When I first began trading the Iron Condor , my game plan was to leave the trade on all the way to the bitter end.
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.
Back then I believed this was the best way to play the trade, because not only would I not have to pay my broker to take the trades off – I would also be able to keep the entire amount.
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.
Here’s what I do now: Right after I put on my iron condor, I tell my options broker (through the use of automatic contingent orders) to buy back both the put credit spread and the call credit as soon as I make the bulk of available profit in each spread.
As an example – if I received a credit of a dollar (let’s say about fifty cents each side) when I put an iron condor trade on – I would immediately ask my broker to set up an order to buy the vertical spreads on each side back when the price on them has been reduced to about ten cents or so.
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.
Personally I don’t think so.
Sure I might make less than if I tried to milk them all the way through to the very end.
But as you will see – that’s not necessarily correct.
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.
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:
Option premiums can decay quickly. Really quickly. As a matter of fact, I’ve seen them almost drain completely over the course of just a few days.
Going back to our example – let’s pretend that I put an iron condor on about 40 days until expiration. For the trade I receive around a 1.00 credit. Fifty cents for each credit spread on either end of the position.
The day after I place the trade, our stock – XYZ – all of a sudden turns south – and proceeds to move down over the next 3 or 4 days.
Four days after I initiated the trade, I discover that I can now purchase the call credit spread of the position for just ten cents.
If I do nothing, I am choosing to risk that CALL spread margin for the next 36 DAYS for a measly $10.00 of remaining profit (per spread).
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.
And – for icing on the cake – if it DOES head back up we have the opportunity to ‘resell’ those identical credit spreads – the same ones we just bought back for ten cents – for potentially the same amount of credit we originally sold them for – or perhaps even more. Doing this it’s possible to wind up with an even greater ROI then were were hoping for when we first initialized the iron condor trade.
But of course I don’t have to resell any spreads. Let’s just say I repurchase them at ten cent to take off 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.
This allows me to totally get away from trading for a few days – or weeks (or however long until the next expiration cycle starts) – and enjoy the other things in my life without having to always be wondering what’s happening to my trade – or the market – or worrying about the next big 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…
Or – at the very least, it’s DEFINITELY worth the.20 or so it costs me to exit early out of the trade…for what is STILL a remarkable monthly profit.
Ted ‘Spread’ Nino is an option selling wild man – exceptionally enthusiastic about trading the iron condor . Go to his iron condor Site to find out more about his easy paint by the numbers system for riding this strategy for dependable returns.