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4 Iron Condor Setups for Option Traders (Skewed, Unbalanced, Wide, and Iron Butterfly) Ep 194

July 26th, 2018

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We're going to take a look at four Iron Condor setups. So that you can see the different variations and the ways that you can set up Iron Condors.

Iron Condor setups can get a little more complicated than just a primary Iron Condor flat normal balanced position. There's a couple different setups and variations that you can do because the flexibility of this is excellent. You can do a lot with Iron Condors. I wouldn't say it's the most flexible strategy out there, I would say diagonals is probably the most flexible strategy, but Iron Condors are still very manageable.

Most people, when they look at Iron Condors, they look at a profit picture. Let's say we have five verticals here on the put side - the put side will allow us to make money as stocks go up. Here we have the call side - so we make money as the stock price goes down.

The Balanced Iron Condor Setup

This is a balanced Iron Condor is what most people know. We'll call this The Balanced Iron Condor Setup.

The way the balance is set up is you have the same amount of contracts on each side. You have five puts then you'll have five calls, if you have six calls then you'll have six puts.

It's very balanced. It's not talking about the width or spread because you can still go wider. This could be at the 280 strike price, but you could go ahead and go wider on this. Then this might be maybe at the 250 strike price so that you could widen it out, but the setup is still the same. It's just you're either tightening things or widening things.

I would say that this is a wide or a high probability Iron Condor.

Skewed Iron Condor

We have variation B, and you'll have more bullish set up for your Iron Condor. In this case, what you'll do is let's say you have seven contracts on one side over here and only have three contracts on the call side. Again, this is the call, this is the put, and this is unbalanced or skewed bullish. So, I'll say Skewed to the Bull Side because you have much more puts going into that bullish direction.

You have the opposite of this as well where you could go a little bit lighter on the call side or a little bit lighter on the put side. This could be three over here, and this could be seven contracts over here on the on the call side. Here's our put side now. This would be Skewed Bearish. This would be our third Iron Condor setup.

The last one I want to share with you, it's a little bit more advanced. You can see we went from a balanced one to a skewed bullish to skewed bearish. In between all of these, you have kind of secondary variations like here we went wider. You could also go skewed bullish much wider as well or even tighter. You could go with skewed bearish tighter or wider.

But here's our last and final variation that I want to show you here of an Iron Condor, and it may look a little funky here for you. It seems something like this, and you're going to think that this is a butterfly probably.

What you can do is go ahead and take the two tips of your Iron Condor. The best way to explain this is to go ahead and draw another Iron Condor here for you. What you're doing is you're taking these two tips, and these two strikes are the same, so you make them the same strike right there at that point. That'll create that peak.

Iron Butterfly

What is an iron Condor if you define it? It's four contracts, even though this might look like a butterfly the contracts are still the same. So, if I had my 280 protection over here and let's say this was 350 okay and somewhere in the middle over here we'll go 320 let's do 310 okay so let's go 310 right here well I have multiple contracts over here at 310. This is two, and this would be one, and this would be one contract over here okay so what this is called, is this is called an Iron Butterfly? In a way but it's still an Iron Condor setup.

Take a look at where you are with these Iron Condors, if you're just getting started, you could do a basic set up, and this would be a balanced Iron Condor.

Unbalanced Iron Condors

As you get into variations of that, you could go wider or tighter then you have some skewed or also known as Unbalanced Iron Condors.

Now you have puts and calls where they're different so that you might go seven puts or ten puts and three calls or four calls. They're a little bit different, and on the bearish side, you might go seven calls and three puts or fifteen calls on the bearish side or the call side and one put on that side.

Now you have these skewed positions or unbalanced positions but if you have a stock that's a little bit trickier to trade or doesn't have a lot of strike prices sometimes, creating something like this - which is still an iron condor could be called an Iron Butterfly it's another variation of an Iron Condor.

You can see there are four different real significant variations to Iron Condors. Of course, there are also subsets of those like wider, tighter and many different variations that you could create within that but these are kind of the baselines to get you started.

Ep 193: 8 Common Options Trading Q+A’s About Iron Condors

July 19th, 2018

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We're going to look at the eight common option trading questions and answers about trading iron condors.

Why would anyone trade Iron Condors?

What's the point of trading iron condors?

When you look at investments in general, there's nothing wrong with putting your money in a regular dividend paying stock. Letting it sit and appreciate with time and collect your dividends.

