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 I would just let them expire worthless and have that premium remain 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 that was a long time ago – and since then – things have changed.
Now, after experiencing too many nights where I couldn’t sleep, a number of very ‘close calls’, more than my fair share of stinging ulcers and even a near hernia, I’ve made a change to the way I trade iron condors.
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.
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).
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 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 after trading these every month for years now – I don’t agree.
Okay, maybe it’s true that doing this will cause me to make less profit than if I were to just hold the trade through expiration and let the options expire worthless.
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.
I have also given myself the opportunity to generate ADDED gains from my overall position – without adding any extra risk.
Let me show you what I am talking about here:
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.
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.
4 days after I put the trade on, I see that I can buy back my CALL side of the Iron Condor for.10.
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).
However, if I decide to just take it off for ten cents – I will have LOCKED IN the lions share of the available profit in that call side credit – guaranteeing that 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.
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.
And even if I don’t resell any spreads – but just buy them back at.10 to close out the entire trade – it reduces my risk, frees up my capital sooner, increases my ROI over number of days, and gets me out of the trade MUCH more quickly than if I were to try and hold on all the way until expiration.
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.
Getting this ‘trading break’ – this freedom to go out and do things without always feeling the need to check quotes on my phone – not having to worry about always being ‘on game’ and strategizing in my head about what adjustments I might have to make – just being able to sleep in mornings for as long as I please without stressing out about whether the market is going to make an opening gap…
That’s priceless.
For me it’s ABSOLUTELY worth the measly twenty cents or so I’ll be leaving on the table to get out of the trade early – and STILL make a ridiculous monthly profit.
Ted Nino is an option selling junkie – particularly addicted to trading the Iron Condor, the Credit Spread, Double Calendars, Gamma Scalping, and the Butterfly Spread. Go see his Iron Condor Training Site to see more about his ‘Super Easy Method to play the Iron Condor for dependable monthly income.