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IRON CONDOR - NUTS & BOLTS THEREOF

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THE IRON CONDOR -- NUTS & BOLTS THEREOF

I've received a number of emails over the past few months and we have a lot of new students in our Couch Potato Trading Institute. People come to the CPTI for a variety of reasons. Some want to learn while some want to take advantage of the positions I post every month. The one thing they have in common is that they need to have a comprehensive knowledge of our favorite strategy -- the Iron Condor.

One thing I've learned from teaching the CPTI seminars is that, people who attend are at different points on the learning curve -- just as are people who read this column. So, for the sake of the many CPTI newcomers, let's review the Iron Condor. We don't want to push the focus envelope, so I'll divide it up into two columns - today and Thursday.

THE IRON CONDOR
The Iron Condor often has a wide wingspan, but an intentionally short life span. We're trying to establish a position, using credit spreads, that will allow an index (or stock) to vacillate (no, it's not a lubricant) up and down within a trading range without violating the integrity of the position.

The Iron Condor consists of establishing a bear call spread on top of a trading range and a bull put spread at the bottom of the trading range. We normally use the front month for both spread positions.

The Iron Condor is a credit strategy. That means the maximum we can make on the trade will be the credits we take in at the inception of the position. We will take in a credit from both spreads and, if the option Gods smile upon us, we'll keep all the money. All the options will expire worthless and ascend to option heaven -- where all good expired options go to when they die.

Criteria for Creating an Iron Condor
Here's a quick review of the concepts used to create an Iron Condor, in this case we'll use our favorite underlying, the SPX (S&P 500) index. Keep in mind that the points below are not hard and fast rules. They are simply guidelines. They will vary from person to person, based on risk tolerance and account size. Basically, we're just trying to position ourselves to have the greatest probability of success.

a) With over four weeks left until expiration, we want to establish a maximum profit trading range of about 100 points. There's a little flexibility here, depending on your risk tolerance. The wider the range, the safer the trade.

b) We want to limit our exposure to about $10,000 per position (this will vary depending on your account size). That means 10 contracts on a 10-point spread or 7 contracts on a 15-point spread. We used to trade wider spreads (20 & 25 points), but learned some expensive lessons and that we should limit ourselves to the smaller spread sizes.

c) Try to make the spread as close to equidistant from where the stock is trading as possible. If the SPX is at 1190, we would initially look at the 1240/1250 bear call spread and the 1140/1130 bull put spread. This isn't always possible because there always seems to be more premium available on the put side than the call side.

d) Take in a reasonable amount of premium. What is reasonable? Well, it has to be worth the risk. Again, that can vary based on the spread size, time left to expiration, number of contracts you're trading, etc. Ideally, I like to get about 10% of the spread size, $1.00 on a 10-point spread, $1.50 on a 15-point spread. It's not always possible, especially with the low premium environment we have now, but it's a place to start.

Choosing the Underlying (Index or Stock)
We want to find a relatively volatile index that is trading within a range. The volatility will hopefully provide us with some decent premium. If we place the spreads properly, the support and resistance levels will hold the underlying within its range and we all live happily ever after. If not, there are ways to deal with a trade that isn't working.

Iron Condor Example
Let's use our old favorite - SPX (S&P 500 Index) - closed Friday at 1195.90. It's had a history of trading within the $35-$45 range. It has good volatility and should be good for this hypothetical example.

The Bull Put Spread:
Sell 10 contracts of SPX Nov. 1135 puts
Buy 10 contracts of SPX Nov. 1125 puts
Credit for Bear Call spread of about $.90 ($900)
The Bear Call Spread:
Sell 10 contracts of SPX Nov. 1260 calls
Buy 10 contracts of SPX Nov. 1270 calls
Credit for Bull Put spread of about $.80 ($800)
From the two spreads, we have taken in a total of $1.70 ($1,700). If you're 
a shrewd trader, you might be able to get another dime, but let's go with the
$1,700 for our calculations. How do you get to be a skilled trader? For
starters, attend a CPTI advanced seminar. Then, experience putting what
you learn to work.

Target Profit
This is the fun part. This part is truly exciting. It causes heart palpitations, eyebrows and various other body parts to rise just at the thought of these returns. Based on what you read in the paragraph above, you can see that we took in $1.70. Our actual risk is only $8.30 ($10 - $8.70). If the SPX behaves and finishes inside the predetermined range, both spreads will expire worthless and our return on our risk is 20.5% -- for about six weeks!! Sure beats the Hell out of a Treasury Note!!

Stay Tuned To This Station
On Thursday we'll continue our discussion of the Iron Condor strategy. We'll look at maintenance requirements, risk calculations, possible position adjustments, etc.

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NEXT WEEKEND . . .
Are you really serious about learning our non-directional strategies and how to get the most out of your trading dollars? Join me next weekend (Oct. 15/16) in Denver for a 2-day advanced seminar. A few spots remain. (See discussion below)

Have questions about the seminar? Send me your number (mparnos@optioninvestor.com) and I will personally call you to go over all the details and to answer any questions you may have.

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CPTI CURRENT OCTOBER POSITIONS
CPTI October Position #1 - SPX Iron Condor - 1195.90
We sold 15 SPX October 1280 calls and bought 15 SPX October 1290 calls for a credit of about $.60 ($900). On Friday we sold 15 SPX October 1160 puts and bought 15 SPX October 1150 puts for a credit of about $.60 ($900). We have a complete Iron Condor with a trading range of 1160 to 1280. Our total potential profit is $1,800. Our maintenance requirement is $15,000.

