day. As time moves forward, you can see that starts to pick up to $25 to $30 little by little because you’re getting closer and closer to expiration.

As you start trading with larger account sizes and capital, you can be beginning with 25 Theta as you pick up contracts 28 beta 35 Theta 40 theta $50 every single day if that stock stands still. This is how the big boys make a lot of money with less capital because for you to be able to earn $2,400 in 60 days, it requires about $18000 on this capital side.

Think about it, $2500 on $18000, look at the percentages. If we take a look at the percentages, $2432 on about $18500, you’re making about 13% percent in 60 days. Pretty good return on investment. You’re not going to make money every single month. But as you manage and budget some of these positions because some of these will lose out as you know, others will make money because they’re not going to land and sit still, you might end up over here. You might close one of the losing ones, but you got the other three, that’ll be okay.

That’s the way money is made in this business, in iron Condor, in stocks. This is how the big boys make money. This is what I wanted to share with you on a portfolio beta-weighted basis. Of course, you can overlay calendars on this and many other strategies – diagonals, verticals – combining it to make a portfolio.

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