Lesson Overview

IWM Iron Condor

As IWM moved closer to our original call spread trade we decided throughout the month to add the short put spread and create an iron condor position. Entering these spreads separate is commonly referred to as "legging" into the trade. You'll see us walk through the strike selection process and get a chance to see what the strategy profit & loss diagram looked like before and after the adjustment that we made to help you visualize the new position. But before we talk about that we'll also cover 2 new trades examples in PFE and GOOG.

Show Video Transcript +

Today we're going to go over all of the trading alerts that we made on Wednesday, August 27th. We had two new opening trades today and then one adjustment to a current position, so I want to cover that adjustment in IWM towards the end of this video.

Before that, I want to go over both of the opening trades that we had both in Google and PFE which is Pfizer. Now as always, if you guys have any comments or questions about these trades, just go ahead and add them to the comment box right below this video inside the membership area and I'll get back to those.

The two trades that we made today are very very similar in nature, and they're both debit spreads, but one is a debit call spread, and one is a debit put spread. We'll show you a little bit about why I made these trades and kind of the directional feel.

I like both of these trades, and they're fairly market neutral to have both of them on here, so we've got Pfizer, which is a call spread, and we want Pfizer to go up, and then we've got Google which is a put spread, and obviously we want Google to go down.

Now, with Google, let's start with that one. We went ahead and bought the 580/575 debit put spread. What that means is that we both the 580 puts, and then sold the 575 puts against that position.

That gave us a total debit of 255, so just over mid price or half the width of the strike which is 250, since it's a $5 wide spread. That gives us a break even point somewhere around 577 and a half, somewhere in there. Okay?

That's really where we have the break even on Google. When we go to the chart, you can see that Google's had a tough time regaining itself after this rally.

It's had a nice little pick up after the kind of market bottom tier a little bit short term in July, and now has started to turn back over and started to roll back over, and it's had a tough time gathering it's feet.

Now technical wise, and I'll talk about this, later on, tonight on the coaching call and webinar with everyone tonight, but we did see a move down from CCI below that zero barrier which gives us that very strong sell signal in Google.

This is one of the reasons, not the only reason, but one of the reasons why we decided to go a little bit bearish on Google instead of going bullish on Google.

Now with implied volatility down in the third percentile, it means that it's as low as it's been in the last year. We don't want to do any strategy that is selling cred spreads or iron condors, nothing like that.

Because we don't want to take advantage of implied volatility going lower since it's already as low as it's been in the last year or so. We want to take advantage of implied volatility potentially going higher, which these debit spreads can help with but at the very least we just don't want to be selling any premium right now in Google.

Now when we actually go to the trade tab, you'll notice that our position is a little bit of the money because at the end of the day with the move in Google, but the reason that I entered these strikes, even though they have very very wide bid out spread is because our break even point like I said is about 77 and a half on Google.

With the stock closing today at 571, that puts our break-even price about $6 higher than where the stock closed today. When we enter this trade, the same thing was held true.

I think it was about $3 or $4 higher, our break even point was about $3 or $4 higher than where the stock was at that time. If we go to the risk diagram here, I'll show you what I mean with this.

We'll see here, let me kind of compress this out just a little bit. This is what the profit loss diagram looks like on Google. Google is trading right now down here around 570. However, earlier today it was trading up here around 574 or so.

When we entered this trade, Google was already on the money with our spread which is great, and we make about the same amount of money here as we are risking.

If we're risking the same amount of money as we potentially make, but Google is already in the money, then that means we're taking better than 50/50 odds on this trade even though our risk is 50/50. Right?

We're risking $250 to make $250 and with Google already in the money by the time we entered this spread, we're actually taking a little of better odds than the market is giving us, giving us a slight arbitrage opportunity where if we made this trade consecutively time and time again and got the same type of pricing.

Then theoretically we should continue to make more money even though it's a 50/50 bet because Google is already trading in the money. It's a slight arbitrage opportunity.

You don't get a lot of these, and it's not a huge thing that you can take advantage of, you don't want to plow a ton of money into it. You still want to keep these things small, but that is exactly why we did the 580/575. Which was a little bit of the money for these strikes, but it gave us a really good break even point about where Google is trading.

All right, so the next one that we want to go over is PFE, which is Pfizer. We did a 29/30 call spread for October in Pfizer, so that means that we bought the 29 calls, sold the 30 calls against them.

