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IRON CONDOR - A REVIEW

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The S&P 500 index did absolutely nothing this week. There was a little up and down movement, but it ended up basically where it began the week. That's the kind of action we like. The TA people call it a consolidation before the next leg up in the market. I don't care what they call it, I'm just glad to have a relaxing week. Is it the calm before the storm? Well, our three October positions are all bull put spreads with nice cushions. If the market goes up, we're golden.

The third quarter has ended, and hopefully so did the institutional window dressing. Now, new money will likely enter the market and that will force the market a bit higher. Then it will likely pause and retest before heading higher. On Friday we'll have one of those "jobs" numbers. They always seem to move the market. Which way? That's the $64,000 question.

In spite of the chaotic plunge in August, the market still seems to have an upward bias. So, at least for the time being, we've held off putting on bear call spreads to complete our Iron Condors.

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Need More Maintenance Dollars?
Our CPTI October RUT 630/620 bull put spread position is sufficiently out of the money that it may be possible to close the position early - with three weeks to go. It's using up $20,000 of maintenance that might better be used elsewhere - IF you need it.

The natural to close the position is a dime. One would have a realistic chance of unwinding the position for a nickel if you put in a limit order. It makes no sense to wait three weeks for a nickel when that $20,000 might be put to work in another trade.

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THE IRON CONDOR

- The Foundation of the Couch Potato Trader

Today we're going to continue with our review of the basic strategies we use here in my Couch Potato Trader column. The most popular strategy is the foundation and the source of most of our profits - the Iron Condor. Below is a reprint of an article that was published about a year ago. You can tell by the prices in the example. It's been a long time since the S&P 500 was trading in the 1100s.

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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CURRENT OCTOBER CPTI PORTFOLIO POSITIONS

CPTI October Position #1 - RUT - Bull Put Spread - 805.45

On 9/7, with the RUT at 775.53, we sold 20 October RUT 630 puts and bought 20 October RUT 620 puts for a credit of $.70 ($1,400). Total net credit and profit potential (so far) of about $.70 ($1,400). Our maintenance is $20,000. We'll look for opportunities to complete our Iron Condor if/when the market pops up.

CPTI October Position #2 - SPX - Bull Put Spread - 1526.75
On 9/20, with the SPX at 1518, we sold 20 October SPX 1395 puts and bought 20 RUT 1385 puts for a credit of $.60 ($1,200). Total net credit and profit potential (so far) of about $1,200. Our maintenance is $20,000. We'll look for opportunities to complete our Iron Condor if/when the market pops up.

CPTI October Position #3 - MID - Bull Put Spread - 885.06
On 9/24, with the MID at 881, we sold 20 October MID 810 puts and bought 20 MID 800 puts for a credit of $.60 ($1,200). Total net credit and profit potential (so far) of about $1,200. Our maintenance is $20,000. We'll look for opportunities to complete our Iron Condor if/when the market pops up.

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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. At that time, $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. With the July profits, our new cash total is $55,060 ($52,210 + $2,850).

ZERO PLUS POSITION -

Watch for a New Position To Be Announced Soon

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CPTI SEMINAR SCHEDULE!

New Seminar Date To Be Announced Soon

CHARLOTTE, NC - Another Huge Success!


Take your trading from a "hobby" to a profitable "business." You need 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 - one that can last a lifetime.

DO YOU HAVE PROFIT-ABILITY?
It's always a challenge (and a pleasure) for me to 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. Contact me and I'll personally call you with all the details.

If you're a SERIOUS options trader, 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. Send me your phone number. I will 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. Take advantage of the "early bird special" and save $100. You'll have a two-day experience that you'll remember, and profit from, for a lifetime. I limit my CPTI seminars to ONLY 25 ATTENDEES. And, as a bonus, if you attend one of my CPTI seminars, you are entitled to RETAKE the seminar a SECOND TIME at NO CHARGE!

53 OUT OF 58 PROFITABLE MONTHS!!
WANT TO ACHIEVE SUCCESS WITHOUT STRESS?
OF COURSE YOU DO!!
USE OUR CPTI WEALTH-BUILDING TECHNIQUES!

You should definitely attend one of my seminars. 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 Trader 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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