My plan for trading the iron condor when I first got started trading this strategy was to put them on and keep them on all the way until expiration.
Then - if everything went well and the trade stayed beneath my profit tent - I'd just let them expire worthless and keep all that sold premium in my account.
I just assumed this was the most effective way to play the trade - especially since it allowed me to save money from my broker by not paying to close the trade.
But that was a long time ago - and since then - things have changed.
Now, after experiencing too many nights where I couldn't sleep, a number of very 'close calls', more than my fair share of stinging ulcers and even a near hernia, I've made a change to the way I trade iron condors.
Now - as soon as I place the trade, I set a contingent order with my broker to buy back the call spread - as well as the put spread - once I've made the majority of the profit in each spread.
Here's an example: Let's say I sold an iron condor on the index XYZ for a total of one dollar - or around fifty cents each side.
When the put credit spread is worth only .10 - I buy it back. And for the call credit spread the same thing goes.
Now perhaps some of you out there might be scratching your head wondering why I'd do something like this. I know when I first started trading these - if someone told me this was their game plan, I'd be scratching my head. Seems like a futile and even sort of dumb thing to do.
But after trading these every month for years now - I don't agree.
Okay, maybe it's true that doing this will cause me to make less profit than if I were to just hold the trade through to expiration and let the options expire worthless.
But not necessarily.
And also let's look at exactly how much we are talking about here. The amount of money we're talking about leaving on the table is actually not that significant.
What's more important (at least for me) - is that by closing my iron condor trade early, I have LOCKED IN FOREVER the majority of the gains on that side of the trade. No matter what happens going forward - those gains that I've just banked CAN'T be taken away from me.
I have also lessened my exposure.
I have also given myself the opportunity to generate ADDED gains from my overall position - without adding any extra risk.
Let me explain:
I've found that many times during a trade, the premiums in options can drain quite rapidly. In fact, its possible for a spread to drain the majority of its premium in a matter of days.
Let's say that forty days from expiry I place an iron condor on the underlying XYZ. I get a net credit of one dollar - or about fifty cents each side.
The day after I place the trade, our stock - XYZ - suddenly turns south - and proceeds to move down over the next 3 or 4 days.
On the fifth day (just 4 days after I put the trade on), I look at my position and see that I can now buy back the vertical spread on the call side of my iron condor for just .10.
At this point, I have two choices. I can do nothing and just let my positions continue to play - or - I can buy back that call credit spread for .10 and entirely remove the upper half of the trade. If I decide to do nothing - I have chosen to retain my upper side risk in the trade just to try and eventually capture that tiny remaining .10 potential profit.
However, if I decide to just take it off for ten cents - I will have LOCKED IN the lions share of the available profit in that call side credit - guaranteeing that return on investment in just four days.
Then, if XYZ bounces back up - which it will often do after a drop - I no longer have any risk on the upside.
Even better, if our underlying continues to retrace back up - it's possible that I could RESELL the exact same credit spread that was sold when the trade was first initiated - perhaps for around the same credit amount - or MORE - allowing me to actually get a BETTER return on investment than I was originally hoping for - WITHOUT increasing any risk in the trade.
But let's just say we didn't 're-sell' any options. Let's just assume that we closed the trade entirely when our contingent orders were hit. In this case what we've done is eliminated risk (good thing) - freed up capital (good thing) - enlarged our return on investment over the number of days we have been in the trade (good thing) - and gotten completely out of the market a whole lot sooner than if we had to sit around and wait until expiration day rolls around (and in my opinion this is a good thing too!).
See, I really love the idea of being able to take a 'trading vacation'. What I mean by that is to take a 'break' away from trading and not having to be 'engaged' in the stock market every day. I love being able to be in a trade for a week or so - and then take a week or so off - away from my trading computer screen. I love being able to get out and do other things without having that little worrisome 'trading nag' in the back of my head - always wondering what's going on in the stock market and wondering if my position is doing okay.
Getting this 'trading break' away from the iron condor - this freedom to go out and do things without always feeling the need to check quotes on my phone - not having to worry about always being 'on game' and strategizing in my head about what adjustments I might have to make - just being able to sleep in mornings for as long as I please without stressing out about whether the market is going to make an opening gap...
That's priceless.
Or - at the very least, it's DEFINITELY worth the.20 or so it costs me to exit early out of the trade...for what is STILL a remarkable monthly profit.