That gave us a total debit of 53 cents, so again just a little bit over mid price. That means that we want Pfizer to continue to move higher. You go to the chart here Pfizer; you can see it's the opposite of Google, right? It's had it's bottom, and it continues to move higher up.

What we like about Pfizer is that it had a little bit of a breakout here today, so it had a very nice little pop higher. Volume was pretty good; it can sustain that move today.

It didn't pop higher and then drop during the day, and instead of Google where we saw some of the technicals start to roll over, in Pfizer, we see some buy signals start to materialize here.

Definitely with CCI, with the line or indicator crossing above that zero barriers gives us a very nice clear potentially buy signal on Pfizer going forward. We like this trade for sure, and we'll keep watching it.

It's a very small trade as are all these debit spreads in our portfolio. They're still not very high probability trades, but coupling that with some technicals give us some really good data to use going forward for our directional moves.

Okay, so the last one that we want to go over here tonight is the adjustment that we made to our IWM spread. This is a very simple adjustment so that for those of you who have the position you can go ahead and add this adjustment in there.

If you do not have the position, if you're one of the new members, we've had a lot of new members sign up this week. If you're one of the new members and you don't have this original IWM call spread, I don't suggest you add the split spread because it is an adjustment to a current position.

It's not necessarily an adjustment we would make as a brand new open order, okay? In this case, what we did here has we already had a call spread above the market, and we'll talk about this all in the analyze tab.

Now IWM is moving towards that call spread, so it's testing us on the top side. What we did to help reduce some of the premium or capital requirement, reduce our risk, take in more premium, has we added this put side to the trade, creating an iron condor.

We went in here, and with this vertical, we added the 114/112 credit put spread. It was a $2 wide credit put spread, took in 33 cents for each of these. We matched up the same width of strikes, $2 width of strikes, and matched up the number of contracts as the call spread.

Now by doing this, by matching up both sides and having an even and balanced iron condor, we take no additional risk. In fact, we are reducing risk, and we reduce our overall potential max loss.

It's a great adjustment to make because it gives us an opportunity to make a profit, we're not taking anymore risks, there's no additional margin requirement, and it reduces our max loss should IWM continue to move a lot higher against our position. It's much better than doing nothing.

Here's a look, chart wise, of IWM. You can see that it's starting to test that kind of upper boundaries, it's had a really huge move from the bottom and the lows back in the middle to end part of July.

Had a huge move higher. I'm going to go to the Analyze tab; this is what I want you guys to look at more than anything. You can see that this is our iron condor now in IWM. We originally had on the top side, let me just kind of take these puts off.

This is what we originally had with our call spread above the market. We had the 17/19 call spread. You can see that we had three contracts for each and a $2 wide strike on the call side.

Now that the market has moved up, it is now testing us towards the call side. What we did is went back in here and added a put spread below the market at 14/12, now creating this very nice, tall iron condor. Okay? That's exactly the mechanics of what we did.

Now before we made this adjustment, our max loss could have been $477, our max profit, $123. Now that we've made this adjustment, our max loss now is reduced to $378 if IWM continues to move higher, and our max profit is increased to $222.

Again, by making this adjustment, keeping everything equal, we reduce our max overall loss and increase our potential for a bigger gain should IWM close between these strikes now.

With that increased credit, that moves our break even point out a little bit closer to 118 on the top side and just about 114 on the bottom side as far as to break even, so we want IWM to close somewhere between about 118 and 113 between now and September expiration.

If we go back to the chart, that means that we've got a nice little range here between 113 and about 118 that we want IWM to close at. A very good range that we could use a move lower that would obviously help this position.

But if IWM continues to move higher then all we'll do is roll up this put side, trade it again, take in more credit, roll it up to something like the 16/15. Again, continue to bank profits and take in credits.

As always, I hope you guys enjoy these videos. If you have any comments or questions again, please add it right below. I'll get back to all those tonight or tomorrow before we open.

If you're watching this somewhere else on YouTube or somewhere else online, you just have to understand that these alerts and this video goes out to our members, but it goes out to you guys publicly about 15 days after it goes out to our members.

You're not getting these alerts real time, you're not getting this video the same night, and if you want all of that you've got to sign up at optionalpha.com. As always, happy trading.

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