A monthly Iron Condor on IWM, SPY, or GLD can complement your weekly positions.
Some readers have requested that I include a longer term trade, on a smaller vehicle, in addition to the weekly positions. Following are the basic guidelines for a monthly Iron Condor I will recommend on one or more of the ETFs as mentioned above. This trade is intended for entry in a range from 30 - 40 days prior to expiration, giving some flexibility on the exact entry date depending on what market conditions exist, as well as trader's schedules.
SELL short call and short put with delta in the range of 15 - 20. More aggressive traders may choose a higher delta for a better credit.
BUY long call 5 points above short call strike.
BUY long put 5 points below short put strike.
Credit: Minimum credit to enter the trade should be $.80
Planned maximum capital allocation is $500 per contract (width of the wings). In a Reg-T account, your broker will hold the $500 less credit received as maximum margin/risk and option buying power. (Example: $500 margin less $80 credit = $420 buying power effect before commissions).
- Target gain is 10 percent of the actual margin. Using the .80 credit as an example, 10% target would be $42 per contract.
- Max loss is 15 percent of the actual margin. Using the same .80 credit as an example, 15% max loss would be $63 per contract.
If the delta of the short strike increases by 10 from the time of entry, the adjustment would be to roll the threatened side so the new short is a delta less than 20. At this point, it is the traders' choice whether to accept the lower credit because of the cost to roll, or increase the number of contracts on the entire position to maintain the same potential gain. It is not recommended to increase the size of the position by more than 50%.
I will wait until Wednesday of this week to look at recommending/entering an IWM position for October. This will be after the President's report to the nation on Syria; which could affect the market one way or the other Wednesday morning. As with all the trade strategies I write about, it is recommended to follow the overall guidelines for trade entry:
- Wait at least one hour after the open before entering.
- If the underlying has moved +/- a one day, one standard deviation move, do not enter the position until the move has moved back to less than a one standard deviation move. If that doesn't occur on the planned entry day, do not enter the trade.
- If there is major economic news pending, wait until after the news is released before entering the trade. The Nightly Market Recap on our web site gives a listing of upcoming economic news.
As always, it is recommended to paper trade any new position before putting it on live position. It's always best to have a complete understanding of any trade, before putting one's own money in the position.
Stay keen on your risk management and trade carefully,