Then - if everything went well and the trade stayed beneath my profit tent - I'd just let them expire worthless and keep all that sold premium in my account.
I just assumed this was the most effective way to play the trade - especially since it allowed me to save money from my broker by not paying to close the trade.
But that was a long time ago - and since then - things have changed.
Now, after experiencing too many nights where I couldn't sleep, a number of very 'close calls', more than my fair share of stinging ulcers and even a near hernia, I've made a change to the way I trade iron condors.
Now - as soon as I place the trade, I set a contingent order with my broker to buy back the call spread - as well as the put spread - once I've made the majority of the profit in each spread.
Here's an example: Let's say I sold an iron condor on the index XYZ for a total of one dollar - or around fifty cents each side.
When the put credit spread is worth only .10 - I buy it back. And for the call credit spread the same thing goes.
Now perhaps some of you out there might be scratching your head wondering why I'd do something like this. I know when I first started trading these - if someone told me this was their game plan, I'd be scratching my head. Seems like a futile and even sort of dumb thing to do.
But after trading these every month for years now - I don't agree.
Okay, maybe it's true that doing this will cause me to make less profit than if I were to just hold the trade through to expiration and let the options expire worthless.
But not necessarily.
And also let's look at exactly how much we are talking about here. The amount of money we're talking about leaving on the table is actually not that significant.
What's more important (at least for me) - is that by closing my iron condor trade early, I have LOCKED IN FOREVER the majority of the gains on that side of the trade. No matter what happens going forward - those gains that I've just banked CAN'T be taken away from me.
I have also lessened my exposure.
I have also given myself the opportunity to generate ADDED gains from my overall position - without adding any extra risk.
Let me explain:
I've found that many times during a trade, the premiums in options can drain quite rapidly. In fact, its possible for a spread to drain the majority of its premium in a matter of days.
Let's say that forty days from expiry I place an iron condor on the underlying XYZ. I get a net credit of one dollar - or about fifty cents each side.
The day after I place the trade, our stock - XYZ - suddenly turns south - and proceeds to move down over the next 3 or 4 days.
On the fifth day (just 4 days after I put the trade on), I look at my position and see that I can now buy back the vertical spread on the call side of my iron condor for just .10.
At this point, I have two choices. I can do nothing and just let my positions continue to play - or - I can buy back that call credit spread for .10 and entirely remove the upper half of the trade. If I decide to do nothing - I have chosen to retain my upper side risk in the trade just to try and eventually capture that tiny remaining .10 potential profit.
However, if I decide to just take it off for ten cents - I will have LOCKED IN the lions share of the available profit in that call side credit - guaranteeing that return on investment in just four days.
Then, if XYZ bounces back up - which it will often do after a drop - I no longer have any risk on the upside.
Even better, if our underlying continues to retrace back up - it's possible that I could RESELL the exact same credit spread that was sold when the trade was first initiated - perhaps for around the same credit amount - or MORE - allowing me to actually get a BETTER return on investment than I was originally hoping for - WITHOUT increasing any risk in the trade.
But let's just say we didn't 're-sell' any options. Let's just assume that we closed the trade entirely when our contingent orders were hit. In this case what we've done is eliminated risk (good thing) - freed up capital (good thing) - enlarged our return on investment over the number of days we have been in the trade (good thing) - and gotten completely out of the market a whole lot sooner than if we had to sit around and wait until expiration day rolls around (and in my opinion this is a good thing too!).
See, I really love the idea of being able to take a 'trading vacation'. What I mean by that is to take a 'break' away from trading and not having to be 'engaged' in the stock market every day. I love being able to be in a trade for a week or so - and then take a week or so off - away from my trading computer screen. I love being able to get out and do other things without having that little worrisome 'trading nag' in the back of my head - always wondering what's going on in the stock market and wondering if my position is doing okay.
Getting this 'trading break' away from the iron condor - this freedom to go out and do things without always feeling the need to check quotes on my phone - not having to worry about always being 'on game' and strategizing in my head about what adjustments I might have to make - just being able to sleep in mornings for as long as I please without stressing out about whether the market is going to make an opening gap...
That's priceless.
Or - at the very least, it's DEFINITELY worth the.20 or so it costs me to exit early out of the trade...for what is STILL a remarkable monthly profit.
About the Author:
To learn more about this style of option trading go to this website. Be certain to view the no cost instruction video and see the free article here: weekly options videos.
0 comments:
Post a Comment