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IRON CONDOR REVIEW - PART II

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IRON CONDOR STRATEGY REVIEW - PART II

Last Sunday, we began our review of the Iron Condor - for the sake of our new Couch Potato subscribers. Plus, a review of the basics never hurt anyone. The Iron Condor is an integral part of our non-directional approach to trading. If you have questions, send them to me. It's important that you grasp the concept. This kind of knowledge can set you free.

If you missed Sunday's column, it's on the site - along with the archives of Couch Potato columns all the way back to January 2005.

Iron Condor Maintenance Requirements

Your brokerage firm will want to hold $10,000 per spread in your account as collateral to cover catastrophic situations (each brokerage house calculates this somewhat differently, so check the rules where you are). A progressive options broker will require a total of $10,000 (for a 10 contract position) for the two spreads. A non-progressive broker will want to hold $10,000 in maintenance on each of the two credit spreads (totaling $20,000). The maintenance requirement can be in the form of cash or marginable securities. If you are using cash to handle the maintenance requirement, it should continue to earn money-market interest while it's resting comfortably in your account. Again, check your brokerage to confirm their policy.

Our Exposure - Cash at Risk & Maximum Loss
The nice part about the Iron Condor is that you can't be wrong in both directions. Technically it's possible, but the likelihood of it happening is infinitesimal.

Our exposure is only the difference between the strike prices of the bull-put spread -- 10 points. Now, remember that we've already taken in $1.70 in credit when we put on the Iron Condor. Therefore our actual out-or-pocket risk is only $8.30 ($10 - 1.70).

Breakeven Points
We have breakeven points (at expiration) of 1261.70 (1260 plus 1.70) on the upside and 1133.30 (1135 minus 1130) on the bottom side. These are breakeven points -- at expiration. Prior to expiration, there is time value to be considered. If you choose to close out the trade prior to expiration, you have to carefully calculate the prices prior to the trade to be accurate in assessing the cost of closing the trade and your profit or loss situation.

Adjustments
There are a few different ways to deal with a potential violation of a short strike price. In our SPX example, let's assume that SPX is trading at 1140, just outside of the desired 1135/1125 range.

A) You can roll up and/or out. You can close out the bear call spread and roll it up and out -- trading an increased number of contracts on the rollout to replenish what it cost to close out the original bear call spread. Or, you can just GTFO -- which is my personal preference.

B) You can wait and see what happens. As you know (hopefully), the market fluctuates. There's still a reasonable chance that the market will come back down and finish comfortably below the short call strike. This is a judgment call, just remember that you are still at risk for the maximum loss here.

C) When a trend becomes apparent, you can close out the bull put spread and establish a bear call spread above the strike and trade a sufficient number of contracts so the credit taken in will replenish the cost to close out the original bear call spread.

D) You can buy back the short put of the bull put spread and, if you anticipate a continued upward move, ride the remaining long put (1125) down. If you're right, and the stock moves to 1115, your long 1125 put will now have an intrinsic value of at least 10 points. But that's IF YOU"RE RIGHT! If it's early in the option cycle, and you believe the stock will continue, you can hold onto the long.

I wouldn't necessarily close out the near worthless spread (i.e., the spread on the opposite end of the trading range) unless you need to close the spread to free up maintenance dollars for another purpose, or unless you can do it inexpensively -- a nickel or dime. If SPX is threatening the lower bull put spread, bear call spread will likely expire worthless. Why spend the money on commissions if you don't have to?

E) If, or when, a stock moves up (or down) through the short strike, we can simply buy (or short) 1,000 shares of the stock to cover the short position. When the returns back below the short strike, we simply sell the stock or cover our short shares. You may incur a few commissions and a little slippage, but it's a good way to cover your positions. Notice that this possibility applies to Iron Condors placed on stocks. It does not apply to indexes.

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OCTOBER CPTI PORTFOLIO POSITIONS
CPTI October Position #1 - RUT - Iron Condor - 743.08
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 - 1353.22
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 - 743.08
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 - 743.08
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 November Position #1 - RUT - Iron Condor - 743.08
With the RUT at about 722, we sold 20 November RUT 620 puts and bought 20 November 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.

CPTI November Position #2 - MID - Bull Put Spread - 768.95
With the MID at about 755, we sold 20 November MID 690 puts and bought 20 November 680 puts for a credit of $.75. Our potential profit is $1,500. Maintenance is $20,000. I'll keep on the lookout for a safe bear call spread to complete our Iron Condor. However, if I don't find an appropriate bear call spread, I'm perfectly content to sit with this bull put spread to expiration.

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CPTI SEMINAR SCHEDULE!
November 11/12 - Ft. Lauderdale
(Only 4 Spots Left!)
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 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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