3 Iron Condor Trades – 1 Open, 1 Close, 1 Hedge

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Iron condor: In this video tutorial, we're going to cover all of the trades that we made here on Tuesday, February 3rd. Didn't have any trades yesterday. Just nothing that we wanted to get into the market. Everything was going pretty well and still is going pretty well as far as our positions go, so we don't want to mess with them all too much.

We did have a good day as far as making a couple of little trades. We had one opening order, one closing order, and one adjusting order all today as far as that goes. And all iron condor, either open, closed, or adjustments. So it's been a pretty good day, and we'll go over these trades with you guys tonight.

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The first one that we want to go over is our additional position in FXE for March. We did have a position in FXE for February. We're not adjusting that position at all, we still like that position, but what we're doing is we're adding in another position in March and stacking or laddering our trades for the next two months because implied volatility remains really high in FXE.

It's been really good. We don't know where the stock is going to go because it's still been crushed down lower with oil and everything else. So we're deciding to do an iron condor around it and just go very wide and take in a pretty decent premium. In this case, we went out to the 116/117 call spread and the 107/106 put spread.

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Again, the 116/117 call spread, the 107/106 put spread. Now when we look at a chart of FXE, you can see that the stock has obviously had a huge, huge down move and then today we had just a little bit more of a pop-up upon the security here today. We don't know if that's going to mean that it might make the turn higher and continue to move higher. We see the MACD is close to crossing, if not going to cross and give a bullish signal tomorrow.

That's really interesting as well. Kind of plays to the upside potential of this security. But what we like is this implied volatility that's starting to come back down. It's still up in the 75th percentile, which is real, really high and we'd like to see it come back down even more, and that's why we're doing the iron condor because implied volatility remains really, really high in FXE.

If we go in here and take a look at the position that we have ... Again, we're not changing February, so we still have that February position. We're adding the position in March. Basically what we decided to do was go out on either end about the 15% probability of expiring, and you can see the market's already just shifted just a little bit and so our call side is going to be a little bit closer than where we entered it today.

On either end, we did start at about the 15% probability of being on the money level, so it's about a 15 delta. If you were to recreate this position now, if you don't have it, then you would start somewhere around a 15 delta on either end. So somewhere around 108 and then somewhere around 118. Again, if you're going to recreate this position you'd want to readjust with where the market pricing is. Again, we like this position. I don't think that we'll change it and definitely, our February position is working out well also.

As far as closing trades, we did have one closing order in COF. Now this was our original "earnings trade," quote/unquote. And I say quote/unquote "earnings trade" because we did make it over earnings. That was the intention, but we did end up holding onto it a little bit longer than we wanted to only because we had to do the February options. The monthly contracts.

There were no weeklies that we liked that were available for COF, so we went out February, took in more premium. As a result, COF has kind of been range-bound. It's had a little bit of a move down and then backs up today. It moved right back inside of our range. That allowed us to close it out for a $100 debit. We ended up taking a $48 profit on this. That's more 30% of what we could have made; our max potential gains the trade.

So we had a nice little trade, and it was one of those iron butterflies, so we were pinning everything on those short strikes on both ends. You can see, post earnings we did have a quick drop in implied volatility, though it did pop back up just briefly it's starting to come back down today, and you can see that, after earnings, the stock has had to move lower, but has now rebounded just a little bit.

Even though it had to move lower, tested us to the lower boundary, you can it's sitting right around 176 or so, which is middle of the range for our position and helps us out as far as being able to take a profit. That position, we did close out today. Take that $48 profit and move on. The other trade that we made today is in GLD, which is gold.

Last week we did enter a new position in gold for March, but this week we're hedging our current position in February. It's a very different trade. Again, make sure you don't confuse this. Last week we entered a new position in gold for March. We're not touching that March position; that's a different contract month. In this case, what we're doing is hedging this trade for February because our iron condor for February remains kind of outside of where GLD is trading right now.

The logistics of what we did is we decided to add a completely new and additional put spread to the trade, so we added the 119/117 put spread. We matched up the number of contracts, which is two, and the width of the strikes, which is a $2 widespread, to what we originally had on that iron condor originally, which is two contracts on either side and a $2 wide spread on either side. This helps us just make sure that this is a balanced adjustment. That it's continuing to move kind of in lock-step with the market.

Now we were able to take in a $47 credit on each of those, so that helps out. Reduce our risk if gold does stay up here for the duration of the rest of the expiration month. Here's what the position in gold looked like before we made this adjustment of the 119/117. You can see this is what our iron condor looked like. GLD is trading all the way out here at 124/46. You can see, we have to do something, because if we don't do anything right now and we just let this position go all the way to expiration we lose about $278.

Our goal first, as always with adjustments, is to reduce risk. So how can we take that $278 and cut that down by some margin? In our case, we were able to get $47 per spread that we sold and added, so I'll just add this position in here, and you can see that moves the needle just a little bit closer. Makes us taller and narrower in our iron condor. You can see we don't get any good distance here with our break-even point.

It does move out about a dollar or so, so we got a little bit of movement in our break-even point. It got a little bit closer to the market, but the biggest thing for us is that we reduced our risk down to $184. This was key for us, is that being able to take a trade like this that goes kind of completely against us from the get-go and being able to cut that loss down from $200-plus down to 148.

We can make room for another adjustment here in the next two weeks, but I think right now we're going to just leave this position and let it be. If gold does continue to move down, we could make about a hundred, $200 on the trade if it settles into the range that we have right now. At this point, we've done a good job in reducing our risk, I think, and we're just going to let the position mature and see if gold maybe continues to head down or continues to head up.

We do have the ability to roll it one more time and get a little bit closer to our position as we head to expiration and further reduce our risk in the trade. Hopefully, that was a really good example of how you can take one of those original iron condors and add one side to the trade. As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below in the comment section. Until next time, happy trading.

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.