Lesson Overview

GS & LMT Iron Condors

After exiting our SLB earnings trade for a profit we'll show you how we made 2 iron condor adjustments in GS and LMT as we near expiration. As always the goal of these adjustments is: 1) Take in a credit and move out our break-even points. 2) Reduce our possible loss should the stocks continue moving higher. The mechanics of doing this remains the same but I'll walk through each of the 2 examples in this video including a detailed look at the risk graphs so you have clear understanding of how the positions look pre and post-adjustment.

Show Video Transcript +

Tonight, we’re going to go over all the trades that we made on Thursday, November 13th. But before we get into those trades, I just want to look at a couple of charts.

I think it’s been very interesting what’s happening not only in crude oil but just the day that we had on the S&P. And I don’t harp too much on this, and a lot of you know that have been members for a long time now that I don’t harp on these charts way too much.

It’s good to look at them and get a feel for where the market is going. But I think today was a really interesting day on the S&P because we had a completely flat day.

We opened up basically where we had closed today, and it’s important because all of these days leading up to this point have been really strong days where we would open lower and close at the highs and open lower and close at the highs.

And now, we have a couple of days where we’re starting to reach the ceiling here and then follow it up with today which is just a huge day of indecision. We don’t know what’s going to happen.

Sometimes this can be just a pause in the continued rally higher, or it can be the signal that the markets are running out of steam and we’re going to head lower. It’ll be interesting to see what happens, but I expect a little bit more volatility to come as we get closer and closer to expiration which is going to be a good thing.

Now, one of the bigger stories today I think was crude oil and just how low crude oil got. And if you're a premium member and you had been on our strategy call this weekend because we do them every single Sunday, you would know that when we talked about crude oil, we talked about it breaking some significant support levels.

And if it did, it might continue to run lower. And when we look at the chart here which isn’t quite loading up just yet. Okay, the chart finally loaded here, so now we can see that crude was trading this little range here between about 77 and 79.

We talked about if it broke below that which it did today. It’s trading even lower than that for the futures market heading into Friday. But it broke below, so I think that it’s probably safe to assume that crude is probably going to head down into the upper 60s.

If not, the very, very low 70s as a target. I think there's a little bit more room to run here in crude, but that may be the end of it. Honestly, it’s a pretty big drop. Crude oil just back in July was at $108 a barrel, and now it’s come back down all the way to around $75 a barrel.

That’s a pretty dramatic move, and this may very well be the last leg down on crude. It’ll be interesting, and we’ll see if there are some trading opportunities that we can get out of it.

The first trade I want to go over tonight is just real quick, our closing iron condor in SLV. SLV was an earnings trade originally, but we didn't trade the weeklies because there were no weeklies available.

We decided to go out to the monthly contracts for SLV and sell the 100/105 call spread, and then the 80/75 put spread below the market. We did this very small, but we took a nice little profit on it today of $72 after closing it out for a $31 debit.

Now, what's really great about this trade and really is a great case study on why you just have to hold things through periods that are a little bit rougher, but you can see that basically, SLV as soon as earnings were announced moved right up towards our short strike on the call side, we’re right here at 100.

And pretty much the entire month, it just traded right along that level, got up even above that level earlier in the month, and then has finally come back down inside that range.

Given the history of it coming back down to around 94 and then rallying higher, we just don’t want to take the chance of it doing that as we head into expiration. That's the reason that we closed out of this trade. We didn't see much of an implied volatility drop.

There was some implied volatility drop, but not a lot or as much as we were expecting. That made us or forced us to hold the trade a little bit longer to get some more Theta decay which worked out, so we were able to turn a nice little profit.

The other two trades that we had adjustments on today are LMT and GS which are Goldman Sachs. Both of these trades are very, very much the similar type of adjustment where we added put spread below the market to our existing iron condor.

I’ll go over both of these, but they work both the same. What we’re trying to do here is add that additional credit in both cases. With LMT, we had a $72 credit, and with Goldman Sachs, we had an 117 credit.

That credit helps move out our breakeven points as the stock started to test the upper boundaries of our iron condor. Let's take a look real quick at LMT, and you can see what I mean, and we’ll go in here to the analyze tab, and this is what the position looks like.

But let's just take off the put spread that we entered today which is the 180/185. This is exactly what our position looked like earlier in the day, so it’s this very wide iron condor, and you can see that LMT is starting to test that upper boundary here. The whole idea is that we’re going to do two things.

We’re going to add that put spread to not only move our breakeven point out further which is going to help in case LMT does come back down inside of this range in the next couple of days, but also, we’re going to try to reduce our max potential loss in case it does just continue to ride higher.

There’s nothing we can do about that. If it does go higher, we want to reduce our loss. Currently, we’d be losing about $400 on this trade, but now that we added this adjustment that we threw in here today, and now you can see that our breakeven points were moved out just a little bit and now our max loss is only about $300.

We've reduced our loss, and we still kept a little window of opportunity here in case LMT does move back down inside of this range between now and expiration. That’s exactly what it looks like.

It’s like a butterfly up here, so this looks like more of your butterfly, and then we still have that put spread out here that's just going to expire worthlessly. There’s no point in closing that out. Just save your commissions on that end.

Now, Goldman Sachs, this one has worked out pretty good, and we’ll see if it continues to work out. But let me just remove the 190/185 put spread.

And you can see this is our original iron condor, lots of room to the downside, but Goldman has been testing us up here, so what we decided to do is to take in a little bit more credit.

Earlier in the day when it was trading higher, we wanted to take in more credit, so we added the 190/185 put spread, and that gave us a butterfly right over where Goldman is trading right now, and you can see it moved back down inside this range.

We’ve got a nice little range here that we can make some money in Goldman and we’ll try to close this out a little bit early. We’re not going to hold this all the way to expiration. It’s starting to decay quicker and quicker every day.

If Goldman can stay range bound in between these two points, we should have a good opportunity to take some profit on this trade and move onto the next one. As always, if you guys have any comments or questions, please ask them right below in the comment section.

I’ll get back to all of those today or tomorrow before the open. And if you're watching this video somewhere else online or on YouTube, you just have to understand that you're getting this video and these alerts about 15 days after they're sent out to our members.

If you want real live-time alerts and you want a video tutorial just like this every single night going over those trades, you’ve got to sign up for a membership at optionalpha.com. Until next time, happy trading!

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