A Beginner’s Efforts Iron Condors ITM Diagonals

A Beginner’s Efforts Disclaimer! I am a beginner and only offer my current understandings. I make no claim regarding the verity or authenticity of this presentation.

Iron Condor – What is it? An Iron Condor consists of a short call and short put vertical that takes advantage of time decay in a highly liquid range-bound Stock or ETF. The underlying can move up, down, or sideways and have a high probability of being a winning trade. An IC can be used as a primary building block of an option inventory.

Iron Condor – P, V, T Selection of the strike prices for an IC is key to success because of the range bound nature of the trade. An IC is a Vega negative trade and is best entered when volatility is high. An IC is a selling strategy and takes advantage of Time Decay. Greeks for the IC: Delta Neutral, Gamma Negative, Theta Positive, Vega Negative

Iron Condor – Steps to Entry Check Open Interest; the greater the better, but a minimum of 20 times the number of trades entered. Decide on capital allocation for the month and enter in five lots over four to five weeks. Begin scaling in at 50 – 20 days to expiration. Scale in on same day each week; accept 30%+ ROR; when 30% minimum is no longer available, go to next month.

Iron Condor – Steps to Entry To determine strikes, sell call at or above resistance; sell put at or below support or use 20 – 40% probability of expiring or use Straddle to capture Market Maker Move. Do two-point wide spreads as these save on commissions by including two one-point verticals; they also earn more daily Positive Theta

Iron Condor – Steps to Entry To illustrate the advantage of two-point spreads over one-point spreads: Sell -50 Sept credit Commissions ; Theta Sell -50 Sept credit Commissions ; Theta Sell -50 Sept -.06 debit Commissions ; Theta

Iron Condor – Steps to Entry Comparison Two-Point Wide Spread Commissions: $ Theta: ( ) Single-Point Wide Spreads Commissions: $ Theta: (+50.89) + (+16.27) = (+67.16)

Iron Condor – Steps to Entry Position Sizing: Use no more than 2% on a Stock IC; Use up to 5% on an ETF IC. ($100,000 portfolio, risk no more than $2-5,000) Compute IC Trade Risk: Strike width on one side minus the credit collected; Portfolio Risk/Per Contract Trade Risk = # of Contracts to sell. A Double Calendar, Vega Positive, may be added to the inventory to neutralize the IC negative Vega.

Iron Condor - Steps to Management Check trades every day for possible adjustments. If trade remains within the range of the two short strikes, do nothing. If either side of the IC goes to 10% of the option chain width, close; then, sell at a strike price with lower probability as long as there are 20 days left in the cycle. (No extra Buying Power is required as this is a replacement trade.)

Iron Condor - Exits If trade moves outside the expected trading range with ten days left to expiration, consider Scaling out: Exit 1/3 or ½ of the contracts at a time Closing the trade Staying to the end and trading the probabilities When 80% of maximum gain is reached, exit. Close within 10 – 4 days prior to expiration.

Iron Condor – Exits Some will stay in the trade until the end of the cycle. Their rationale: the trade was set up with a 30% chance of being worthless and a 70% chance of being profitable If the stock moves through both of our strikes, the trader has experienced maximum loss; however in checking the Probability of Touching, there is a chance of the stock reversing itself thus providing some profit.

ITM Diagonal – What is it? An ITM Diagonal Spread is one that involves trading options with different strikes prices and different expiration dates. An ITM Diagonal sells a front month option that is closer to expiration and buys a back month option that is further away from expiration. An ITM Diagonal combines a calendar, in the front month, with a vertical spread in the back month.

ITM Diagonal – Steps to Entry ITM Diagonals are best done on upwardly trending or range bound stocks or ETF’s To select strike prices, begin by determining where the stock/ETF will be trading by the expiration of the front month. Use Greeks to support your choices.

ITM Diagonal – Steps to Entry Choose to sell the strike with a Delta of approximately for the front month, keeping in mind that the stock must have room to move to the chosen strike and expire worthless. A check of support/resistance and pace of movement of underlying can also be of benefit. Choose to buy a strike with a Delta close to.70 for the back month. This needs to be below where the stock is currently trading because we want it to behave like the stock. Choose 40 – 20 days to expiration for the front month and 60 – 150 days for the back month. We want to slow down Time Decay against us and accelerate Time Decay in our favor.

ITM Diagonal – Steps to Entry It is best to do ITM Diagonals when $VIX is low. A consideration to help balance an inventory that includes ITM Diagonals may be to enter trades having negative Vega like long call and put vertical spreads. Evaluate the advantages/disadvantages of an intermediate/long term Diagonal. Greeks for an ITM Diagonal: Delta, Neutral, Gamma, Negative, Theta, Positive, Vega, Positive

ITM Diagonal - Example Buy +1 IWM Jan Call Sell-1 IWM Sept Call Debit $9.51 Commission: $3.00 Greeks: Delta; Gamma; Theta; Vega Stock/Option Equivalency: Option: Controls shares of IWM $9.51 = $370 Stock: Owns/Controls shares of IWM $67.50 = $2,626

ITM Diagonal – Steps to Management Manage the short option as a calendar which benefits principally from Volatility and Time Decay. If the stock trades at the short strike (calendar), within days to expiration, roll the position or part of it. Roll the short option when it has 10% of strike width within option chain remaining. Roll the short option within the 10-4 day window before expiration.

ITM Diagonal – Steps to Management Close the short option anytime you want to make $$$ on the long option without capping your gains. Bullish, when the stock shows strength (MACD rolling higher). Take action if the trade as a whole goes into Negative Theta. Because this presentation is limited to ITM Call Diagonals, no attention is being paid to rolling ITM Put Diagonals.

ITM Diagonal – Steps to Management When an underlying moves quickly, it may be necessary to roll strikes within any one calendar month, thus taking money off the table or taking on extra risk. Do this if the trade moves to Negative Theta. Keep in mind that the long option is the vertical part of the trade and therefore directional. Roll down to.70 Delta, when the existing Delta has moved to.86 or.90+

ITM Diagonal – Steps to Exit Keep track of debits and credits throughout the history of the trade. Should the stock have reversed significantly and should evaluation point to further losses, one might consider closing out the entire trade at whatever point of gain and/or loss the trade has earned.

ITM Diagonal – Some Observations Diagonals can take more margin than Calendars Volatility can work dramatically for and against the trader; hence, the importance of managing the Diagonal in the context of an inventory. In a strongly trending market, the Diagonal can be a powerfully profitable trade because it benefits from the Directional Trend and Time Decay It is possible to skew the direction of the diagonal in the context of a changing trend. However, there are Tradeoffs.