Iron Condor - Here, Can You Push This Thing Back Into My Belly?
When I first discovered the iron condor and began trading it - I never thought about whether or not I should ever take them off early
. I just left them on all the way till the very end.
Then I would just let them expire worthless and have that premium remain 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 I've changed my game plan since then.
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.
When the put credit spread is worth only .10 - buy it back. And for the call credit spread the same thing goes.
Now a lot of iron condor traders might say this would be a dumb thing to do.
But after trading these every month for years now - I don't agree.
Yes of course it is true that by buying the trade back I am leaving money on the table. At least it seems that way.
But then again, not necessarily.
And even so, it's not THAT much less.
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:
Option premiums can decay quickly. Really quickly. As a matter of fact, I've seen them almost drain completely over the course of 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.
4 days after I put the trade on, I see that I can buy back my CALL side of the Iron Condor for.10.
If I do nothing, I am choosing to risk that CALL spread margin for the next 36 DAYS for a measly $10.00 of remaining profit (per spread).
But - if I instead just spend the ten measly bucks to pull off that upper credit spread - I will LOCK IN the majority of the profit that was available in that spread - and earn a great 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.
And even if I don't resell any spreads - but just buy them back at.10 to close out the entire trade - it reduces my risk, frees up my capital sooner, increases my ROI over number of days, and gets me out of the trade MUCH more quickly than if I were to try and hold on all the way until expiration.
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.
And being able to temporarily take some time to 'get away' from the game - from the iron condor and 'option trading' and 'vega' and 'adjustments' and 'theta decay' - to be able to go out and do other things during market hours without always feeling the need to check quotes on my phone to see what the market is doing - and just having the opportunity to fall into bed at night and sleep like a baby without a care or worry about whether or not there will be a huge gap tomorrow morning at the open...
That's priceless.
For me it's ABSOLUTELY worth the measly twenty cents or so I'll be leaving on the table to get out of the trade early - and STILL make a ridiculous monthly profit.
by: Ted Nino.
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