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Posts Tagged With 'iron condor'

Posted by Martin September 26, 2015

How to create options spreads using delta

When I started trading options a few years ago I used all sorts of analysis, predictions, chart reading, but mostly my trading was based on direction prediction. It was all wrong. No one could ever predict where the market or any particular stock will go nor ends up in any particular day in its life span.

There are many traders out there who use all sorts of analytics to enter a trade. Some use unusual options activity others volatility value, or technical analysis only.

In the past I always struggled with one task, how do you choose your strikes when trading options? You do not want to be too close to the underlying price and you do not want to leave money on the table to be too far away.

I wanted my trading simple and easy. I wanted a process which could be simply defined and repeated every day, week, or month. A system, which has given rules or steps and it is easy to implement.

Lately, I finally created such system. It is so easy that I always question myself why it took so long to create this strategy.

Here is my way of trading Iron Condors or spreads against SPX. It can be used against any optionable stock, not just the index. I trade index only because I want to focus on one trade, one market, be in tune with it and not be distracted by other trades.

Here are my steps.

 · Find Delta

To find delta to trade I use my Cash management strategy. Deltas used in the table are arbitrarily chosen. I simply decided to trade 0.10 delta when the market is closer to all-time high, for example 5% – 10% below all-time high. You can choose your own level. If you want to be more aggressive, you can trade delta 15 or delta 20!

But I look at it this way, if the market is at all-time high, the risk of a decline or crash is higher than after the crash and the market is for example 20% below all-time high.

The table showing deltas I decided to trade is on the Cash management page. If you go there, the spreadsheet inserted in there tells you the current delta I will be trading (see “Traded Delta” line). As of this writing it is Delta 0.10.

 · Example of creating a put spread

  1. Once you know the Delta you will trade, the process is very simple. Go to your trading platform, find the delta you want to trade for the short put strike.
  2. When you find delta 0.10 you want to trade, it will tell you its corresponding short put strike price.
  3. Sell the put option from the Bid column of that strike.
  4. Determine how wide spread you can trade.
  5. Let’s say you can afford to trade 10 dollar wide spread, subtract 10 dollars from your short strike to get your long strike.
  6. Now you know your long strike, go and buy that option in Ask column.

Now you are done. Because pictures are worth thousand words, below is the above described process shown:

Creating put spread

The picture above shows how to create a put spread. You can follow the exact same steps to create call spreads, or if you do both together, you create an Iron Condor.

 · How to choose selling price

Once you build your Iron Condor or spread, you need to choose the selling price. When you create a Condor or spread in your platform, it will offer you a price you most likely will not be able to get. So I typically lower the asking price. For Iron Condors I usually want 6% – 15% of the spread width.

For example, if I trade 10 dollar spread or $1000 wide spread, my selling price will be between $100 – $150 dollars. I start with $150 (1.50) and if it doesn’t execute I lower it a bit, let’s say to $130 (1.30) all the way down to $100 (1.00), etc. This also depends on the delta you are trading and time of expiration. The lower the delta and longer expiration the harder it will be to get the desired price.

If you only trade separate spreads, then I usually go for 5% of the spread width, but not less than $30 dollars (0.30) per trade. The $30 dollars premium is my absolute minimum I am OK to trade for. If I cannot get it, I skip the trade whatsoever and wait for the next week.

 · What to do after you place an order?

After you are done, send the trade to your broker and if it executes don’t forget to place your stop loss order and 50% credit capturing order (OCO order) to protect your trades or collect gains as soon as they occur.

You can place your stop loss order based on the underlying price or spread value. The goal is to get out of the trade quickly before you get trapped in never ending battle with the market.

Hope this helps you to start trading. Let me know if you have any questions or need help. You can also subscribe to my free newsletter and follow my trades I trade in my account.

Good luck!


Posted by Martin September 15, 2015

How to manage and defend SPX Iron Condors

I created a great strategy for myself and I thought that the strategy was completely invincible. And it was running great and I was making money.

