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Today we're going to take a look at what profit potential you can expect from trading iron condors.
We will cover three main points:
- Why is it important to know your profit potential
- what determines your profit potential when trading iron condors
- How to increase your profit potential with iron condors
July 5th, 2018
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I will show you why trading condors are easier than trading stocks.
You might be thinking well you're kind of crazy to say that because trading options are much more difficult.
Overall, yes it is more complicated when you look at overall all the components that go with it. It's much more complicated to go ahead and trade options because you're looking to learn and the learning curve and the amount of knowledge you have to learn to trade options is much more so than you have to learn to trade stocks. But in the end, once you have that knowledge, it becomes easier.
Think for a moment when you've learned to ride a bicycle. You're trying to go uphill, and you're brand new to riding a bike.
As you're learning to ride a bike and you go uphill on those one gear bicycles, it's much more difficult to go uphill. Only because you don't have the extra gears to go from low gear to high gear and switch based on the conditions.
It's much more difficult to learn to ride a mountain bike or a bike that has gears and shifts and go uphill. But once you've learned how to use the gears, it makes it much easier to go uphill.
This is what options trading is really like.
Initially, it may seem like it's much more difficult. You're trying to climb that mountain. You're trying to go uphill. But that's because you don't know how to shift gears. You don't know the techniques that you need to use. But it is much easier once you do know how to use it. It's much easier to go ahead and trade options or iron condors than to trade stocks, at least if you're more actively trading.
Let's take a look at how this applies overall
I want to share with you another example here of why it's much easier and why you can do this.
It's just really about giving you that extra little bit of knowledge, and that's really what our course covers. It's giving you that additional knowledge - getting you to understand how to use those gears appropriately.
When we look at picking stocks overall and compare this to trading stocks, you can see that as we take a look at Apple. Do we know for a fact that Apple is going to go up tomorrow? Next week? Next month? Or next year? It's challenging to understand and as you start looking through this list of stocks. We're trying to pick out some stocks. Which ones are going to go up? And which ones are going to go up the fastest?
Now that's typically the way you make the most money. Picking the right stocks at the right time and letting them run higher. But it's tough to do that because you don't know which way a stock will go.
Let's take any stock for example. Let's take a Microsoft or a Netflix okay let's go with a Microsoft.
Do you think that you could pick a range? In the next 30 days? 60 days?120 days? It's up to you what range you want to choose where that stock will fall and land on.
Well, let's say you choose a range somewhere in between. You can select a range may be between 110 and 90. Could you choose that? Could you go ahead and make that choice and decision? For most people, yeah, they could go ahead and choose that decision.
What about if you think well it's been heading higher, maybe you'll choose somewhere between 95 and perhaps a 115. Perhaps you'll pick a little bit of a higher range. Other people may go ahead select 105 to 90 or even 87. Maybe you'll choose a little bit of a lower range.
Don't you think that's a lot easier than just choosing a stock?
Stocks do have their place in investing. They're more of a longer-term investment where you set it and forget it.
When you look at trading options., for example, it's much easier to trade or choose a range than it is to say hey this stock is going to head higher or this stock is going to head lower. In that case that stock needs to move.
But in this case, if you're looking at a range while that stock needs to hit somewhere in that range, in that bull's eye.
Most people they get a little bit confused about how you can do this or how you can trade a range. All you're doing is selling two verticals or selling contracts on these ends or area - which is another word for insurance. You're ensuring the stock at higher prices and insuring it at lower rates. This is how this works.
You can do this on any popular company that trades options, like Netflix. Would you think that Netflix is going to be higher or lower in the next couple weeks? Well, you don't know. There's a lot less certainty in that than to choose a range for Netflix in the next couple of weeks.
Let's say somewhere between 480 to maybe 340. Now that range is a lot easier to go ahead and choose. You might think okay well Netflix is a little extended and now it's acting weak, so maybe it's 450 and 300. You might select a lower range, or perhaps you believe in the stock, and you say okay well around probably 360 and 490. You could choose a little higher rate. So that's a lot easier.
Take a look at how you can do this and do the setup.
So, let's say we go to Netflix and we're kind of neutral on the stock. Now I'll go ahead and choose my IRA one, just so it's clean.
You can see right here we can go 45 days out. So here's our option spreads. I type in the ticker symbol. Then, I would choose if I want to go 45 days out or for a shorter duration. That means I get less width for my time value. Meaning, the closer you go in time, the less money you make but the stock can wiggle around and move quite a bit.
Let's start out with 45 days as an example. We'll go out let's say - you can go 320 and maybe 450 in the next 45 days. I'll go ahead and sell a vertical at the 320 and repurchase one at the 310. Now I'm directionally-biased.
That would be similar to stock and let's say around 450. Again, we'll sell a vertical over here, and we'll also go ten points. We're just setting up kind of a spread.
You can see that in the next 45 days, as long as that stock is between 320 and 450, I go ahead and collect $294 on $700 of investment. It's a pretty good return on investment.
