1. IRON CONDORS ONE SIGMA METHOD
Hello to all and welcome to the latest version of Iron Condors – The One Sigma Method
In the first portion of this presentation , we will cover Trade Entry – Picking your Option Strike Price and your Option Month
Later on, we will discuss trade management through the life of the trade
and then finish up with Trade Exits
Thanks for joining and lets get started
Iron Condor Strategy -
Version 3.0

2. Disclaimer This is not an investment or trading recommendation.
The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment.
I am not a licensed trading or investment adviser, or financial planner.
You should make your own trading plan decisions based your own research and tolerance for risk.
I am not a trading authority.
Most of this presentation is just information I have compiled from other sources and other authorities over the past year
Links and Footnotes have been added to help with your deeper research

3. Right now, I only trade the SPY.
SPY is the #1 ETF for volume / liquidity.
Condors need a certain amount of liquidity for entry and exit

4. Trading results since started tracking in April 2009

5. How I calculate RATE OF RETURN
For details on how I calculate rate of return,
just go to this link
Or if that link does not work
just go to CONDOR OPTIONS.COM
and click on the PERFORMANCE tab.
Half way down the page you will see a section starting off with – HOW WE CALCULATE OUR RETURNS

6. The next few slides show other places or references where you can read up more on the Iron Condor Trading Strategy.
This Power Point is just my interpretation of the ideas in the following articles

7. TOS IRON CONDOR SEMINAR
xsprofits.com
There are currently six User Groups in the Southern California area (link). This web site is common repository of information and presentations the groups share
Here is a source for more information about the Condor Strategy discussed here
TOS IRON CONDOR SEMINAR
It is called the
(COMPLEX STRATEGIES)
WORKBOOK

8. xsprofits.com SOURCE INFORMATION TOS IRON CONDOR (COMPLEX STRATEGIES)
WORKBOOK

9. WHERE YOU CAN READ IN MORE DEPTH ABOUT THE CONDOR TRADING STRATEGY
BELOW ARE MORE SOURCES
WHERE YOU CAN READ IN MORE DEPTH
ABOUT THE CONDOR TRADING STRATEGY
This presentation is essentially my interpretation
of a Condor trading strategy taught at the
TOS - Option Planet - Advanced or Complex Strategies for Traders seminars
Here is a link if you want more detail on the free TOS seminars
Here is a link to the TOS seminar workbook for the Complex seminar
A very similar Condor strategy is discussed at length at CONDOR OPTIONS.COM
Here is a link to the Condor Options web site
Of course, the strategy in this presentation is not exactly the same strategy as the above 2 sources
It is just my version and my interpretation
So , Please - Study the above sources
and develop your own interpretation and application of this strategy

10. NOTE: CONDORS HAVE A “HAZARD”
CONDORS DO NOT DO WELL IN STRONG TRENDING MARKETS
UP OR DOWN
If the underlying goes “out of range” and stays there through expiration,
you can lose all of your cash.
But your lose is limited previously described “defined risk”
Statistically, this event should occur only 32% of the time
if you enter a 1 Sigma Trade
But this lose can wipe out a number of past winners
That is the Condor “Hazard”
There are ways to manage Condors to reduce this risk and they will be discussed in this presentation
Of course, There is no single strategy which is good for all market conditions

11. STRATEGY ORIGINS This strategy was originally presented to me at a
Don Kaufman - Options Planet –
Advanced or Complex Options Seminar in 2007
You can Goggle “WHAT IS AN IRON CONDOR”
but you will not find much about launching Condor orders or managing positions.
I did find an article recently which seems to do a decent job of summarizing the strategy

12. to a good article on Condors
Here is a link
to a good article on Condors
Or alternate link is below
The next few pages are about this article

13. How to Use Options to Generate An Income Stream
By Jonah Williams
(Jonah Williams is one of the principals at Condor Options.com)
Much of this article is similar to the ideas discussed
at the Don Kaufman Option Planet Seminars
Advantages of an iron condor spread
1. Collect Premium - Iron condors allow you to profit from a decaying asset
2. Market or Delta Neutral - Iron condors can be constructed as a market-neutral position,
With a delta neutral position, you won’t necessarily need to worry about picking a direction in which you think the underlying equity or index will move.

14. One of the key factors determining whether
an iron condor will be successful or not
is the selection of strike prices.
But looking at a big board of strike prices,
how do we know which strikes to pick ?

15. Selection of strikes could be based on "feelings" or "hunches"
but obviously that won't get us very far.
Some traders try to use technical analysis to help with strike selection.
But that can only give us part of the picture,
and risks bringing directional bias into our trades.

