Mini Guide to Trading Iron Condors

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Iron condor: In tonight's video, I want to go over all of the trades that we made for today which is Thursday, March 26th, as well as the one closing trade that we had for yesterday. Since it was just one small closing trading, we just wanted to cover that in tonight's video. Today is all about iron condors.

We had a slew of the opening of trades and iron condors and iron butterfly. It was a fascinating day to put some premium on. Markets were a little bit crazy, and that's what you have to do when things are looking like implied volatility's peaking or heading higher. You've got to start putting on trades. That's exactly what we needed to do. 

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The first thing I want to go over tonight is the closing trade from yesterday. Again, this is not trade for today Thursday. This is a trade that we closed out of yesterday which is Wednesday. This trade is the classic example of why you roll a contract. We ended up entering SMH on a March trade. We're trading SMH the 57, 58 call spread. We were trading it during March.

As we get towards the end of March expiration, which again you can see right here on the chart, is right here. This is March expiration, the day before March expiration. That green line. Again, we have the 57, 58 contracts which mean our break even point was right around where I'm drawing the line here on the chart. We were able to extend the trade and move this contract out to April expiration which is this line right here on the chart.

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We were able to extend this trade for credit, and the whole reason that you do that versus just closing out the trade is so that you get all of this additional time till you right. You don't know if the stocks are going to turn around or if it's going to keep going. If you can do it for credit, you still reduce your risk which is why I like to roll for credit.

We also get that timeline, that extra time, those extra 30 days to see if we're right in our trade. You can see that it only took another 2 days before SMH had a huge move lower. Naturally, it gave us an opportunity to close out this trade yesterday. That's exactly what you have to do. This is honestly a textbook example of why you would roll a contract and why it's so important to take in credit when you roll a contract.

Now, we're able to close out this trade at .15 debit and take a nice $44 profit on it. Not a gigantic winner by any means but it's just again a classic example of why you roll correctly into more timeline, more duration in the trade. Then you have an opportunity to close it out for a profit. All right, let's get into the opening trades today.

Again like I said, all iron condor trades, there's a couple little tweaks that we did to them. Namely, the iron butterfly in USO. Let's start of here with DIA. Now again, the name of the game here is just entering trades when the market's favorable. Now, earlier in the morning when the market was really promising. As we start to head towards the middle afternoon, the market was still really promising and implied volatility was going higher.

That's why we entered these. In most of these implied volatility has subsequently come down. When we entered these trades, it was all over the 50th percentile for sure. Now, in DIA we enter the 184, 186 call spread. The 162, 160 put spread. Now you'll notice this is a $2 wide spread. We did take a nice credit of about $48 on that spread. With DIA, let me go back here. I'm clicking too fast. Still clicking too quickly.

With DIA, apparently, the market was moving lower. Implied volatility was moving higher; it did take above the 50th percentile today. It was up around the 55th percentile. It's now down settling around the 48th percentile. It's just moving fine right now, even after we enter this trade. What we look to do is enter each of the short strikes for DIA at about the 15% probability of expiring in the money.

You'll notice on each end that our short strike, which is the first one here, is the 15% probability. It's a little bit less now because implied volatility's come down. That's where we were targeting. That's about the one standard deviation mark on either end. You'll notice that just distance wise, distance from at the money strikes, the put side is, of course, a greater distance or a greater number of contracts.

It naturally is going to adjust based on probabilities where these strikes need to be to compensate for possibly a bigger move down in the security, in the put region. More significant move down in the security if the stock falls or if DIA falls. It's really good though to ... I always like to in most cases try to enter these at about an even probability on each side so in this case, you can see our probabilities are very even and balanced with the DIA trade.

With USO, it's a little bit different. We already had a position in USO; we had an iron butterfly below the market. We're already going to add another iron butterfly above the market just a little bit. We're a little bit bullish here on USO. Again, we already had a position on the market. We feel comfortable adding in another position above. We did the 18, 22 calls and the 18, 14 puts. What makes us an iron butterfly is that the call or that the short strikes are both the same.

You'll notice that these 18 strikes are the same. That means we're doing a strangle right over the 18 strike and then we go out 4 strikes, and we buy protection on either end. We go down to the 14 strikes on the put side, and we go up to the 22 strikes on the call side. That gives us some protection, and it reduces the margin that requires holding this trade. We took a nice $215 credit, so our break even point gets moved out $215 on either end from where USO is trading.