I also created a defense strategy in case something would go wrong however, I never expected to use the defense.

Until the recent sell off and market crash.

Then I realized how weak my defense was and how vulnerable I was. I decided not to believe in the crash, not to react and take a small loss. By doing so, I decided to swap a small loss for an even bigger loss I am dealing with now.

I found out, that the biggest enemy during violent markets was myself. Thanks to my emotions I was unable to react or reacted at the wrong time and wrong price.

How many times have you heard or read that a trader must eliminate emotions? Dozen, right? How many times have you heard or read how to do it?

I haven’t heard of any great advice. All was just a gravy beating around the bush and no advice was applicable.

The recent market moves made me to sit down again and think about my defense strategy to make it bullet proof and eliminate emotions, so all trading would happen automatically and without me.

And here are my findings and adjustments to my strategy.

 · 50% credit capturing

This is nothing new. Many experienced traders use this strategy. Tom Sosnoff from Tasty Trade advocates very strongly this strategy of taking profits off the table. Tasty Trade even performed a study which proved that when you take 50% of the original credit, you will be better off. You will hold a trade shorter period of time and you will eliminate a negative gamma effect as the expiration approaches.

Within the same period of 45 days cycle if I capture 50% credit, I can make 2 to 3 trades for about the same credit as the first trade and actually make more money. Look at it this way, if I make a trade #1 and get 1.50 (or $150 dollars) credit, then I can close it in 15 days for 0.75 (or $75 credit) and immediately open a new trade, again for $150 dollars credit, close it again in 15 days for $75 dollars, I still can open another $150 dollar trade for the remaining 15 days in the entire 45 day cycle. If all goes well, I can actually make $225 dollars instead of the original $150. And reduce risk.

Of course the projection above is theoretical and the best case scenario which may never happen. For example Tasty Trade results show average holding period 27 days instead of my 15 days. I could close a trade in 15 days due to a recent drop in volatility. Also the premiums may differ and will not be same in all three trades. But the point has been made. It is safer, you may make more money, and your probability of success is larger.

50% profit capture

In the picture above you can ignore the first column as we do not use that strategy and pay attention to the column 2 and 3. As you can see, we hold shorter period of time, make more money ($1,235 dollars more than in unmanaged trades) while our risk is same.

That’s what we definitely want.

 · Protecting Iron Condors against downside risk

The next step is to protect our trades during sell off, crashes, panic, freak-outs and similar disasters Wall Street time to time suffers. As of this writing, we are heading towards a possible interest rate hike in 7 years. Next Thursday the FED will hold an FOMC meeting and may or may not announce a rate hike or not. Nobody knows. And market may react violently to this event.

It may crash again or it may spike up. If I had a crystal ball I would reposition all my trades accordingly. But I do not have one. I can postpone my new trades after the meeting, but what about the running trades? Close them with a loss? Let them run and risk even bigger loss?

A crash would be nice. I can open many new put spreads collecting fat premiums. But what to do with the existing trades and not to repeat the same mistake of being inactive when I was supposed to act?

There is a strategy to remove the put spread if the price to buy it back doubles the credit received. For example, if we open a new trade and receive 1.50 or $150 premium. I would close the put spread if its price gets to 3.00 or $300. I will limit my loss to $150 dollars only. I can then use calls and roll them lower to collect another credit to offset this loss a bit to make it even smaller.

Now we know, what we want to do. We want to take profits if the trade goes with us and close it quickly if it goes against us.

But how to do it to eliminate emotions?

 · Create closing orders to eliminate emotions

There are three methods known to me how you can protect your downside of a trade – be it just a put spread or the entire Iron Condor.

You can hedge the Condor by adding more long puts to your short puts (for example to each one short put you add another long put, so you will have 1 short and 2 long puts). But with SPX hedging with long puts can be quite expensive and in many cases you may end up with no profit at all.

The second method is to buy VIX calls, but VIX not always acts rationally and in correlation to the hedged index, so I actually see this as adding risk or worsening my risk/reward ratio.