16. Perhaps the simplest way to construct an iron condor
The One Sigma Method
Perhaps the simplest way to construct an iron condor
with a reasonable chance of success
(while still generating sufficient premium)
is to select short strikes that are one standard deviation
(or one sigma) from the current price of the underlying.
This metric means about 68% of the time,
the underlying index or equity we're using will close
on expiration day within one standard deviation
(or "one sigma") of the current price.
So if we structure our trades
so they can tolerate a one sigma move
and still expire worthless,
then we can expect success over two thirds of the time.

17. A standard deviation is a measure of the distribution
of a given set of values.
In trading, we usually assume prices
will be normally distributed,
and therefore any given possible value will fall within
one standard deviation of the mean about 68% of the time.
Two standard deviations from the mean
would account for for almost 95% of all possible values,
and three standard deviations would account for nearly 99%.
You can also see the standard deviations (sigma)
by using the Probability Cones
on the TOS trading platform – See the next page

18.
Here is a good place to find an explanation of using Probability Cones on the TOS platform

19. The Condor Options article gets into a rather complicated mathematical formula for picking strikes
As an alternative, the next slides show an easier way to pick condor strikes
And the following is generally the method described to me at an earlier Don Kaufaum – TOS – Options Planet Advanced Options seminars

20. IRON CONDOR ENTRY First WHICH MONTH TO ENTER ?
Just enter trades MIN 30 day and MAX 70 days before Expiration –
Example – I will start looking for Feb Condors
the week after Dec expiration (about Mon Dec 21)

21. FINDING THE DAYS TO EXPIRATION
Click the TRADE tab and enter your underlying, these are the CALENDAR DAYS left in these option months before their expiration
Enter trades MIN 30 day and MAX 70 days before Expiration – best seems around 50 days

22. IRON CONDORS Other factors when looking for a good time to enter trades
STOCHASTICS - Try to enter when the market is not extremely overbought or oversold which might indicate the market is getting ready to make a dramatic reversal
VOLATILITY - Try to enter SPY Condors when the VIX is relatively high compared to the last 1 to 3 months

23. Be aware of these peaks and troughs
INVESTOOLS CHART
Stochastics
Be aware of these peaks and troughs

24. (An easy way to track volatility is to watch the VIX)
Watching the VIX when trading SPY Condors
The Volatility Chart
When you enter Condors
When you exit Condors
Comment
High volatility
(An easy way to track volatility is to watch the VIX)
Low volatility
Best scenario is to enter Condors when the VIX is high and then exit later when the VIX is low !!
Low volatility OK
High volatility
Danger

25. How do you pick the STRIKE prices
IRON CONDOR ENTRY
WHICH STRIKES ?
How do you pick the STRIKE prices
in an Iron Condor ?

26. One Sigma Method The idea is to select short strikes which are
one standard deviation (one sigma) away from the current underlying.
Trades constructed in this way will have about a one Sigma or one Standard Deviation
or 68% probability of success,
assuming the price curve over the life of the trade is normally distributed.

27. In this strategy, pick strikes which are :
1. DELTA NEUTRAL
SHORT STRIKES will be equal distance from underlying.
LONG STRIKES are just 2 points farther out from the shorts
We are not trying to pick direction.
We want to be DELTA neutral entering this trade.
2. ONE SIGMA
The strikes will yield a 68% probability of success

28. To start, Right click on the Blue dot next to your underlying, Then click TRADE

29. Open the Option Chain on the Month you want to trade
RIGHT CLICK on the BID PRICE of the
“AT THE MONEY” Call,

30. 1. Left click
SELL
2. Left click
IRON CONDOR

31. This is just a starting point.
This “default” IRON CONDOR will load up and look like this on the TOS platform.
This is just a starting point.

32. First, make your verticals 2 points wide In other words,
The long call should always be 2 points above the short call
The long put should always be 2 points below the short put
See below for example
The logic for this is explained in the Option Planet Workbook. For time being, just do it

33. The Underlying SPY is at 110 today
To be market neutral and have your Delta as close to zero as possible, your short strikes to be an equal distance from 110
Adjust your short strikes farther and farther out from 110 until you get about a .68 to .79 credit price
Remember, Keep your long strikes 2 points away from your short strikes
.68 credit would be exactly a 1 sigma trade
But you will rarely be able to get an exactly .68 credit
I always try to get the next Credit higher than .68.
In the example below, my starting Credit would be .77

34. MID PRICE You could enter this trade at .77
But it will normally not fill quick
You could enter a Limit day trade and it might fill later today or you could enter a Limit GTC trade and it might fill sometime in the future
If you want this Condor quick , you will need to cancel and adjust your credit down to Wait 5 or 10 minutes.
If that does not fill, cancel order and retry order at .75
Generally speaking, in the SPY, 1 or 2 ticks below mid price should yield a fairly quick fill
MID PRICE