When you look at this, and you say, can I choose a range that the stock will move in? That's a lot easier than selecting stocks. Absolutely! It's a range. You're not looking for exact movement because you can move down ten percent and still make the same amount of money. You can move up ten percent, and you always make the same of money. That's a lot easier.
Now, let's say you think well things are going to be worse. You could give yourself a little more range on the downside. I go ahead and go to the 280 and over here we'll go to the 290. I've created more room on the downside. I only make $227 overall on $773 on the investment, which is still pretty good.
I make a little bit less, but I have more room to move. It's a give-and-take relationship in the market.
You can see now that's means to drop to about 290. It needs to go down all the way to the April lows for us to lose out and the upper range that we're in is right around 450 460.
You could play this range right there in that stock in the next 45 days. That's a lot easier to do than just choosing a stock and trying to manage that position.
Many people get tripped up with were to adjust. And it's again going back to that bicycle riding concept. It's about learning how to shift gears. In this case, you might say, we got this box, where do you make that shift? Where do I make that adjustment? Where do I make those tweaks?
You could say you don't understand where to make the tweaks. By doing things time and time again, you'll get that experience to learn where to make that adjustment.
But if you look at this is the ceiling, this is your floor, and this is your wall. When you have your wall, and you're looking to paint your wall. You take out a roller, and you're trying to paint your wall. You give a roller to a kid. He paints things all over the place. He might drip on the floor. He might go to the ceiling. He might move to another wall. If you have kids, you understand the concept.
If you paint your wall, you're slowing down as you're starting to reach a little bit higher or closer to the ceiling. Because maybe that ceiling has a texture. Maybe it's white, and you don't want it to be a colored kind of ceiling.
Again, as you go up, you're slowing down and that's where you would make your tweak and your iron Condor or an adjustment. As you go down closer to the ground, the same thing.
As you're reaching this level, we'll make a tweak because we're closer to our danger zone. We're getting closer to an area where paint could spill or paint get into areas we don't want.
This is what you do with options when it comes to iron condors. You're looking at that range and as a stock is behaving in a nice range for you, you could paint and go wild and crazy and not worry about it. You're not worried about hitting the baseboards or the ceiling because you got a lot of room.
But as you're getting closer there, you're watching intricately to make sure that the blue color doesn't go on your white ceiling. And that's what you do when it comes to iron condors. This is where you make those adjustments - the tweaks. Going out and closing out some of these positions or reducing those positions.
This shows you how much easier it is when it comes to knowing and understanding the trade of an Iron Condor. It's not about finding the perfect stock; you could trade the same stock over and over again, all you're doing is you're looking at that range. When things get a little bit tight on a specific area, you need to make a tweak or an adjustment.
You might go ahead and add a little more positions on one side. So now you'll become a bit more positive or bullish on the stock. Or you might do it a different way where you're a little heavier on the calls where now you're looking more at a downside move.
You have more risk - a risk that has worked out for you very well on the upside.
This is what it's all about. Tweaking your prices and ranges and learning how to deal with those.
All you need to do when it comes to trading iron condors is picking a range
It's not about choosing the right stock. You could trade the same stocks time and time again, as long as they're trading options. You're choosing the range.
Yes, they are more complicated just like riding a bicycle uphill with gears is more complicated. But once you learn how to shift the gears, once you learn the appropriate way to do that, riding in the mountains makes it much easier than when you have just a single gear bicycle.
And that's really what it's all about when it comes to trading options. When you get that little bit of extra education, you can now see that you can make money through time decay and time value because you're selling insurance.
With time, the white line which is the current line or today's line gets closer to the Green Line, and you're collecting this theta this premium from your decay.
Can you get out of the iron condor earlier?
Absolutely! As time gets closer, and you're still in that sweet spot, you can even get out early if you want. Then you can reset and put on another iron Condor another month out or two months out if you like. Because you're collecting that premium. You're collecting that data from that time decay. All you need to do is choose a range. You don't need to choose a stock. You don't need to wait for one to get in. It doesn't matter if you get in a couple of days later or a couple of days earlier.
Yes, there are some favorable situations where you might want to get in on certain days - which we'll talk about in the course - but overall it's not going to affect you that much because you're choosing a range in the future. You're selecting a range whether it's more in the middle.
It's just about choosing your range or sweet spot of what you believe this stocks will do in the next 30 days, 60 days, 40 days, 80 days. You get to choose the time frame now.
I wouldn't go too tight on the time frame because the shorter the time frame, the less premium you make.
For example, in this situation and in this case, we have two contracts on the puts and the calls. You're going to make $470 on $1530 of investment. But if we go up to September, what you'll make is $614 on 1386 so versus $470 on 1500. You make much more money if you go further out.
I hope this shows you the power of iron condors and how easy it can be compared to options. I'm not saying it's entirely and effortless because there's still a lot of work involved behind it.
There's a lot of knowledge that you need to know and understand, just like learning to ride a bike, you got to get that knowledge. You need to build that education, but it's a lot easier than to figure out which stock is the best stock.