The third method is to take the put portion off the Condor out when the value of puts reach two and a half of the received credit. I like this method better and I am going to use it.

Why puts only and not the entire Condor? The risk to the downside is bigger than to the upside. I have seen the market crashing down violently many times but never to crash to the upside. There is a saying that the market takes stairs up, but elevator down. If we close puts only for a small loss, we still have calls to play with and by rolling them down, we can make the loss even smaller.

Therefore, we want to place an order with our broker to achieve the following strategy:


  1. Right after a new trade executes we want to place an OCO order (One Cancels Other).

  3. The order will consist of two parts – one closing the entire Condor, the second closing put spread only.

  5. If the price of the entire Condor drops down to 50% of the original credit, the first part of the OCO order executes and the second part is canceled.

  7. If the price of puts rises to two and a half of the original credit the second part of the order executes and the first part of the order is canceled.

  9. If only call spread are left, we lower them to collect more credit.


Since picture is worth 1000 words below are screen shots of how to create above described order in Think or Swim application. If you trade with a different broker at a different platform, you may contact your broker and ask them for help how to create such order. If a broker you trade with doesn’t support OCO orders, then you have to watch your trades mentally and act manually. But that’s something I failed to do myself in the past, so I like to place those orders after opening each trade and forget about it. If you are like me, I would change a broker which allows OCO orders.

The pictures below are based on actual trades I had in place. It was against trade #13, trade #14, and trade #15.

1. Cancel the original closing trade

SPX cancel the original trade

Originally, I had a 50% capture order in place. Such trade couldn’t be replaced with an OCO trade, so I had to cancel the old trade order first.

2. Select the trade to be closed for profit or loss

SPX selecting all legs

Then go to the “Monitor” tab, select the trade you want to close for a profit or a loss, highlight all four legs of the Iron Condor (yellow highlight), right click on the selection and from the menu select “Create closing trade > select the top option to buy back the entire Condor”.

3. Modify the closing ticket

SPX ticket modification

The closing order is added to the trade ticket. Change the “Single Order” to the OCO in the lower left drop down menu. Also change the limit debit price to 50% of the original credit. If you originally received $80 premium, change the price to 0.40 limit or $40 debit. In the example above I has a trade which I wanted to close for $10 only as this was a 5 dollar wide spread only. Change TIF (time in force) to GTC (good till canceled).

4. Add put spread to OCO

SPX puts closing only

Go back to the “Monitor” tab and go to the same trade. This time, instead of selecting all four legs, select (highlight) puts only.

5. Create OCO closing trade on puts

SPX puts closing only

Right click on your selection and from the menu select “Create closing order” and select the top line to buy back vertical spread. This is a similar step as in number 2 above.

6. Modify the added closing trade

SPX puts closing only

The new vertical spread closing trade is added to the order ticket as shown on the picture above. Now, change the limit price to the double of the original credit. In the example above I originally collected 0.50 or $50 premium, so my trade above is set to 1.00 or $100 debit (Note, I changed this to 2.5 of the credit, so it should be 1.5 or $150 in my next trades). Change the LIMIT order to STOP order from the drop down menu. Also change the TIF (time in force) to GTC (good till canceled).

Now you can send the order to the broker.

7. Final result

SPX puts closing only

If you did everything as described above, your order should look like the one on the picture. You should have two orders linked together. For example the highlighted Iron Condor is currently trading at 1.474195 (see the price next to the “WORKING” tag. The highlighted order says, that if the price drops down to 0.70 the entire Iron Condor will be closed and the put spread order will be canceled.

If the price of the put spread rises at or above 2.80 the put spreads will be closed and the first order to close the entire Iron Condor will be canceled.

 · Rolling calls

When the puts spread is taken away from the trade at a loss I roll down my calls. If the puts are taken off with break even or gain, I just place a buy order on the calls to buy them back for the desired 50% total gain.

For example, I had a trade where I received $140 credit. My 50% credit capturing strategy would dictate to buy back the entire Iron Condor for $70 dollars. During the volatile market my puts happen to be closed for $35. So I placed a buy to close order for calls for the remaining $35 dollars.

