3 Different Ways to Trade Iron Condors

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Iron condor: Tonight, we’re going to go over all of the trades that we made for Monday, December 15th. I can’t believe it’s already halfway through the month and I’ve still got tons of Christmas shopping to do for the holidays, probably like rest of us. But we had a very busy day with the market continuing to sell off to kick off the week.

And that was amazing because for those of you who are premium members, we talked about a lot of these different trades on the strategy call last night and we executed them today which was great to get some proper credits. And we’ve got a lot to go over, including an FXE adjustment that we made right up into the last week of expiration.

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But before I do that, I just want to go through couple little quick housekeeping things. And it's important to watch this because I know that you guys are starting to see inside of the membership area we’re starting to make changes. And you'll see in here that I put this box in here for those of you who are new, but if you’ve been around for a while, you probably noticed it.

But really, it’s just a matter of continuing to improve it, and we’ve had probably over 30 phone calls with premium members and it's been great getting feedback, and obviously, feedback from everybody else has been fantastic. We’re continuing to make changes to the website, and we’re going to do that live. Some things are not going to work, and they’re going to look weird and out of place. If you’re actually on the site, live today…

I know a couple of people were actually on some video tutorial page as I was changing them, so they’re being updated right in front of their eyes. But the new layout that we’re going with is much more of a training course design, and it’s my fault for not doing this a little bit better, to begin with, but that's why it's so great to get feedback from everyone.

But I’m going to be doing it very strategically in laying out some different categories in beginner, intermediate and advanced courses, so more of a course type feel which is going to obviously add more value, it’s going to be a little bit easier to navigate, things are going to be a lot cleaner and simplistic and obviously, we continue to take out a bunch of the junk that’s just really not needed, that doesn't help you get anywhere.

This is one of the beginner course training pages, and you’ll see on here that it’ll start to list all the videos right in alphabetical order here as you go through them. And as you go to a video like the option strike price video, this is what the actual course video page will look like, and it’ll have the lesson description, then you can click on the next lesson and keep going.

A lot of cool stuff we’re going to be continuing to add, downloadable worksheets and cheat sheets as far as entry size, position size, strategy cheat sheets so that you guys can have those and use those forever which is going to be awesome. And then obviously, we’ve got a huge, huge announcement about how we’re going to restructure obviously the membership levels with this new layout and then obviously, pricing is going to be completely different than what it is right now. Obviously, anyone who gets in now is going to be grandfathered into current pricing and existing structure.

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Alright, let’s get into some of the trades that we made today. Let’s start with FXE. FXE, we have a weird iron condor in. We’ve made adjustments in it before, and we’re making one last adjustment right here before expiration because FXE started to go higher early in the morning. And we talked about this adjustment on the strategy call with premium members last night. But we went ahead in the logistics of the trade and sold four more of the 122/121 put spreads for a $.30 credit.

And really, what we’re trying to do here is add to the total credit that we’ve received in the entire trade and that helps reduce our cost on the trade and reduce our risk. And as long as we kept the number of contracts the same which is 4 and the width of the strikes the same which is 1, we didn’t add any additional risk on this trade right at the money.

This is what the profit loss diagram currently looked like for FXE before we went into this trade today. And you can see it was an unbalanced iron condor. Let me just skew it out here. We have most of the risk to the topside, but we’re not even close to getting anywhere. But you can see that FXE was right here on edge and, it was on the edge of either making money or not. What we want to do is just make one last adjustment to reduce the risk in case FXE does move higher.

And in this case, we don't want to be stuck with about a $200 loss, so we wanted to reduce the risk, and we did that by adding a put spread back here behind FXE. That’s exactly what we teach on the adjustments webinar that we just did last week. We add that put spread back here behind it. That now moves the breakeven point out further on the topside because of that credit that we took in. Once I make this live, here's the actual new position and you can see what it looks like now.

Now, by adding that extra 122/121 put spread, we basically have a butterfly over 122, and you can see that that adjustment now puts the current FXE price right inside of our strategy range, it actually gives us a little bit more room to the topside, so we moved that breakeven point out a little bit further. But even more so than that, what we did is ended up reducing our risk on the trade for the last couple of days here barring a huge, huge move in FXE from about 200 down to about 68.

At this point, it's a good adjustment. That's why I like this adjustment. It continues to reduce risk and gives us an opportunity to make some money in the trade. I like this adjustment in FXE, and we’ll be pretty aggressive about getting out of it in the next couple of days as well.

As far as opening trades, you can see a lot of iron condors. And this is a tutorial in doing different types of iron condors because we did every type of iron condor that you can think of in today's video, so this is a huge, huge case study in iron condors and one to watch all the way through. The first one that we did is in SPY. And notice that we kept all of our position sizes small. In SPY, we did just one of these, but we did something a little bit different and we did an iron butterfly.

This is what looks like a butterfly spread, profit loss diagram. And again, a butterfly spread looks something like this. It’s got a tall peak, and it’s got flat wings. That’s a butterfly diagram. But in this case, we didn’t use all of the same types of options, so we didn’t use all calls or all puts. Instead, we created it by doing two separate credit spreads. We did the 200/205 call spread above the market, and we did the 200/195 put spread below the market.

We sold the 200, we bought the 205, so that’s a 5 point wide on the top, and on the bottom, we sold the 200 again, the same strike as the 200 call, and we bought the 195, so 5 points wide on that side. It’s an even and balanced iron condor, but it's got our short strikes right at 200, so they’re the same. Now by doing this, it acts like a strangle. That’s the great part about this strategy. And I wanted to trade a strangle but considering that we already have a couple of strangles in our portfolio, it’s just not smart to continue to allocate money towards that, we just don’t have enough room in allocation right now to do that.