If you want to be a little more of an active trader and collect premium every single month, a dividend Iron Condors would be the way to do it. Also, you don't need to choose a direction. Whereas with a stock you have to select a stock that's heading higher. With Iron Condors, you are trading non-directionally.

Yes, you can skew some things to be a little more bullish or bearish, but in general, you can go ahead and set that position up. If the stock doesn't move at all, you can still make money. If the stock moves up a little bit, you can make money. If the stock moves up a medium amount, you can even make money. If it moves up a lot, that's where you struggle.

If it moves down a little bit, you make money. If it moves down the average amount, you still might be okay. If it moves down a lot again, you could be in some trouble.

This is non-directional trading because what happens is - as stocks go up, they'll pull back a little bit. They might power higher and pull back.

That's the point with Iron Condors - you don't need to choose a direction, you need to choose a range. The reason it works so well is that you're looking at time-premium decay just like insurance companies. They sell you time premium on insurance, or if you get in a car accident, you've purchased that amount of time, and they'll pay you out if things go against you. But you know, if nothing happens, they collect that money and this what you do with Iron Condors.

That's why you would want to trade Iron Condors - because most of the time, stocks are not doing much. They'll go sideways, they might power up a little bit, they might pull back a bit, and they're usually trading in a range.

That's why this strategy and these types of trades work out so well.

How long does it take to learn to trade options?

This is a difficult question to answer because it's going to depend on a few factors. Your commitment, How right you are at seeing yourself evolve, and how much time you put into things.

Some people never get there because they stop at a point and they don't want to pick up another book. They start trading options or Iron Condors, and they try to figure things out on their own.

But you know, it's tough to write an essay or a book if you don't know how to speak English or how to write or create a word structure. Give a monkey a keyboard, and eventually, it'll create and write a page or a paragraph. If you have some basic knowledge of the language, you can do it much faster.

The same thing here - you can speed up the process through courses, through books, through coaching sessions, through watching videos. I would say in general, at least 1-3 years minimum - the time it takes to get a good grasp of understanding in Options trading.

That's just the sheer fact of putting on trades, consistently doing it time and time again, making adjustments and tweaks.

It depends on how much you invest in yourself - your education, your awareness, how aware you are of seeing where you are screwing up. A lot of people don't like to look in the mirror and admit to themselves that they did a bad thing. Most people will brush it off and push it to something else; they don't take responsibility.

We want to protect ourselves from the hurt or the damage and that ego. So, if you can get rid of that, you'll speed up that process.

How many years of trading do I need before I trade Options?

You don't need many years of trading before you start trading Options. You can begin trading Options almost right away.

Basic knowledge and understanding of overall market dynamics or just the basics of how the market works are essential. Maybe, one to two months of studying the markets and what it means.

You can get into Option trading almost immediately after that because Option trading is its world. You don't need to go crazy with learning and understanding dividends.

If you understand dividends, you probably also know and understand how the market operates. You're looking at trading spreads, and you got to work it from the ground up.

Anyway, you don't need 50 years of experience before you can go ahead and trade options.

Do you need to know technical analysis to trade Options?

 

When you look at options overall, yes you have directional options trading - like buying a single put purchasing a single call. Yes, in that sense, technical analysis is helpful. It will guide you in what way, bullish or bearish, to go with on a stock or a position.

But overall, you don't need a lot of technical analysis.

If you're doing non-directional trading, like with iron condors or any spreads like a calendar spread. Yes, it will help to have some technicals because now you can skew that Iron Condor making it unbalanced, a little bit more bullish, or a little more bearish because you see something in the charts.

But when you create an Iron Condor position, or just working with spreads, you're putting on a non-directional trade. Meaning, now you start watching where the price move. As the price moves in that direction and starts pressing against one of your breakeven points, then you go ahead and tweak that position.

So, you're constantly tweaking and adjusting based on what you see in the conditions. This is how the real big boys make money - they're not looking at specific a price direction, they're looking at what do I do with my position.

I wouldn't say you need it, but I would say it is helpful to know some technical analysis because you want to know and understand how far stretched specific prices are to the upside or the downside.

Besides Iron Condors, what else should I learn?

Remember, Iron Condors is a strategy. You're doing two verticals - vertical on the left or the put side and vertical on the right or the call side. You create two verticals to be able to collect and make premium or your time decay or theta.

When you look at Iron Condors, they are negative Vega trades, that means that when volatility goes up, it hurts you.

What's good to learn beyond just Iron Condors is to look at some positive Vega trades. That would be things like double diagonals and calendars because that helps offset some of that more significant risk that you have especially if you're trading a more extensive account. Because a huge down move in stock prices will pop up that volatility quite a bit and that could damage your position quite a lot.

