2. CONDORS

3.  Iron condors are strangles with longs to control risk and margin farther out of the money.  They are credit spreads in that they are a combination of a put credit spread and a call credit spread.  Iron condors are negative vega trades—the shorts are closer to the money than the longs, thus the net vega is negative.

4.  High probability iron condors are one of the most popular options spreads.  Very slow moving trade.  Typically entered 45-70 days out to take advantage of time decay curve of OTM options.  Delta of short strikes below.10 on both put and call sides.  Wings set at whatever distance provides the highest return on equity—usually but not always the next strike further out of the money.  Returns typically 13-18%

5.  Both sides of an HP condor are credit spreads.  When the original credit spreads shrink down to a small fraction of their original credits, then the position shows a profit.  This often happens in phases with the market running in one direction allowing the opposite side to be closed and then the market reversing allowing the originally “troubled” side to be closed.  When this scenario unfolds it is the perfect HP condor scenario…….

11.  Most months will not be perfect and will require adjustments to bring the trade home for a profit.  Delta of the short strikes is what creates both the income potential and the “trouble” in HP condors. That is why adjustments are based on deltas for HP condors.  Typically when the short strike on either side gets to.20-.22 that spread is closed and then “rolled” to the original (below 10 call deltas). Capital can be increased at this point to recapture some of the credit.

12.  When either credit spread has shrunk to 10- 20% of its entry value it should be closed.  This often happens when the other spread is in trouble and needs to be rolled.  If that is the case then consideration should be given to rolling half the closed side closer to the money to pick up additional income as the rolling of a credit spread normally “kills” the potential income unless supplemented by additional income from the closed side.

22.  Iron condors can also be placed at higher delta entry points.  Low Probability Iron Condor trades involve higher yields and have to be managed more aggressively.  As the initial credit is so high, frequent adjustments can be “afforded” and reasonable income still left in the trade.

23.  There are two basic common approaches to adjusting low probability condors  Buying long calls or puts (or long call debit spreads or long put debits spreads) to control deltas while market fluctuates  “Rolling” (repositioning) credit spreads out of the money to reduce deltas, while market fluctuates.  This introductory technique involves combining those two basic techniques.

24.  Typically initiated 30-37 days out from expiration.  Delta of short strikes 15-20.  Wings set with highest return on investment (typically, but not always next strike up).  Buy back month long call (or call debit spread) to cut deltas in half at trade inception.

27.  First adjustment involves buying a back month long to cut deltas in half when either short strike delta gets to.25  If that same short strike hits.35 delta then sell back month long option and roll entire condor to original initiation deltas. If market is fast at this point, wait 24 hours or more (awaiting a 24 hour period with less than 1 standard deviation move), before repositioning condor (this can save you a lot of money!)  Can increase capital at this point, but no more than 20% and no more than necessary to increase potential dollar return to original initiation level of income.  If market reverses after putting on back month long and.25 delta is reached on the other side of the market, sell the back month long and buy a new one to cut deltas in half on new “offending” side.  Can repeat process as often as possible till max loss is reached.  Max loss=15% of original capital.  Target profit=10-15% of original capital (lesser if adjusted numerous times).

35.  If you are good at calling intraday direction, you can “leg into” each of the credit spreads that comprise a condor. Otherwise, execute as a four legged spread (recommended for beginners)  When vols are low (usually grinding up market) it is a good idea to purchase extra put side longs. They are cheap and protect against a hard down move.  On high prob condors, don’t “push it” on rolling closer to the money for more income—never re-sell a put spread more than once during a trade—chances of a reversal are serious.  Exit all trades 7 days before expiration as delta/gamma situation in expiration week are too dangerous for all but the most experienced traders.

36.  Select any January of the last five years and place a high probability iron condor on each month, utilizing a 10 lot on the $RUT. Adjust according to the adjustment techniques mentioned in this session. Set up a specific account for this in Optionvue and note your gains or losses for each month. Set up and X/L spreadsheet with 12 rows for each month and columns representing for each month: initial return potential of trade, ATM call volatility on day of initiation, capital level of trade (net requirement), final capital levels (should capital level have been increased during the trade) final percentage and dollar return and a section for notes (you can learn a lot by making notes as to what happened in each month and how it affected the outcome).  Select any January of the last five years and place a low probability iron condor on each month, utilizing a 10 lot on the $OEX. Adjust according to the adjustment techniques mentioned in this session. Set up a specific account for this in Optionvue and note your gains or losses for each month. Set up an X/L spreadsheet as for the high prob condor exercise above and populate all fields.