My plan for trading the iron condor when I first got started trading this strategy was to put them and keep them on all the way until expiration.
Then – if everything went well and the trade stayed beneath my profit tent – I’d just them expire worthless and keep all that sold premium in my account.
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.
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.
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).
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.
Let’s take a second look at the amount of money we are talking about here. Ten cents per side – or twenty cents total. Okay – sure – it’s nothing to sneeze at – but when you step back, get a broader look, and start to take a few other things into consideration – it can actually start to look quite miniscule.
What’s more important (at least for me) – is that by closing my iron condor trade early, I have LOCKED IN FOREVER the majority of the gains on that side of the trade. And no matter what happens going forward – those gains that I’ve just banked CAN’T be taken away from me.
AND – I’ve reduced my risk.
I have also given myself the opportunity to generate ADDED gains from my overall position – without adding any extra risk.
Let me explain:
A lot of times, the value in options will evaporate really quickly during a trade. I’ve actually seen options lose most of their value in 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.
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.
And then, if our underlying suddenly turns around and shoots back up (which actually happens quite often) – I have no worries whatsoever since I no longer have any upside risk in the trade.
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.
But let’s just say we didn’t ‘re sell’ any options. Let’s just assume that we closed the trade entirely when our contingent orders were hit. In this case what we’ve done is eliminated risk (good thing) – freed up capital (good thing) – enlarged our return on investment over the number of days we have been in the trade (good thing) – and gotten completely out of the market a while lot sooner than if we had to sit around and wait until expiration day rolls around (and in my opinion this is a good thing too!).
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.
Or at the very least they are WITHOUT A DOUBT worth every penny of the ridiculously small .20 cents or so of potential profit left on the table in exchange for getting out of my monthly iron condor trade early – at what is STILL an incredible monthly return.
Ted Nino is an option selling fanatic – especially passionate about trading the Iron Condor , the Credit Spread, Double Calendars, Gamma Scalping, and the Butterfly Spread. Go to his Iron Condor Website to find out more about his ‘Simple Paint By The Numbers Blueprint’ for playing the Iron Condor for reliable monthly returns.
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