subject: Iron Condor - When To Take Your Profits [print this page] 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 figured this was the smartest way to go, since I would bank the ENTIRE credit received - and I wouldn't have to pay any broker commissions to close out the trade.
But I've changed my game plan since then.
After a lot of sleepless nights, too many close calls, a couple painful ulcers and one near hernia, I've changed the way I run my Iron Condor business.
Here's what I do now: Right after I put on my iron condor, I tell my options broker (through the use of automatic contingent orders) to buy back both the put credit spread and the call credit as soon as I make the bulk of available profit in each spread.
For example, if I sold an Iron Condor on XYZ for a total credit of $1.00 - or.50 each side - I would set up a contingent order to buy back the call spread for.05 or.10 (or at the very most.20).
After I place the trade, I would set up two contingent orders with my broker. One would be to buy back the upper half spread of the iron condor for ten cents - and the other to buy back the lower half spread of the condor for five or ten cents.
Now perhaps some of you out there might be scratching your head wondering why I'd do something this. I know when I first started trading these - if someone told me this was their game plan, I'd be scratching my head. Seems like a futile and even sort of dumb thing to do.
Personally I don't think so.
Sure I might make less than if I tried to milk them all the way through to the very end.
But then again, not necessarily.
And also let's look at exactly how much we are talking about here. The amount of money we're talking about leaving on the table here is actually not that significant.
What is significant - at least to me - is that by taking off those positions, I've LOCKED IN the lions share of the profit available in the trade.
I have also lessened my exposure.
AND - I also now have the ability to generate ADDITIONAL profits from this iron condor position - more than what was possible when I originally placed the trade. And I can generate this additional profit in the trade WITHOUT an increase in the trades original risk.
Here's an example:
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.
Say I put an Iron Condor on XYZ - 40 days from expiration - for a credit of $1.00 - or.50 each side.
Immediately after placing the trade, XYZ heads downward over a number of days.
Four days after I initiated the trade, I discover that I can now purchase the call credit spread of the position for just ten cents.
At this point, I have two choices. I can do nothing and just let my positions play - or - I can buy back that call credit spread for .10 and entirely remove the upper half of the trade. If I decide to do nothing - I have chosen to retain my upper side risk in the trade just to try and eventually capture that tiny remaining .10 potential profit.
On the other hand, if I buy it back for.10, I lock in the bulk of the profit for the CALL side - making that ROI in just 4 days.
Then, if XYZ bounces back up - which it will often do after a drop - I no longer have any risk on the upside.
In fact, if XYZ bounces back up high enough, I could RESELL the same CALL spread that I originally sold - for the same original credit - or maybe even more - increasing my total ROI for the same amount of RISK that I began with.
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.
This allows me to totally get away from trading for a few days - or weeks (or however long until the next expiration cycle starts) - and enjoy the other things in my life without having to always be wondering what's happening to my trade - or the market - or worrying about the next big 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.