If my puts are taken off for a loss instead, I then lower (roll down) call spread to collect additional credit. I roll calls down with the same expiration and I do it a week prior to expiration (usually on Monday/Tuesday). This allows me to collect additional $40 – $50 dollars to offset the loss.

For example, if I originally collected $140, my stop loss is placed to 2.5 times (updated) of the credit higher, thus to $350 (or 3.50). If the stop loss trade executes, my loss will be $350 – $140 = $210. If I lower my calls down and collect additional $50 dollars, my loss will be $160 or 18% (860 total risk). Instead of losing the entire risked amount of $860 dollars, with this strategy I could limit the risk to $160 only.

What if the SPX price slices thru both put strikes?

This is tricky to deal with, in this case you have to assess whether the market recovers or not. Hard to say. If it does recover, all your adjustments will go against you. If it doesn’t you salvage your trade. So you decide what you want to do.

If that happens and there is no prospect of recovery, All you can do is lower you calls to match your puts. It is called an Iron Clad trade. Let’s say you have the following put spread:

– 1950 puts
+ 1940 puts

You ten roll your calls lower to the following strikes:

+ 1960 calls
– 1950 calls

With this strategy you collect more premium. You may collect 50% or more (if done in time) to offset majority of your loss. I had a trade where I risked $1,500 dollars total. With the original credit and Iron Clad adjustment I could collect additional $980 dollars, the trade recovered a bit and closed with short put ITM only leaving the long puts OTM for partial loss of only $200 dollars. With all the collected credit the trade was a winner ($980 – $200 = $780 profit).

 · Conclusion

With the closing OCO orders as described above I will be able to capture profits if they occur and close potentially losing trades when the losses are still small before they become big. Remember, there is a saying, “if you are not willing to take a small loss now, you will take a mother of all losses later.”

The protective trade above will eliminate my guessing whether the market recovers or not. It will eliminate my emotions, hope, wishful thinking or prayers from trading. With those order I take a small loss compared to the entire risk. I trade 10 dollars wide spreads, thus I risk $1,000 dollars for the entire trade. With the closing order I limit the risk to approx. $100 – $150 dollars per trade. And that is something what we can afford if the market goes against us.

We can take the released cash and sell a new Iron Condor with better strikes and offset the loss. If we lose $500 or even $1,000 in one trade, we basically liquidate a year of profits. So why let our guesswork and hopes whether the market returns back up or not ruin our trades, right?


Posted by Martin February 12, 2015

SPX 2005/2010/2105/2110 Iron Condor in good shape to expire

This morning I opened a new trade – Iron Condor against the S&P 500 (SPX). My strikes are 2005/2010 puts and 2105/2110 calls. I collected $30 credit for this trade. Although there are still two days left until expiration the trade is in good shape to expire worthless.

With Iron Condor you want the underlying to stay between the two spreads. An Iron Condor consists from two spreads – a bear call spread and bull put spread. As with a bear call spread, you want the price of underlying to stay below your short call strike. Same with the bull put spread, you want the underlying to stay above the short put strike.

The above trade is constructed of the following legs:

Long 2110 call option
Short 2105 call option

Sooo, you want the underlying (in this case SPX) to stay here.

Short 2010 put option
Long 2005 put option

So, if the stock (SPX) stays between 2010 put – 2105 call, the trade expires worthless for full profit of the entire collected credit.

Will SPX stay between strikes making this trade a winning one?

Although there are two days left until expiration and the trade is in a good shape, everything can happen. We can see the market rallying like crazy this last two days and smash the call side of the Condor, or we can see a frantic sell off falling thru the put side.

If that happens, then I will have to deal with it and roll the endangered side or even close it for a loss. What are my expectations then?

SPX Iron Condor

As you can see from the chart above, the trade has more risk to the upside. The market must run only 37 points up to endanger the call side. That’s 18.5 point every day. And that is not something too unusual. For tomorrow, the expected move is 19.34 points up or down!

