Iron Condors – The Comfort Zone (1 of 8) – San Jose Options
San Jose Options presents Iron Condors - The Comfort Zone
The Iron Condor is a very popular options strategy today. It's known for it's high probability, but everyone knows that the risk to reward on this trade is highly unfavorable.
One thing that is not pointed out is that although this trade appears to have a high probability, included in this is extreme risk and high stress.
When we look at the "Comfort Zone" and safety range, we see that this only covers about 35 to 40% of the probability range.
We also take a look at Butterfly Spreads and Calendars. All three of these popular income strategies share a similar "Comfort Zone."
Although the Traditional Iron Condor appears to be a high probability trade with low risk, we believe it's not the trade it appears to be. In today's fast-paced market, it's a very risky trade that exposes your portfolio to great risk.
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Hi everybody! This is Morris and now we will continue this study and discussion on the risk involved with traditional option strategies. First, we’re going to look at one of the most popular strategies in the world, which is an iron condor. I’ll show you how to construct this trade and I will warn you of the risk and I’m not advocating that you do this. Let’s take a look.
First thing we do, we’re on Thinker Swim, most people use the Russell; we’re using the Russell, the IUT and we see the different months that are available. A typical trade on the Russell, which is a high probability, which is considered high prob but I don’t consider it high prob at all, would be using something like this, a trade with 40 days to go. I’ll go ahead and open up this option chain. Over here I have the deltas and I have my puts on this side. I have the calls on this side. You can see how I have the Greeks lined up. I’m just using kind of a standard format in the Thinker Swim software.
To make this trade high probability, we’ll typically use something like a 7 or 8, maybe even a 10 delta. I’m going to go ahead and use an 8 delta. What I’m going to do is I’m going to sell this. I’ll tell you another secret. Why don’t we skip a strike or skip two strikes? This will save you 66% or so, on your commissions at the end of the year. This is a wonderful concept to apply to your trading. Instead of using a 10-point spread, you can use a 20-point spread or a 30-point spread. We normally do this in our course. It saves a lot of commissions actually. Remember, I’m not even advocating this trade and we don’t do this particular trade in our course. I’m just showing you a typical trade that the popular public does.
In this case, let’s use a 20-point spread. I’m starting at the 8 delta and use 20-point spread. So notice I sold the 8 and then I just go up the chain a little and then I bought the 5-delta. Now I’ll come over here and I’ll do a similar thing on the call side. Over here I have 10 or 6 so I’ll just use the 6. Now I have what’s considered to be high prob iron condor. We sold some are nearest 7, 8, 6 delta on the call side, the put side and the trades out about 40 days. This is a real typical trade that you’ll find published all over the internet in most of your popular courses and so on. You don’t have to go and pay thousands of dollars to learn this. It’s pretty common.
Come over here, we’ll see the margin on this is about 18,000 and we’re bringing in about 1,800 up here at the top. Now, there are different strategies on this trade. Some people will just put this on, consider it to be high probability and they don’t do any adjustments and they try to make that 10% by letting it go to expiration. These people, they’ll do something like this: they’ll come up to the top to change the probability, again, this is how you measure your probability with the software, change this to the date, notice I have September’s. Then I can move these over to my breakevens. I’ll just push that way outside, bring this end over to the breakeven and I can see that this trade, from the beginning, starts with a probability of about 83%. So you see that. We can also see one standard deviation. So you see the different colors in blue. This controller is up here…