Iron Condor


Uploaded by RealWorldOptions on 04.08.2012

Transcript:
Hi this is Tod. Let's talk about iron condors. This video may be advanced for some of us
and we will be going through the concepts quickly so hang on. The iron Condor is considered
by many people to be an options income trade. Many traders use this strategy to generate
steady income from a market. A basic iron condor typically consists of a call credit
spread on the upside and a put credit spread on the downside. The iron condor strategy
can be configured many different ways which also implies many different risk and reward
profiles for the trade . The call and put credit spreads are both typically positioned
out of the money and the risk reward will be determined by how far apart they are positioned
and the spread width. A common way to specify this distance out of the money is by probability
or by the deltas on the short options. You must also choose the time frame or expiration
cycle to trade which can be from just a few days to several months. Let's take a quick
look at three examples on my options trading software and we will see what is going on.
OK, here we go. I put 6 vertical spreads but you can see their all in different expirations
here. Let's do the first one, it's a weekly and you can see there is the call vertical
spread, it is clicked on and we will click on the other credit spread and it makes this
iron condor. I have set up this little calendar here to the 20th which is expiration and then
I set these little slice things here to break even at expiration. You can see that gives
us about a 70, my target was 70 percent and this gave us a 72 percent probability. You
can see this is fairly narrow, it's just not that far away, the market is probably right
at 1350 something and right in here somewhere so it is not a very big move, I mean in 7
days a 20 or 30 point move is pretty easy to hit. So, what this says, we look at this
red line at expiration that is 7 days from now on the 20th on 7/20 and read this. Wherever
my cursor goes you can read the line right here. So, up here it says it is 1600 dollars,
so you will get that credit right away and this 8400. Well, what does that mean? You
can lose that much money if it goes outside of, goes over this far to the 1310 and that's
defined by, this spread width. All of these examples are going to have a spread width
of 10 and 10 options of each one, so that is 40 options total, so that is a margin of
10,000 dollars. So that is 10 wide times 10 is a hundred times another hundred for the
number of options in a contract, umm, oh shares in a contract, excuse me. So that is where
we get the 10,000 dollars minus the 1600 equals 8400. Ok, so it will be real similar for all
of them in all these examples except for the time frame. I'm changing the time frame and
the credit you get will change also. OK. We have pretty much analyzed this, we see that
it is close in, but you only have 7 days so there is a good chance, so if it stays between
there, in between these shorts here you get to keep that money. Great, let's move on.
Okay, there is a put spread and there is a call spread. These are for August. You can
see were the other one is and see how much wider that is, isn't that cool. So this is
like 34 days, I believe away and let's change this so we get the right, ok the 17th is the
expiration. Then if we set the slices to break even, you can see this is at 70 percent, so
roughly the same thing but if you think about it you have a lot more time. You have 34 days
instead of 7 days so the same probability gives it more room for the market to go up
and down. Big difference. Again it is the same and in this one you get 2300 dollars
if you stay inside, but it takes 4 weeks instead of 1 week. And then here the 10,000 minus
the 2300 is the 7700, Ok, 7600 or whatever it is. Ok, the market is moving there a little
bit. Now let's look at the last one here, where we jump up to September instead of August.
You can see, there is the put spread and then we add the call spread. It is interesting
to note that this margin is required even if you only do 1 spread. The reason for that
is, the second spread is free margin is because you can only lose on one side at a time. So
that is interesting to note, so if you are doing credit spreads, you might consider doing
these irons because the other side has free margin. OK, you can see where the old one
was here so it is quite a bit wider and this is 69 days out. Let's move the thing to the
21st of September. Set the slice to break even on that day. You can see this one is
right at 70 percent also. So it is roughly a similar trade but you can see it is so much
wider and a little over 2 months and stay inside those shorts, you are going to get
2800 dollars, but it is much wider. Some feel it could be safer, it is hard to say. Then
over here the 10,000 margin minus the 2800 over here you can see it is now 7200 potential
loss if you are finishing up out at 1220. Ok, that is what I wanted to show for these
iron condors. I know it was a little fast and furious but that is kind of how they,
how they work. Hopefully this short video has helped you understand the basics of an
iron condor. If you are interested in learning more about trading options take the link below
to Real-World Options where we have put together an innovative course for learning about option
trading and how to evaluate an iron condor. After taking the link you will find more information
about the course. Bye now.