Until we get through December expiration and start rolling off some other trades, we need to be smart about how we’re using our capital, and we just don’t have enough room to do another full strangle. This is the next best thing because we take in a lot of premium which is great, we took in almost $400 of credit on this one iron condor, but it helps reduce the margin that's required to hold the position because we have these long wings on either end.

Let me show you guys exactly what this looks like. We’ll first go to the SPY chart here so that you guys can take a look at that. And the whole idea here with SPY is that as the market has continued to move lower, then that's obviously given us an excellent opportunity to see implied volatility jump higher which allows us to do some of these premium-selling strategies. Here’s a chart of the S&P.

And you know that obviously the markets had a huge selloff and it’s been ideal for options because implied volatility has rallied. It’s definitely above that 50th percentile that we’re looking for, so what we’re trying to do here is take advantage of the higher implied volatility and doing net selling as many net options as we possibly can. When we go to the strategy tab or in the risk profile, you can see that this is what our strategy looks like in SPY.

And it’s got that shape of a butterfly, but it's a very low risk, high reward type of a trade. And you can see that obviously, the market is trading I think… Let me reset these slices here. The market is trading right about 200 right at where our short strikes are, and we just want it to stay between 196 and 204. That’s right where our profit loss breakeven points are, and you just take that credit and add it and subtract it from the short strikes of 200.

But you can see here that we’re risking about $102 to possibly make somewhere around $200, $300. I doubt we’ll make $400; we got to pin it almost exactly like $200 which is very unlikely. But $200 to $300 for risking about $100 is a very, very good risk reward trade and doesn't tie up a lot of capital. For us, we’re looking at a range of about $194 up to about $204, so a pretty big range given that the markets made a huge move down, so we’d like to see some consolidation. I don't think we’re going to hold this all thaw way until expiration; we just want to see a drop in implied volatility and then we can naturally exit the position.

Now, the trade that we had in DIA is almost the same setup as SPY; it just was diversifying across a couple of different indexes. We went through DIA and SPY; we did the same thing on the DIA, we did the 170/175 call spread and then we did the one 170/165 put spread below the market. Those short strikes are at 170 and then we made 5 points wide on either end. Same look and feel as SPY. Here’s DIA.

We tilted a little bit lower, and DIA rallied a little bit towards the end of the day, but at least we’ve got a little bit more bearish exposure in the portfolio. But that's what that profit loss diagram looks like. We’re risking about $100 to possibly make about $200 to $300 if it stays in this range and a little bit of a bearish tilt because of the end of the day rally, but that's okay. That gives us a little bit more downside exposure and negative Delta in our portfolio. I like this trade as far as risk reward. Both of these trades are great. Moving onto bonds, we figured why not leave Bonds out of the equation. I think bonds have had a magnificent run-up and I don’t foresee it staying up here too much time as we get into January obviously. What we did is we did an unbalanced and skewed iron condor here. And what we did is we did the 130/132 call spread and the 122/120 put spread for about $.58. Now with TLT, the way that our profit loss diagram looks is a little bit skewed to the downside, and it doesn’t reflect here because bonds had just a little bit of a selloff towards the end of the day. I don’t think the charts are going to load here for me. But it had a little bit of a selloff towards the end of the day, so that gave us an opportunity to re-center the graph. But you can see that we've got ourselves a pretty good distance between ourselves and the market down to the bottom side and to the topside, so we’re relatively neutral on bonds, but when we actually entered this trade, we were a little bit bearish, and we got some of that move already, we just need to see implied volatility drop in bonds which I think can happen very quickly.

The last trade that we got into today is VXX. This is one that we talked about on the strategy call last night. I looked at getting into VIX, but I didn’t like the premium as well as I liked it in VXX. Now, this is a truly unbalanced iron condor. And you can see the reason that it’s unbalanced is because on one side, on the call side, we have a $1 widespread, so we have the 35/36, and on the put side, we have the 25/23, so it’s a $2 wide put spread below the market and a $1 wide call spread.

Well, that leaves more risk on the put side of the market. We're giving ourselves a little bit of edge possibly if VXX goes higher and we’re protecting ourselves saying if this market continues to be irrational and continues to selloff and implied volatility continues to rise, then we don’t want to lose as much if the VIX goes higher and if VXX goes higher. We gave ourselves a smaller spread on the topside of the market, which $1 widespread, that gives us a little bit more protection, and in return for that, we had to take on a little bit more risk down below 25.

In this case, that's okay because at this point, if VXX drops, these options are going to drop quickly in value. And I don’t think the charts are working for me right now because the platform just stinks. But you can see that we already saw a pretty good drop here in VXX today. But this is what the profit loss diagram looks like. I’m just shrinking it down. VXX is currently trading around 32.5 which is right about here, and our profit loss diagram has more of the exposure on the put side of the trade than on the call side.

You can see that that graph is much smaller over here loss wise than it is down here. Ideally, what we want is we want VXX to trade between about 24 and about 35. But if it does continue to move higher, if the market is irrational, then we’re going to save ourselves some money by having a smaller spread up here and only lose about $100 on this trade to make about $100, and then we give up some additional risk down here.

But if VXX does go lower, the beauty of this product is that as it goes lower, implied volatility is going to drop, so these options are going to decay in value pretty quickly and we should have a profit even if it drops, and before it drops through our short strike at 25.

That’s how that unbalanced iron condor is created. I really like it in these types of scenarios where you feel like you have a little bit more potential risk in one direction or another. It works out really good and we like that trade and obviously, we can add to it if the market continues to be a little bit irrational. As always, I hope you guys enjoy these videos. If you have any comments or questions, please add them below right in the comment section. I’ll get back to all of those tonight or tomorrow before the open. And 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.