CPTI October Position #2 - OEX Iron Condor - 552.92
With the OEX at about 559, we sold 15 OEX October 590 calls and bought 15 OEX October 600 calls for a credit of about $.55 ($825). Then we sold 15 OEX October 525 puts and bought 15 OEX October 515 puts for a credit of about $.75 ($1,125). Our credit and potential profit is $1,950. Maximum profit range is 525 to 590. Maintenance is $15,000.

CPTI October Position #3 - SPX Iron Condor - 1195.90
With the SPX at about 1230, we sold 12 October SPX 1285 calls and bought 12 October SPX 1300 calls and received a credit of $.80 ($960). We had asked for $.75, but, our broker came back with an $.80 fill (bless his heart). Then, we sold 12 October SPX 1155 puts and bought 12 October SPX 1140 puts for a credit of $.65 ($780). Our total profit potential is $1,740. We have a maximum profit range of 1155 to 1285. Maintenance is $18,000.

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CPTI CURRENT NOVEMBER POSITIONS

CPTI November Position #1 - SPX Iron Condor -- 1195.90
With the SPX trading at about 1215, we sold 12 SPX November 1140 puts and bought 12 SPX November 1130 puts for a credit of about $.80 ($960). Then, we sold 12 SPX November 1280 calls and bought 12 SPX November 1290 calls for a credit of about $60 ($720). Our total credit and profit potential is $1.40 ($1,680). Maintenance is $12,000 (if you have the right broker). Maximum profit range is 1140 to 1280.

CPTI November Position #2 - RUT Iron Condor -- 644.33
With the RUT trading at about 665, we sold 12 November RUT 610 puts and bought 12 November 600 RUT puts for a credit of about $.60 ($720). Then, we sold 12 RUT November 720 calls and bought 12 RUT November 730 calls for a credit of $.65 ($780). Our total credit and profit potential is $1.25 ($1,500). Maintenance is $12,000 (IF you have the right broker). Maximum profit range is 610 to 720.

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ONGOING STRATEGIES
ZERO-PLUS Strategy - September SPX Iron Condor - 1195.90
In my Feb. 8, 2004 column, I outlined a strategy based on an initial investment of $100,000. $74,000 was spent on zero coupon bonds maturing in about seven years at a value of $100,000. The principal $100,000 investment is guaranteed. We're trading the remaining $26,000 to generate a "risk free" return on the original investment.

Our new cash position is: $33,000 + $1,700 (September Profit) = $34,700

For October we duplicated the CPTI portfolio position by selling 20 October SPX 1155 puts and bought 20 1140 puts for a credit of $.65 ($1,300). We also put on the bear call spread for our September Iron Condor. We sold 20 Sept. 1285 calls and bought 20 Sept. 1300 calls for a credit of $.80 ($1,600). Our total potential profit is $2,900. Our maximum profit range is now 1155 to 1285. Our maintenance is $30,000 (15-point spread X 20 contracts).

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QQQ ITM Strangle - $38.34
We own 10 January 2007 $42 puts and 10 January 2007 $32 calls at a total cost of $14,600. Only $4,600 is at risk as the other $10,000 of intrinsic value will always be there. We then sold the March $36 puts and $38 calls, taking in a total of $1.10 ($1,100).

On September's expiration Friday we rolled out our short September positions. October is going to be another low premium month, while we wait for the QQQQs to come back down to earth. We sold the October $37 puts for $.15. Earlier in the month we had purchased back our September $37 put for $.05. We ended with a credit of only $.05 for the put side.

Near Friday's close, we bought back the September $37 calls for $2.40 and sold the October $37 calls for $2.60 -- giving us a $.20 credit. Our total net credit for the October rollout is $.25 or $250

Based on these figures, the new total of generated premium (through the October cycle) is $5,350 ($5,100 plus the $250).

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COUNTDOWN TO DENVER --
ONLY A FEW SPOTS LEFT

CPTI SEMINAR DATE -- DENVER, CO - OCT. 15/16
Our CPTI seminar will be on Saturday & Sunday, October 15th & 16th in Denver, Colorado and there is still room for YOU!!

Our CPTI seminars are limited to ONLY 25 ATTENDEES. If you're a serious options trader and you want to learn the nuances of our advanced non-directional trading strategies and hone your trading skills, contact me ASAP at mparnos@optioninvestor.com. I'll send you all the pertinent information. The price is right -- $995.00 -- about half of one profitable Iron Condor trade -- and you'll have a two-day experience that you'll remember, and profit from, for a lifetime.

Our latest Philadelphia CPTI Seminar was a great success (actually, they all are). There are now 25 more enlightened minds, with smiles attached, ready to generate a healthy annual return using our CPTI strategies. Remember, if you attend one of my CPTI seminars, you are entitled to retake the seminar a second time at NO CHARGE!

31 OUT OF 34 PROFITABLE MONTHS!
WANT TO ACHIEVE SUCCESS WITHOUT STRESS? OF COURSE YOU DO!!
USE OUR CPTI WEALTH-BUILDING TECHNIQUES!

You should really try and make one of these seminars, if you can. With what you learn, you'll see a substantial increase in your trading results. Contact me at mparnos@optioninvestor.com. If you've already signed up, I'll see you there. If you haven't signed up, what are you waiting for?

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HAPPY TRADING!
Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them.
MIKE PARNOS, Your Options Therapist and CPTI Master Strategist

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Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.

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