I would say, combining verticals, Iron Condors, calendars, double diagonals, and butterfly spread, putting those things together - knowing those few different strategies will give you a vast arsenal to be able to trade options and be very flexible at it.

I would say some positive Vega trades beyond Iron Condors is helpful like calendars and diagonals. That could help round you off.

If you want to do something that's also negative Vega, then go ahead and take a look at butterfly spreads as well. But again butterflies with Iron Condors will increase your Vega risk or volatility risk. So if you don't understand volatility yet at this point, we cover much more of that in the course.

How good are Iron Condors compared to other Options strategies?

I think Iron Condors are good, in the sense that they are much easier to understand because everything is in one month. Everything you do is in one month.

When you look at calendars, the reason they're called calendars, is they're spread across multiple months. So when you do calendars, the spread of them is a little more complicated and difficult for people to grasp and hang on to. With Iron Condors, they're a little bit easier to understand because what happens if you're able to dictate your probabilities right through a panel.

It tells you exactly hey I have a 40% chance of success or I have an 80% chance of success. Which one would you rather be on? Most people would say 80% chance of success, of course, but you make less money. Would you rather be at 80% chance of success and make $100 or would you rather be at 40% chance of success and make $120? For the extra $20, is it worth that lower value in probability?

When you look at strategies, with Iron Condors, it's flexible to looking at your probabilities. They are a more natural way to get into options. They're less complicated. So, it's an excellent way to get your foot in the door when it comes to trading options with Iron Condors.

Other spreads - other strategies, start becoming a little more difficult. Just the construction of them themselves. Yes, you pay a little more in commissions because there are four legs to trading an Iron Condor - you need to sell one and buy one her protection sell one and buy one for protection on the call side as well. You pay maybe one or two more on per contract to create that spread or strategy, but it makes your life a lot easier on the management side. Getting into them and so forth.

I think they're perfect and especially great for as a starting point to getting into trading options.

How do Iron Condors make money?

Iron condors make money through beta decay.

Let's say you sell insurance as a car insurance company does. When you sell that insurance, when people don't cash in on their insurance policy, you collect that money.

So think of this as people, every single month, giving you money $100 to ensure or protect their stock. That's what you're doing - you're ensuring their stock by selling at different strike prices. You're going out a little wider on the left and the right side, and you're getting a little bit of premium, a little bit of money, every single month when that stock stays in that little bit of range.

Sometimes, things move a little bit higher, and sometimes things move a little lower. But do you still get that insurance premium if the stock price went a little higher? Yes, absolutely. Because let's say you were riding in a car, and you had a little nick and dent or a scratch on the door, are you going to call your insurance company on that?Probably not. But when you have some major issues? Yes, you will call your insurance company.

When that stock is just moving a little bit to the upside, a little bit to the downside, even a slight bit could be two-three percent higher to three percent lower, and you could still collect on that insurance premium.

Why do some people never make any money from trading Iron Condors or Options in general?

A lot of times it is due to the knowledge gap. I mean we've talked about the key three elements that you need to be able to be successful with trading in general or trading options.

It all stems from knowing and understanding how things work. So, if you know and understand how things work, that's a knowledge issue. If you have a knowledge issue, you need to go ahead and get some of that knowledge.

The other thing is a strategy. We talked about strategy in our previous episodes where if you don't have a good strategy, you're just going to be all over the place.

Finally, it's going to be your actions. If you're not taking actions, if you're not adjusting, those things are also going to play a part in your successes. Also, a personal mentality right goes along with those actions.

So, if you don't know, how do you create a strategy? And if you don't have a strategy, and then you have no plan in mind, and then you got to do the actions.

What people tend to do is - they do the action, they do the trading, but they don't have the strategy or the knowledge. How do have a strategy if you don't have the right knowledge? People start out backward thinking that they already know. A lot of times what they're doing or they get a little bit of knowledge and insight. So they hop on over, and they go ahead and do the action part not realizing that they're still lacking the strategy or lacking the knowledge part.

This is one of the big reasons, of course, there's many other reasons and factors, but just something for you to consider and think about.

If you're struggling with Iron Condors or trading:

  • Do you think you have a knowledge problem
  • Maybe you have a strategy problem or
  • Perhaps it's yourself or the actions problem that you might be having

Are you adjusting to the losses? Are you adapting to your mentality? Are you too emotional about things?

All those things work hand-in-hand together.

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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