See for yourself:

SPX expected move

So, hope that the market stays flat as it was so far and there will be no violent move to the upside. If any violent moves should occur, let’s be it to the down side. The stock market would have to fall by 58.53 point in two days which is less likely.

If this trade expires then I will realize a nice profit of 6.4%.

Posted by Martin November 28, 2014

Expiration Friday mostly flat

Expiration Friday mostly flat

The week looked good until last Thursday end of the trading. Markets were slightly up which was good for our options positions set to end this Friday.

I had an Iron Condor against SPX set to expire today. It was 2105/2110 calls and 2030/2035 puts. Since the market ended at $2067.56, both legs of the Condor ended out of the money and expired worthless for a full profit.

When I was opening the trade I collected $40 premium per contract. This represented a gain of 8.70% in a week.

My second trade was a bull call spread or debit spread against SPX. I had 2065/2070 call spread and my risk was $290 to make $210. Not bad if the trade could end profitable.

On Thursday the stock market was well above 2070 making this trade a great deal. Even today morning the stock market went up above 2075 a share. But then it reversed and continue falling heavily pushed down by energy stocks.

If the market ended above 2070, both calls would end up in the money and could be exercised against each other for a full $210 (76.36%) profit. Unfortunately, it didn’t happen. The market fell hard and I had to decide what to do with this trade. I had an option to either close the trade for a partial profit, let it expire and offset both calls against each other for partial profit, or roll it.

Since the market continued falling hard and my lower long call option (2065 strike) became also endangered I decided to roll the trade. If I closed it, the profit could be very little or I could be closing with a loss. Rolling the trade increased my risk, but also increased a chance that this trade ends up in the money and I will profit.

So I rolled my debit spread 2065/2070 further away in time (into December 12, 2014 expiration) and hope the market will continue higher by then.

But what if the market won’t continue higher in the next two weeks?

Then I have a plan to close my short call position (2070 strike) and sell 2060 strike converting my debit call spread into a credit call spread. That will turn my bullish trade into a bearish trade and hopefully also expire worthless. We will see next week.

Happy Thanksgiving Trading Day!

Closing bull put spread against SPX for 11.29% a week early

Closing bull put spread against SPX for 11.29% a week early

We had a bull put spread against SPX which today became worthless and we could close it early. The trade was originally remnants of an Iron Condor we put our on October 21, 2014. The trade didn’t go well originally as our call side 1955/1960 call spread was breached when markets continued their incredible recovery from October lows.

We originally put the Iron Condor 1955/1960/1820/1815 that day and collected 0.40 premium per contract (since we sold 2 contracts we collected $80 premium total). Later the put side expired worthless, but the call side ended in the money (ITM).

When adding this trade on, the market was at 1944 and at 61.8% of Fibonacci retracement level where everybody expected the trend pull back. Although we put the Condor way out of the 1 standard deviation, the market relentlessly marched up and broke thru our call side without hesitation.

We had a dilemma whether to roll the call spread further away in time and keep it a call spread or convert to a put spread. There were no signs of the market to stop so we decided to convert the trade into a bull put spread.

On October 23, 2014 we reversed the 1955/1960 call spread into 1960/1955 put spread and collected another $40 premium. The total premium now reached $120 per the entire trade.

Today, the markets are at 2038 level. I am so glad we reversed the trade.

The SPX is now showing some weakness. It may be a temporary consolidation before the next move or bears exhaustion and we may see trend reversal or pull back. I would say the latter would happen as we are terribly overbought. Look at the chart below and the Fibonacci levels. The market moved up without a stop by more than 100% of the previous fall. I do not think this is a typical behavior.

SPX uptrend

I believe this trend is not sustainable. I cannot say how long this would continue (and don’t take me wrong, it may continue for a long time in this crazy manner). It may also crush soon or even this week.

Therefore I deemed it wise to take the sure profits off of the table and buy the put spread back for a few cents.

