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THE IRON CONDOR -- NUTS & BOLTS THEREOF

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THE IRON CONDOR -- NUTS & BOLTS THEREOF

If you haven't noticed, the CPTI method of generating profit month after month is catching on. It works. I was recently told that even a few of my seminar grads have branched out, started their own websites and are hustling their version of what we do. Imitation is the sincerest form of flattery, or so they say. But, they can't match the original Couch Potato. That's why I'm called the Master-Tater.

I've received a number of emails over the past few months and we have a many 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 my 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. Also, the numbers and example are not current, so don't go looking for this trade on Monday.

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 - $18,000 per position (this will vary depending on your account size). That means 10 contracts on a 10-point spread or 12 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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TWO SEMINAR DATES - LA (Dec. 2/3) & Ft. LAUDERDALE (Nov. 11/12)The Fort Lauderdale seminar is filling up nicely - and now, the reservations are coming in for the December Los Angeles seminar.

Don't procrastinate!! Check your schedule and plan to attend - but only IF you want to improve your trading results. Contact me. I will personally call you to go over the details and answer all of your questions.

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OCTOBER CPTI PORTFOLIO POSITIONS
CPTI October Position #1 - RUT - Iron Condor - 725.59
With the RUT at about 708, we sold 20 October RUT 610 puts and bought 20 October RUT 600 puts for a credit of about $.50 ($1,000). Then we sold 15 October RUT 790 calls and bought 15 October RUT 800 calls for a credit of about $.60 ($900). Our total net credit and profit potential is $1.10 ($1,900). Maximum profit range of 610 to 790 -- 180 points!! Maintenance is $20,000 -- IF you have the right broker.

CPTI October Position #2 - SPX - Iron Condor - 1335.85
On 9/7, with the SPX about 1295, we sold 12 October SPX 1210 puts and bought 12 October 1195 puts for a credit of $.80 ($960). Then we sold 12 October SPX 1365 calls and bought 12 October 1380 calls for a credit of $.60 ($720). Our total net credit and profit potential is $1.40 ($1,960). Maximum profit range of 1210 to 1365 - 150 points. Maintenance is $18,000 - IF you have the right broker.

CPTI October Position #3 - RUT - Iron Condor - 725.59
With the RUT at about 707, we sold 15 October RUT 630 puts and bought 15 October RUT 620 puts for a credit of about $.60 ($900). Then we sold 10 October RUT 770 calls and bought 10 October RUT 780 calls for a credit of about $.75 ($750). Our total net credit and profit potential is $1.10 ($1,900). Maximum profit range of 630 to 770 -- 140 points!! Maintenance is $15,000 -- IF you have the right broker.

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ONGOING STRATEGY - THE ZERO-PLUS Strategy
In the past, 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. We are not compounding our profits by dramatically increasing the number of contracts we trade. Just think of how well we would be doing if we had increased the number of contracts, even a little.

Our August RUT Iron Condor position expired worthless - according to plan. We can now officially add another $2,300 of premium to our cash stash. We have now generated $47,250 ($44,950 + $2,300).

October Zero Plus Position: RUT Iron Condor - 725.59
With the RUT at about 708, we sold 40 October RUT 610 puts and bought 40 October RUT 600 puts for a credit of about $.50 ($2,000). Then we sold 30 October RUT 790 calls and bought 30 October RUT 800 calls for a credit of about $.60 ($1,800). Our total net credit and profit potential is $1.10 ($3,800). Maximum profit range of 610 to 790 -- 180 points!! Maintenance is $40,000 -- IF you have the right broker.


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NOVEMBER CPTI PORTFOLIO POSITIONS
CPTI October Position #1 - RUT - Iron Condor - 725.59
With the RUT at about 722, we sold 20 November RUT 620 puts and bought 20 October RUT 610 puts for a credit of about $.50 ($1,000). Then we sold 20 October RUT 800 calls and bought 20 October RUT 810 calls for a credit of about $.60 ($1,200). Our total net credit and profit potential is $1.10 ($2,200). Maximum profit range of 620 to 800 -- 180 points!! Maintenance is $20,000 -- IF you have the right broker.

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CPTI SEMINAR SCHEDULE!
NOVEMBER 11/12 - FT. LAUDERDALE
NEW DATE - DECEMBER 2/3 - LOS ANGELES

Don't put off making your reservation. Airline tickets get more costly the closer you get to the event. If you really want to take your trading from a "hobby" to a potentially profitable "business," you'll want the information you'll learn at my CPTI seminar. You'll learn more than the "how to's" of trading our strategies. You'll learn a new lifestyle - and a nice lifestyle - one that can last a lifetime.

DO YOU HAVE PROFIT-ABILITY?
It's always a challenge (and a pleasure) for me when I have a roomful of bright people who have a passion for, and are excited about, learning. We go over everything imaginable - from the non-directional strategies to the psychology of trading. We cover a lot more than the mechanics. Inquiring minds want to know the whens and the whys, not just the hows. That way, they're prepared for the best (and the worst) - and know the best way to handle either situation. There are still spots open for Ft. Lauderdale. Contact me and I'll call you with all the details.

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 personally call you with all the pertinent information. The price is a bargain - ONLY $995.00 -- less than the profit from one Iron Condor trade -- and you'll have a two-day experience that you'll remember, and profit from, for a lifetime. Our CPTI seminars are limited to ONLY 25 ATTENDEES. Remember, if you attend one of my CPTI seminars, you are entitled to RETAKE the seminar a SECOND TIME at NO CHARGE!

43 OUT OF 46 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 my 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: Our remote batteries and self-discipline should 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 (though many often do) 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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