Saturday, June 16, 2012

Iron Condor - Please Give Me My Life Back

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

After I placed the trade, I would just leave it be until expiration day where the options would expire worthless and disappear into option heaven.

I just assumed this was the most effective way to play the trade - especially since it allowed me to save money from my broker by not paying to close the trade.

But I don't think this way anymore.

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.

Now - as soon as I place the trade, I set a contingent order with my broker to buy back the call spread - as well as the put spread - once I've made the majority of the 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.

Then I would set up a contingent order to buy back the put spread of my iron condor for.05 or.10 (or at the very most.20).

Crazy?

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 (at least for me) - is that by closing my iron condor trade early, I have LOCKED IN FOREVER the majority of the gains on that side of the trade. And no matter what happens going forward - those gains that I've just banked CAN'T be taken away from me.

AND - my risk in the trade has been reduced.

I have also given myself the opportunity to generate ADDED gains from my overall position - without adding any extra risk.

Let me show you what I am talking about here:

A lot of times, the value in options will evaporate really quickly during a trade. I've actually seen options lose most of their value in just a few days.

Going back to our example - let's pretend that I put an iron condor on about 40 days until expiration. For the trade I receive around a 1.00 credit. Fifty cents for each credit spread on either end of the position.

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

On the fifth day (just 4 days after I put the trade on), I look at my position and see that I can now buy back the vertical spread on the call side of my iron condor for just .10.

If I do nothing, I am choosing to risk that CALL spread margin for the next 36 DAYS for a measly .00 of remaining profit (per spread).

However, if I decide to just take it off for ten cents - I will have LOCKED IN the lions share of the available profit in that call side credit - guaranteeing that return on investment in just four days.

Another thing to consider, is if the stock or index we are using abruptly changes direction and heads back up (which of course DOES happen all the time) we really have nothing to be alarmed about since we've removed those upper options and eliminated all upside risk.

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!).

Trading this way lets me take a 'vacation' away from the markets until it's time to put on another trade. It allows me to peel myself away from my trading monitor and get out and enjoy all the other things in my life I'm interested in - without always thinking about how my iron condor is performing - or fretting about what I'll do if there is a sudden stock market crash.

Getting this 'trading break' - 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.

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