My plan for trading the iron condor when I first got started trading this strategy was to put them on and keep them on all the way until expiration.
Then I would just let them expire worthless and have that premium remain in my account.
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've changed my game plan since then.
After spending far too many nights worrying and not being able to fall asleep - along with a lot of expiration day close calls - painful ulcers - and a near hernia or two - I've altered the way I manage my iron condor trades.
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.
Here's an example: Let's say I sold an iron condor on the index XYZ for a total of one dollar - or around fifty cents each side.
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 like 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.
But personally - I completely disagree.
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 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 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.
Let me show you what I am talking about here:
I've found that many times during a trade, the premiums in options can drain quite rapidly. In fact, its possible for a spread to drain the majority of its premium in a matter of days.
Let's say that forty days from expiry I place an iron condor on the underlying XYZ. I get a net credit of one dollar - or about fifty cents each side.
Then, as soon as I put the trade on, our underlying starts to move down and continues doing so for a couple trading sessions.
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.
Now, if I don't do anything and just let the trade continue to play - what I am actually doing is risking that upper side spread margin - for the next thirty six days until expiration - for just ten little dollars of additional potential profit. And that doesn't really seem that worth it to me.
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.
Then, if XYZ bounces back up - which it will often do after a drop - I no longer have any risk on the upside.
Even better, if our underlying continues to retrace back up - it's possible that I could RESELL the exact same credit spread that was sold when the trade was first initiated - perhaps for around the same credit amount - or MORE - allowing me to actually get a BETTER return on investment than I was originally hoping for - WITHOUT increasing any risk in the trade.
But of course I don't have to resell any spreads. Let's just say I repurchase them at ten cents to take off the whole iron condor trade. What have I done? I've diminished my risk - I've freed up my trading capital - I've increased my 'return on investment' over number of days in the trade - and I've exited the market much sooner than I would have had I stayed in the trade all the way to expiry. And to me, all of these things are GOOD things.
See, I really love the idea of being able to take a 'trading vacation'. What I mean by that is to take a 'break' away from trading and not having to be 'engaged' in the stock market every day. I love being able to be in a trade for a week or so - and then take a week or so off - away from my trading computer screen. I love being able to get out and do other things without having that little worrisome 'trading nag' in the back of my head - always wondering what's going on in the stock market and wondering if my position is doing okay.
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...
Then I would just let them expire worthless and have that premium remain in my account.
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've changed my game plan since then.
After spending far too many nights worrying and not being able to fall asleep - along with a lot of expiration day close calls - painful ulcers - and a near hernia or two - I've altered the way I manage my iron condor trades.
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.
Here's an example: Let's say I sold an iron condor on the index XYZ for a total of one dollar - or around fifty cents each side.
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 like 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.
But personally - I completely disagree.
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 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 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.
Let me show you what I am talking about here:
I've found that many times during a trade, the premiums in options can drain quite rapidly. In fact, its possible for a spread to drain the majority of its premium in a matter of days.
Let's say that forty days from expiry I place an iron condor on the underlying XYZ. I get a net credit of one dollar - or about fifty cents each side.
Then, as soon as I put the trade on, our underlying starts to move down and continues doing so for a couple trading sessions.
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.
Now, if I don't do anything and just let the trade continue to play - what I am actually doing is risking that upper side spread margin - for the next thirty six days until expiration - for just ten little dollars of additional potential profit. And that doesn't really seem that worth it to me.
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.
Then, if XYZ bounces back up - which it will often do after a drop - I no longer have any risk on the upside.
Even better, if our underlying continues to retrace back up - it's possible that I could RESELL the exact same credit spread that was sold when the trade was first initiated - perhaps for around the same credit amount - or MORE - allowing me to actually get a BETTER return on investment than I was originally hoping for - WITHOUT increasing any risk in the trade.
But of course I don't have to resell any spreads. Let's just say I repurchase them at ten cents to take off the whole iron condor trade. What have I done? I've diminished my risk - I've freed up my trading capital - I've increased my 'return on investment' over number of days in the trade - and I've exited the market much sooner than I would have had I stayed in the trade all the way to expiry. And to me, all of these things are GOOD things.
See, I really love the idea of being able to take a 'trading vacation'. What I mean by that is to take a 'break' away from trading and not having to be 'engaged' in the stock market every day. I love being able to be in a trade for a week or so - and then take a week or so off - away from my trading computer screen. I love being able to get out and do other things without having that little worrisome 'trading nag' in the back of my head - always wondering what's going on in the stock market and wondering if my position is doing okay.
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...
