Iron Condor – How To Fix An Ulcer

June 15, 2012 by Ted Nino  
Filed under Investment

When I first began trading the Iron Condor, my game plan was to leave the trade on all the way to the bitter end.

Then – if everything went well and the trade stayed beneath my profit tent – I’d just them expire worthless and keep all that sold premium in my account.

Back then I believed this was the best way to play the trade, because not only would I not have to pay my broker to take the trades off – I would also be able to keep the entire amount.

But that was a long time ago – and since then – things have changed.

Now, after experiencing too many nights where I couldn’t sleep, a number of very ‘close calls’, more than my fair share of stinging ulcers and even a near hernia, I’ve made a change to the way I trade iron condors.

Here’s what I do now: Right after I put on my iron condor, I tell my options broker (through the use of automatic contingent orders) to buy back both the put credit spread and the call credit as soon as I make the bulk of available profit in each spread.

As an example – if I received a credit of a dollar (let’s say about fifty cents each side) when I put an iron condor trade on – I would immediately ask my broker to set up an order to buy the vertical spreads on each side back when the price on them has been reduced to about ten cents or so.

After I place the trade, I would set up two contingent orders with my broker. One would be to buy back the upper half spread of the iron condor for ten cents – and the other to buy back the lower half spread of the condor for five or ten cents.

Now a lot of iron condor traders might say this would be a dumb thing to do.

But personally – I completely disagree.

Okay, maybe it’s true that doing this will cause me to make less profit than if I were to just hold the trade through expiration and let the options expire worthless.

But not necessarily.

Let’s take a second look at the amount of money we are talking about here. Ten cents per side – or twenty cents total. Okay – sure – it’s nothing to sneeze at – but when you step back, get a broader look, and start to take a few other things into consideration – it can actually start to look quite miniscule.

What’s more important to me, is that by buying back those credit spreads, I’ve LOCKED IN the BULK of the profit.

AND – my risk in the trade has been reduced.

AND – I’ve created the potential to make even MORE money on the trade than was originally possible when I first initiated the trade – WITHOUT increasing my original risk.

Let me show you what I am talking about here:

I’ve found that many times during a trade, the premiums in options can drain quite rapidly. In fact, its possible for a spread to drain the majority of its premium in a matter of days.

Say I put an Iron Condor on XYZ – 40 days from expiration – for a credit of $1.00 – or.50 each side.

Immediately after placing the trade, XYZ heads downward over a number of days.

4 days after I put the trade on, I see that I can buy back my CALL side of the Iron Condor for.10.

Now, if I don’t do anything and just let the trade continue to play – what I am actually doing is risking that upper side spread margin – for the next thirty six days until expiration – for just ten little dollars of additional potential profit. And that doesn’t really seem that worth it to me.

On the other hand, if I buy it back for.10, I lock in the bulk of the profit for the CALL side – making that ROI in just 4 days.

And then, if our underlying suddenly turns around and shoots back up (which actually happens quite often) – I have no worries whatsoever since I no longer have any upside risk in the trade.

And – for icing on the cake – if it DOES head back up we have the opportunity to ‘resell’ those identical credit spreads – the same ones we just bought back for ten cents – for potentially the same amount of credit we originally sold them for – or perhaps even more. Doing this it’s possible to wind up with an even greater ROI then were were hoping for when we first initialized the iron condor trade.

But let’s just say we didn’t ‘re sell’ any options. Let’s just assume that we closed the trade entirely when our contingent orders were hit. In this case what we’ve done is eliminated risk (good thing) – freed up capital (good thing) – enlarged our return on investment over the number of days we have been in the trade (good thing) – and gotten completely out of the market a while lot sooner than if we had to sit around and wait until expiration day rolls around (and in my opinion this is a good thing too!).

See, I really love the idea of being able to tad a ‘trading vacation’ – or what I mean by that is a ‘break’ away from trading – of having to one way or another ‘engaged’ in the stock market every day. I love being able to be in a trade for a week or so – and then take a week or so off – away from my trading computer screen. I love being able to get out and do other things without having that little worrisome ‘trading nag’ in the back of my head – always wondering what’s going on in the stock market and wondering if my position is doing okay.

Getting this ‘trading break’ away from the iron condor- this freedom to go out and do things without always feeling the need to check quotes on my phone – not having to worry about always being ‘on game’ and strategizing in my head about what adjustments I might have to make – just being able to sleep in mornings for as long as I please without stressing out about whether the market is going to make an opening gap…

These things are priceless.

Or at the very least they are WITHOUT A DOUBT worth every penny of the ridiculously small .20 cents or so of potential profit left on the table in exchange for getting out of my monthly iron condor trade early – at what is STILL an incredible monthly return.

To watch more about the iron condor approach, click over to this training site for stacks of free education videos, illustrations, and tutorials on how to fittingly start, exit, oversee and adjust the iron condor strategy to produce a ongoing monthly source of revenue.

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