Category: Iron Condor

RUT Iron Condor : May 2007
RUT Iron Condor May 2007

Even though markets are little shaky currently, here is my thought for my bread-n-butter strategy i.e. Iron Condor.
- Underlying: Russell 2000 index ($RUT)
- Price: RUT @ 800
- BUY: Call – May 07 880 call; PUT – May 07, 730
- Sell: Call – May 07 870 call; PUT – May 07, 740
- Credit: $2.35 or better.
- Margin: $7.65
- ROM: 30%
Why this trade:
The chart seems to be telling a different story than what I am looking for a potential trade. In my opinion, resistance areas are 810(minor) and 830(major). Key support areas are 800, 795, 770 and 750. Based on this, my potential trade seems to be quite resilient to cover 130 point rang. [92% (call side) and 83% (put side) expectation of expiring worthless].

IV on the call side is pretty low, seems like traders are expecting for RUT to go down vs. going up. While IV on the put side is roughly double of call side.

There is a general saying “Sell in May and go away”. Though I don’t want to rely on history but history is also a good teacher. In May, Japanese will return from long holidays, called “Golden Week” holidays. Last year’s meltdown was triggered right after that, from Japan. Recent Feb meltdown was triggered from China. Net, Asia will affect US market as well and Japan is influential.

Even though I can tighten the range to get more credit, but we are already on shaky grounds and going into shaky times, so 30% ROM seems to be good returns for 6-7wks holding period.

Enjoy, waiting for fill, OptionPundit
April 2, 2007
RUT Iron Condor (Mar’07, Closed for 23.2% Profit)

I closed my RUT Iron condor by buying back the BCS for $0.25.

I had already bought back my BPS for $0.20 that I had mentioned here. With this, the overall March RUT Iron condor yielded 23.2% for roughly 1 month holding.

My strategy of closing leg one after other as soon as it hits the exit criteria also paid very well and tested very well against the ups and down of the market. A simple yet powerful concept resulted in no need for adjustments or ju-jitsu.

My margins are freed and now I shall start looking for April income trades. As the volatility has risen, so is the premium and so is the Risk. It’s important to choose the trade carefully.

March 1, 2007
RUT March Iron Condor – Update

Starting with a lower open RUT started to moveup and it’s now moving into new territory. My BPS hit my exit criteria and I was able to buy it back for $0.20.

When the tide rises, it lifts all the boats and one doesn’t want to fight with it. Closing this trade at $0.20 yielded $0.70 profit as I had opened this trade at $0.90 credit. Check out the overall trade here. Now I have 850/860 BCS left and I will have to keep a close watch if RUT is about to touch my adjustment point and start to threaten this leg. However by closing BPS, I can use that margin to open another BPS at an appropriate time.

Stay tuned, profitable trading

OptionPundit

February 22, 2007
RUT March Iron Condor

Trending markets are not good friends of Income traders especially the markets that jumps in either direction too quickly. I had talked about Iron condor briefly here, that an iron condor works best when market remains in defined zones or continue sideways action. Few weeks back I opened a RUT iron condor that I shared with the OP readers here, this iron condor while still profitable, may soon be threatened on the call side. Put side has already given good amount of credit and is nearing my exit point.

As you may know, opening an Iron condor is not that difficult at all. The real fun lies in how does one adjust the trade. Seems like RUT is going to challenge, now that’s where serious money is involved, so let the fun begin.

Cheers and profitable trade, OptionPundit

February 21, 2007
Iron Condor Option Trading Strategy : Part-1
I am starting this series to discuss about the Iron condors (IC). This is a strategy that is used by almost every professional option trader. In this part-1, I shall focus on discussing what is an Iron condor, how is it created and why I consider Iron condor for my portfolio. I would like to start with the fundamentals so as to make sure the new readers would be able to follow along. Before we delve into details, let me restate key terms:

ATM stands for At the Money. This means the strike price of an option is the same as the price of the underlying stock/index. i.e. a 475 GOOG call would be ATM when the value of the GOOG is 475.

CTM- Close to the money. This means the strike price of an option is closer to ATM and it is not very far from ATM.

ITM – In the money. For a call this means the strike price is below the value of the underlying, and for a put the strike is above the value of the underlying. i.e. A 810 RUT call would be ITM when the RUT is at 811 or more.

OTM – Out of the Money. For a call the strike price is above the value of the underlying, and for a put the strike is below the value of the underlying. i.e. a 850 RUT call would be OTM when the RUT is 850 or lower.

FOTM- same as OTM but with very far from ATM. Generally speaking 1 std dev or more away from the ATM.

Credit spreads are the foundation for Iron condor. For more about credit spread, please click here.

What is an Iron Condor: An Iron condor is made up of two credit spreads i.e. one Bull Put Spread and one Bear Call spread for the same expiry month. Since it is made of credit spreads, we are obtaining credit to open an Iron condor. For an example on Iron Condor (assume RUT is currently at $800):

A Bear call spread will be any call OTM spread i.e. short 850, long 860 calls Mar expiration

A Bull Put spread will be any PUT OTM spread i.e. Short 760 and long 750 Put March expiration

This will create an Iron Condor that is 750/760/850/860

This is how above IC will graphically look like…Click here

Why an Iron Condor: Iron condor makes money primarily via time decay. Because you are a premium seller, time erosion works in your favor and therefore sideways markets are the best friend of IC traders. An IC makes the most money when the underlying remains in between the short strikes (760 and 850 in the above example). Your risk as well reward is known in advance and your Risk/Reward expectation will determine your winning probability. Keep in mind though, this is high probability trade and therefore the risk/reward ratio is not attractive. At the same time its statistical superiority is what makes it loved by almost every professional option trader and many treat this as their bread-n-butter strategy.

End of Part-1

Profitable trading,
OptionPundit
February 7, 2007
Iron Condor (RUT) : Mar 07 (New Trade)
This trade is now open for viewing/reading to broad OP readers.

After playing speculative strategies during the last 2 week of earning season, I am back to my bread-n-butter strategy. In this Iron Condor, I am selling the RUT March 850 calls and 760 puts and buying the March 860 calls and 750 puts for a net credit of $2.25.

Trade Price: I received $2.25 credit for this trade.

Underlying: RUT roughly $808

Trade Risk: Total margin required is $775 per Iron Condor

Trade Duration: Till March 15 or before.

This Iron condor is quite market-neutral at this point (rather slightly negative delta). There is about a 16% chance that the RUT will close above $850 at March options expiration, and a 14% chance that the RUT will close below the $760 level at March options expiration. The potential risk to reward with trade is 29% for holding till March 15 or before (if RUT remains between 850 and 760 by March options expiration). I shall be continuously monitoring this position for the best time to either adjust or close depending upon the price of the options and the underlying shares of the RUT.

Disclaimer : As with other posts, this is not an advisory. These are my personal trades that I open for viewing. Please read the legal notices and disclaimer here for details.
February 3, 2007