Last week we placed the order to buy this spread back for 0.05 per contract. Today the order got executed. We paid $15 total and our total premium received ended at $105 or 11.29% gain. Taking this trade off also released our margin now available for next trading (week early) and secured our profits.

Happy trading and have a great week!

Friday Weeklys Expiration SPX, GOOGL, NFLX

Friday Weeklys Expiration SPX, GOOGL, NFLX

Tomorrow is an expiration day for weekly options. We have a few trades which are set to expire tomorrow and most of them will do so.

We had an Iron Condor against SPX, but our call side of the Condor got breached and we decided to move it away in time and converted it into a bull put spread. Now that side is a bullish trade and we have a new full month to deal with it.

The put side of the Condor will expire worthless tomorrow for a full profit of that spread.

We also had a bear call spread against SPX, which may expire worthless if the market stays below 1965 strike price. During this week the market moved rapidly against us and we need to watch this trade carefully tomorrow to see if it expires or we need to adjust it.

We had a bull put spread against GOOGL, which will expire worthless tomorrow.

Our last trade set to expire tomorrow was a bull put spread against NFLX. That trade will also expire worthless for a full profit.

If those trades expire tomorrow, we will realize a full profit of $292.00 (2.04%) in 5 days.

It is nice to have such gain every week!

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Have a great and Happy Friday and good luck trading stocks and options.

Posted by Martin October 09, 2014

The worst market results in 2014 so far

The worst market results in 2014 so far

Wow, the market had the worst time ever. It looks like we are at the top of the trend and reversing. I do not remember seeing such swings of 300 points (Dow Jones) in just three days. At least for a few last years, this behavior didn’t happen.

I watch weekly, daily, and intraday charts to see how the markets do and what would be the next outcome (see below). I am not an expert in it, but learning. And I have learned a few things so far.

The weekly chart held the trend until today. The large sell off pushed the trend into a reversal. When the market closes below 21 EMA, it is a warning sign to me. On Wednesday, FOMC meeting provided a relief to the markets and we saw a huge rally up.

This also provided a great relief to my positions, mainly to my Iron Condors which are supposed to expire tomorrow.

I though, all is good.

Although, the markets were in a downturn as was clear from the daily charts, today’s trading changed the wheel of fate again. I expected the markets sliding down or moving in a normal matter. I haven’t expected a panic sell off which was even larger than the one in Tuesday.

As I felt “all is good” yesterday, I am back nervous today.

Now we have the weekly chart flashing a red light of a trend turning point, and the daily chart in deep downtrend. No sign of strength at all.

Our rigged market in its 5 year history makes shorting this trend difficult. Is this really a trend reversal or just a dip to buy?

My Iron Condors are in danger again today. The lower, put legs are in jeopardy to get ITM. Calls side is okay and the calls will expire worthless for a full profit tomorrow. I need to pay attention to my puts side.

If the market bumps up a bit tomorrow, I will be safe and all my Condors expire worthless. If it, however, continues in a dramatic sell off, I will have a problem.

Today, I could roll down one of the spreads to a lower strike (from 1925 to 1920), but if we see another wild selling tomorrow, even this rollover will not help.

I will have to watch tomorrow’s trading carefully and if the market slides bellow 1920 and there will be no sign of it going back above it, I will have to roll those puts again.

I am hoping for the best. I hope, my puts will not get breached tomorrow and all my spreads expire.

What do you think? Will the market bounce up or continue sliding tomorrow?

Posted by Martin January 06, 2012

New trade – DO

This trade shall open on Monday next week:

Diamond Offshore Drilling Inc (DO)

Iron Condor

BTO 1 DO Jan21 2012 66.25 Call
STO 1 DO Jan21 2012 61.25 Call
STO 1 DO Jan21 2012 52.00 Put
BTO 1 DO Jan21 2012 47.00 Put

Price: limit credit $4.61

Max risk: $39
Max gain: $461 if price is between 52.00 – 61.25 at expiration

01/09/2012 – trade canceled – market maker unable to execute as condor combination, it may work as separate spreads, so I will review later if it makes sense to add as separate spreads.