35. Email me if you want a copy of the Excel file
The Next Slide shows an Excel file I use to assist in picking my Condor Strikes
me if you want a copy of the Excel file

36. Just change the numbers in the Yellow boxes
For me, it is easier to use an Excel spread sheet like this to pick the strikes prices
Just change the numbers in the Yellow boxes
and it will show the strike prices you enter TOS.
Price locations are same format as TOS trade
File - CONDOR CALCULATOR xls

37. PRICE Trade entry is based on Price The price of your option includes
Intrinsic portion – Underlying current price – strike price
PLUS
Extrinsic portion - determined by 4 main factors :
Time to expiration,
Interest Rates,
Volatility and
Dividends payable.
Calculated by using a pricing formula such as the Black-Scholes Model
Price includes all of the above
So price can be used to calculate probability

38. You can review and print the summary page
SUMMARY NOTES:
The goal of every Condor manager is to Collect as much money up front as possible
Shoot for a 60 to 70% chance of success
68.27% is one standard deviation in a normal distribution
i.e. One Sigma
Let time and volatility cause the options to decay in value
Then, Try to buy back the position as cheap as possible later.
When you enter a trade, TOS will summarize what your Max possible $ loss or Risk
You can review and print the summary page
before you click the final button to send the trade
Condors are “defined risk” trades
When you sell a Condor, you collect some money up front. This is the premium.
Max $ Loss Possible – The premium = Your actual $ possible loss or $ risk
So as your premium decreases, your max possible $ financial loss increases.
The less you collect up front, the higher your probability of success.
So what is strange here is your probability of success can increase
but your Max Possible financial loss will also increase.
The Long call and Long put in a Condor are just thrown in there as insurance.
You don’t want to sell a Naked Put or Call without some insurance.

39. Rough calculation for figuring trade Probability of Success
First figure your max loss
Max Loss = Width of your vertical – your credit
In the previous trade that is = 1.23
Probability of Success = Max Loss / Width of your vertical
In the previous trade, that is / 2 = 61.5% is your probability of success
If you would have picked a .65 credit, the probability of success would be = and / 2 = 67.5% which is closer to one standard deviation or a 1 sigma trade
Above is just a rough calculation. The Analyze tab in TOS will yield a more precise figure for probability of success

40. EXIT STRATEGIES

41. MOST DIFFICULT SECTION
EXIT IS THE
MOST DIFFICULT SECTION
One Condor loss can wipe out a lot of earlier Condor winners
This is the CONDOR HAZARD
This is an area where I am still doing research. Not done with this yet

42. Don Kaufman – TOS – Option Planet Exit method
EXIT STRATEGY # 1
Don Kaufman – TOS – Option Planet Exit method
Always exit 4 to 10 days from expire
Do not exit sooner
(unless you can buy back for 80% of the profit)
Be consistent
Just add Inventory (Sell more Condors)
Keep Delta as neutral as possible
Sell more Condors or other positions (to reduce delta)
when market trends up or down
and is threatening your short calls or short puts
The idea is to sell future Condors and collect that money
as a way to pay for the loses (if any) of near term Condors.
Selling future Condors will tend to keep your Delta closer to zero
That is why Don uses the Greeks to manage his positions.
He is always adding inventory to keep Delta more neutral
TOS says this adding of inventory process is a way to “ finance the loses”

43. when the underlying starts to threaten your short strikes
EXIT STRATEGY #2
BUY CALLS OR PUTS
when the underlying starts to threaten your short strikes
Just Buy calls (Next month out) when the market trends up and crosses your short call strike.
Or Just Buy puts (Next month out) if market downtrends and crosses your short put strike
Example: If your current Condor is a November contract, then you would be buying December Calls or Puts for protection

44. Testing Exit Strategy #3
Here are the ideas I am testing as of
for managing and exiting Condor position
1. BUY BACK VERTICALS
if you can ever buy them back for .15 or less.
( .15 was exit figure from the Option Planet Workbook )
In fact, I put in GTC Limit orders for .15 on each vertical so the computer will automatically buy back the position if the market ever moves enough when I am at work
2. SELL MORE CONDORS
if the Underlying starts to cross either short strike.
You incur loses when the underlying crosses your short strike.
Adding new market / delta neutral condors helps finance that loss.
Adding positions (inventory) is the Option Planet method

45. Overall Trading Strategy Idea
Try to keep Delta as neutral as possible
Try to keep Theta as high as possible
Layer in Condor inventory over time
to keep delta neutral.
Enter Condors when volatility is higher
Ride the volatility down

46. Thanks !!