I've got to figure out when to get in the position when to get out of the position. In this case, what you're doing is you're setting up a position range so that way that stock has room to wiggle and you collect your theta in premium decay.
There's still a lot of work that goes into it as far as learning this. There's a lot of time you got to determine when the appropriate time to shift gears, so that goes along with when you put on the Iron Condor. And some of these things will be covered in the course. That's what the course is all about to fine-tune those things.
With iron condors, it's about choosing a range rather than picking a stock that you know is going to go up or down. It's not about a direction.
June 28th, 2018
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I want to share with you the three common issues reasons or roadblocks that people have when it comes to trading investing, or it could apply to other aspects of life.
I'm doing this because a lot of people I'm noticing they struggle with trading options and as we get into our iron condor options course.
Take a look at yourself you'll probably figure out that you fall into one of these areas or you're lacking one of these areas and the biggest one is probably what you need to correct and fix and this is going to be all internal.
Three Key Problems:
- Brain/Knowledge Issue
- Strategy Issue
- Actions Issue
These are pretty much the main things that anybody will struggle with when it comes to becoming successful, doing things the right way. This is really where the problems lie. If you're looking to lose weight, you know you have to eat healthily and exercise.
The strategy is what people are always looking for. What's the best strategy? How do I save time? They're always looking for strategies of what to eat how to fine-tune those things.
But then most people lack the action. Doing those things consistently because if you eat healthily, you often exercise chances are you know you'll lose weight.
Going back to trading and investing in the stock market. Let's break this down.
Are your trading problems a knowledge Issue?
- Coaching discussions
How do you spot the knowledge issue?
In trading, let's say you knew every single thing in trading. In this circle represents everything in trading that the world has concerning knowledge. You don't have to know all of that to be successful.
You might have a penny stock trader who just hones in and knows penny stocks. He doesn't do fundamental analysis, but he's still successful because he knows that component of what he needs to do.
So, if you're struggling and you're having issues, you might only know this much, and you lack the other little piece to be successful. You need to go out and get that extra little bit of knowing whether it's through courses, books, groups coaching, watching other free training videos that we have available on the YouTube channel or website. Whatever it gets this extra knowledge so this is a brain or knowledge issue that you may have will be resolved.
Could it be a strategy problem?
- Figure out strategy
- What strategy works
The key issue is that you got to figure out a strategy but then what is it that's going to work for you. Figuring out the strategy that works for you is kind of the key you need to target specific things.
Some people they come up with different strategies. You might have two strategies. The first one might not work but the second one works. The first one doesn't work because it's not right for you but the second one works. But people aren't happy with it so they try to go back and find a new strategy rather than improving on that second strategy
Another issue or problem that people have is that they go to a whole different strategy rather than evolving that second strategy that's already working for them right
So if I'm trying to lose weight and I run because I know that running is working. Why would I stop running and all of a sudden start swimming and change it completely? What happens is, people are jumping big leaps all over the place to try and find new strategies.
In a way, you could say they're looking greener pastures, and they're doing big hops instead of micro hops. Do micro hops with strategies, and this will help you evolve those strategies to modify them, tweak them for you.
If you're trading, penny stocks and you have a fifty-five million dollar account. It might not work when you're trading non-liquid stocks because you have such a significant capital. So you're going to get stuck in a position. You need to find a different strategy that works for you.
You can resolve problems by taking the following actions
- Habits - Discipline
- Repeat - Consistency
- Sticking to it - Longevity
When you change up your strategy time and time again, that's really where the problems lie. Sometimes people can't stick with something long enough. That could be an issue, they might try something for a week, but that's not long enough to test out a strategy. They might test something out for two months. Again this might be good, but then they drop out, and they aren't able to stick with it so
All of these things loop together when you look at them your brain. Your knowledge power, your strategy, and your actions, they all work together. And this is really where people have issues.
Stock trading, options trading, iron condors, calendars, doesn't matter what you're doing. The same thing is correct if you lack the brain power the courses, the books, and the coaching sessions.
You don't need everything; you need that fraction okay to be able to get you to the next step.
You got to come up with a strategy. Make sure that the strategy works for you. Most people are always trying to figure out other people's strategy. It's not about other people's strategy, it's about your strategy what works for you and then breaking that out for what's working and accelerating it.
And then doing the actions consistency and following your strategy. Sometimes, even if you're consistent but then all hell breaks loose. Then, something's going wrong, and you're not developing your plan. It would create other problems and issues
These are the three main things. I want you to look at those on yourself personally and evaluate yourself. What is it that you're doing right? Are you consistent? Are you following your plan? If you don't have an idea, figure out a strategy. Is your strategy correct? Is it working for you? If not, you need to figure out the strategy. You might need to go back and get some more knowledge courses, books, group coaching, or coaching in general one-on-one. Take a look at some of the material we have that are very in-depth, and it'll help you accelerate there, but it all starts with the knowledge.
June 21st, 2018
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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.
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.
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.
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.
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.
June 14th, 2018
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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.