Trade Details & Summary

CMG Iron Condor (LIVE Opening Trade)

Want to learn how to trade iron condors? I just recorded my live trading platform (and real money account) as I walked through the process of entering a new iron condor trade in CMG stock. Inside you'll see me analyze, price and fill the trade in real-time.

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  • Jeff Smock

    The trade credit doesn’t equal the length of the leg x probability…I believe it comes up about .25 short. What am I missing?

    • But once you factor in that the credit moves the break-even points out further than the short strikes it should be very close if not right on. Make sense?

  • Depends on what else is available in the market but we are ideally shooting for something around $1.40-1.50 range. Keep in mind that our premium increases our break-even points wider than the short strikes AND generally we’ll win more often than 70% long-term since IV is overstated.

  • The credit received just moves the break-even points out that much further on each end so you have to extrapolate a little on the new “with credit” probabilities.

  • The reason is because what we have found in our backtesting is that even when you accept less than ideal premium you’re still profitable long-term because IV is always overstated and the strategy will win out more so than the initial probabilities suggest. This doesn’t mean we are doing a 180 in our strategy but that we’ll also incorporate this low-level IV selling into our overall system. When IV is high we’ll still sell more premium and bigger positions because the pricing is better. Also see this podcast:

  • It’s a custom TOS script we wrote that we have for those who also purchase our watchlist software.

Show Video Transcript +

In this video, we're going to look at entering a new iron condor trade in Chipotle or at least pricing it out. We'll see if it ends up working out. Chipotle has been on a little bit of a downward move for the better part of the last six months or so, but then recently, it has rallied higher.

And with this rally higher, we didn't see the drop in implied volatility that we're used to seeing when stocks make a move higher. When stocks make a move higher, we see a decline in volatility, but we haven't seen that. We didn't see that that much even through the earnings event that we just went through.

But we don't have earnings on deck until just after April expiration, so we're going to get in here and try to get into an iron condor in Chipotle are try to make a trade here. Implied volatility is in the 62nd percentile. It's higher than where we want to be, so it's greater than the 50th.

It's not insanely high, so it's not in the 78th or 80th or 90th percentile. Implied volatility is high, it's not insanely high, and that's why we want to go, or at least one reason why we want to go with the iron condor is that we don't want to be super aggressive in selling options.

There is a chance that implied volatility can go higher than where it is right now, so we want to sell some options, but we don't want to be super aggressive and do like a straddle or a strangle.

Now in the same vein here, Chipotle is also a 500+ dollar stock, so for most people, we don't want to make a trade that has an insane amount of margin required to carry a position on a $500 stock. It's just going to be too much to carry. That's why we're going to do the nice iron condor.

When we go into the trade tab here, you can see we got nothing on in Chipotle. The field is open for us. We're going to go ahead and select the April options. They've got about 53 days to go. It's a little bit further out than where we want to start this process, but I like the Chipotle trade, and we want to go a little bit further out than just the front month contracts.

Now in all cases, what we do with our iron condor is we start building this trade at about the 15% chance of being in the money on each end. In this case, we'd be starting to sell options about 435 on the put side. Remember,

Chipotle is trading right now - This is live, so all these prices will be updating as the market updates. But it's trading right now at about 521.40 or so. Now, we're trading options a decent clip below the market as $90 below where the stock is trading right now.

That's where we're going to start on the put side. On the call side, we'll go up all the way to about the 590 strikes. You can see we're doing everything very systematic, it's very mechanical, and we're going to make these trades.

Now, here's a little cool thing. And I think we mentioned these on a couple of other live videos. But with Chipotle right now, the April contracts for Chipotle just opened today. I mean, this is like real time stuff that we're looking at right here.

And this is why you don't see any open interest in these contracts. That's because the contracts just opened today. Open interest has a one-day lag, so anything that's traded today, anything that shows up as volume today will then flow over appropriately as needed to open interest tomorrow.

Even though there's not a lot of open interest right now, Chipotle is a big-name security; there's going to be some buyers and sellers out there that are going to be willing to make some trades, so you can see that's why there's no open interest today. Just a little fun fact of the day I guess.

For this Chipotle trade, what we're going to do is we're going to sell the 590, 595 call spreads. We're just going to right-click, and we're just going to sell this vertical call spread, to begin with. And that's how we start building it out. I just do it on one side and then another.

We'll take in a $75 credit for that one, and then down below the market, we're going to just - On my computer, it's an Apple. You hold CTRL and then right-click on the 435's and go over and sell another vertical. We're just going to stack another vertical right on top.

And what that's going to do is it's going to group this entire order. The system already knows that we're going to make an iron condor trade, so it'll group this whole trade together as the full iron condor.

Again, the 590, 595 call spread and then the 435, 430 put spread down below the market and taking in a decent premium around 125. I like this to be up around 135, 140. But that's a pretty decent premium, so we can go ahead here and hit confirm and send, just take a look at our risk profile on this trade. We're looking at making about $125 on this trade.

We're risking $375. It's a very low-margin required for this trade because it's risk defined, it's that iron condor feature. This is a good trade for even a small account, an IRA account. This is the type of trading that you want to do. And you can always convert any of our trades at Option Alpha into an iron condor if we don't start like this. But this one will go out to members if it gets filled as a full iron condor.

In our case, we're going to scale up just a little bit here and enter two contracts in Chipotle. We can always add to this later. But we're just going to enter two of these, so we get a little bit bigger premium.

And I like the 125 order, so we'll just throw that in here and see if we don't get filled here very, very soon. And I think it gets filled right away. You can see that order went in almost immediately today and filled. Now, we're into the 125 iron condor in Chipotle. This alert went out to members.

And again, what these iron condors, we're going to manage them in about the 50% credit level. We took in a credit of 125 and what we'll do is we'll look to take a premium of about 50% of that off the table. When it decays in value about 50%, then we'll take some money off the table and buy this thing back early.

That's our new position in Chipotle. As always, if you guys have any questions or comments, please add them right below this video. And until next time, happy trading!

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