The reason why I like USO and I continue to get into it is because it's got crazy high implied volatility right now. It's up in the 71st percentile. It's much higher today. Although the stock is rallying just a little bit, I think it's going to take some time for this oil market to find a base. That's why I'm comfortable making these trades, that's all we have to do. We don't exactly know where the markets are going to go but we can make high probability trades, and we can start to sell premium as soon as we get an opportunity.

With USO, this is what our position looks like currently. Let me take off the May contracts, so you guys can see what April looks like. Again, we have this iron butterfly in April. The iron butterfly in April is centered around the 16 strike. That's where we want it to trade. Oil's trading right here about 18 right now. That's why we're going to recenter our new trade around this 18 strike.

Now, when we look at the new trade you can see that ... I'm just throwing it up here, that the new trade is centered around this new movement in the stock. We're always trying to move with the market. We're not trying to take too big of a position at 1 particular price. We're trying to spread out our strikes, spread out our positions, and definitely with oil. Implied volatility is really high, this gives us a great opportunity to be more of a net seller of premium and taking a little bit more of credit.

All right, SPY very similar to what we did to DIA. We went ahead and did the 214, 216 call spread. Again, a $2 wide call spread and a $2 wide put spread. 188, 186 credit put spread. Took a $51 credit on SPY as well. With SPY, you'll see where we put our strike prices. Was very similar to what we did with DIA in trying to make this thing about as even on both sides as humanly possible.

Here are our 2 strikes here, see if I can fit them in the same windows. You can see on the call side, the probability of being in the money is about 14.75 or 14.71. On the put side, it's about 13.17. Again, implied volatility has already dropped. You can see how consistent and mechanical we have to be in entering these trades. There's really not much thought that goes into it.

Once we meet some criteria as far as implied volatility, it's just a matter of finding the strikes that we want to trade and entering those strikes on a consistent basis. That's exactly what trading should be. It's not a lot of thought or emotion. It's really more of a systematic and robotic approach to how we do things. You can see that SPY and DIA are very similar. They should be. That's just that we're spreading the risk among SPY and DIA, just to help diversify ourselves a little bit more.

Also, we also added a position in TLT. We had a position for last month in TLT that went well. Have a current position in TLT that's going very well. Now, we're adding another position in May, continuing to stack or latter our trades out into the future. With TLT we did the 137, 138 calls and the 122, 121 puts. Because they're only $1 wide, we did have to increase the number of contracts that we traded.

We took in about a $24 credit on each of those spreads that we sold. Same thing happens with TLT, really high implied volatility right now. The stock is all over the place because bonds are moving, changing, and shifting. With implied volatility up in the 60th percentile, just gives us an excellent opportunity to enter this straight and again outlay some more premium for the next month.

With TLT we did play it a little bit closer to the vest as far as probabilities. Very similar to what we're doing with SPY and DIA. You can see both of our short strikes were right around the 15% probability of expiring. Again, just being very systematic, very mechanical here. Honestly, sometimes it's kind of boring doing this. This is what you need to do to be consistent in this business.

Get into this repetitive nature of waiting for a good opportunity and then outlaying a lot of premium to get into that. With TLT we've got a excellent position, a nice iron condor that goes all the way up to 137 and 123. You can see if we go back to the chart here that 123 is about down here and 137 is all the way up here. We've got a wide profit window here that we can make some money with TLT. Now before we end here, just again a word on portfolio strategy and what we're looking to do here.

You'll notice that all of these positions, as I mentioned in the alerts. All of these positions are relatively small. We only did 1 contract, 1 contract. We made 3 contracts, but they're short strikes, narrow strikes. This leaves us an opportunity to continue to add to these types of trades. That's what we want to do. In all cases that we saw today, except for really USO which had high implied volatility.

DIA, SPY, and TLT has fairly high implied volatility. It could go higher. We want to leave ourselves room cash wise to add to these positions and increase our exposure if implied volatility goes higher. I think that's a really key point is that we don't want to outlay and throw up all of our money into the market. We don't want to put everything into the market as soon implied volatility spikes just a little bit. It can definitely expand more and if it does we want to have some cash available to take advantage of that.

I hope you guys enjoy these videos. If you have any comments or questions, please add them right below. If you're watching this video somewhere else out there online or on YouTube, you just have to understand you're getting this video about 15 to 20 days after it's sent out to our members. If you want real-time alerts like the ones you see in this video, you've got to sign up for a membership at Option Alpha.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.