Option trading school

Discussion in 'Investing' started by Ronzoil, May 5, 2017.

  1. Ronzoil

    Ronzoil Member

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    Iron condor are one of my favorite trades. While they are not the highest profitable trade they do offer a great chance of turning a profit just about end any market condition. So to better understand and iron condor let look at how we set one up and how it can play out.


    1. First we pick a stock or ETF I like to choose ones with good volume as they have the smallest bid ask difference when you trade as many as I do a few cents makes a difference.

    2. Let pick BA . Current price 185.00

    3. Lets say we sell the condor 180-182.50 put spread and 187.50-190 call spread with 28 days left for 1.42 or $142 credit.

    4. The $142 is max profit and with a 2.5 wide spread the max loss will be $108.

    5. This has a Theta decay of 1.35 per day I like to have over 1 when I place a trade.

    6. I like to close out an condor for 25% of max profit if all goes my way. In this trade it would be $35 per contract.

    7. Let say that it does not go my way , the price start to fall after placing the trade. Well I don’t start losing money until it cross the 182.50 put.

    8. At that time I look to collect more credit, by adjusting the call side.

    9. To do this we buy back the 187.50 call we sold when we first put on the trade and sell the 185 call for a credit ( based on today closing price this will bring in 1.08 in credit. I am sure it will be less if the stock price drops. So let say we only get .75

    10. So to review we now have taken in a total of 2.17 in credit. So this lowers the point to where we lose money down to 180.33

    11. Let say the price continues to go down below our 180.33 we then make another adjustment.

    12. We now buy back the 185 call we just sold and sell the 182.5 call let say we take in another .50 credit. ( notice this is the same price we original sold the put at) we now have what is called an iron fly.

    13. We now have taken in a total of 2.67 so our new breakeven point it 179.83

    14. If the above scenario was playing out I would also be selling additional call spreads in order to take in more income.

    15. Remember with options there is always another way to skin a cat.

    16. forgot to add what to do in the case of a big move against your position.

    17. sell the call spread.

    18. if not to far out of the money you are roll the put spread to collect more credit.

    19. if your far out of the money take assignment of the stock and sell close to the money calls against your position.

    20. I like to sell calls with 2 weeks to go and when one week left if your still far out roll the call if you getting close to break even or a profit hold until Wensday of the week your option is going to expire then make the choice to roll again or let expire.
     
    #1 Ronzoil, May 5, 2017
    Last edited: May 6, 2017
  2. Timbo

    Timbo Active Member

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    Great thread, THANKS..
     
  3. spindr0

    spindr0 Active Member

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    >> To do this we buy back the 187.50 call we sold when we first put on the trade and sell the 185 call for a credit ( based on today closing price this will bring in 1.08 in credit. I am sure it will be less if the stock price drops. So let say we only get .75

    >> 12. We now buy back the 185 call we just sold and sell the 182.5 call let say we take in another .50 credit. ( notice this is the same price we original sold the put at) we now have what is called an iron fly.

    This is a good analysis of reducing the downside risk as the underlying drops but it fails to acknowledge the upside risk that is added every time that the short call is rolled down a strike (see #'s 9 and 12). That increases the upside risk by $3.42 (the width of the final call spread is increased by $5 less the $1.58 of premium received).

    >> 14. If the above scenario was playing out I would also be selling additional call spreads in order to take in more income.

    Selling additional call spreads further increases the upside risk even more than the previous adjustments.

    If the underlying rallies sharply, the upside loss will be far, far larger than the potential loss of the original iron condor.
     
    Rustic1 likes this.

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