Recommended Option Strategies: Decisions to Make Before Trading an Iron Condor. Part II

Timing

Some investors believe they
have a ‘feel’ for the market, or individual stocks and ‘know’ when that stock
is going to make a large move. If you
are one of them, then don’t open an iron condor position unless you believe the
stock is NOT going to make such a move before the options expire. As an alternative you can have an iron condor
position with a bullish or bearish bias. You do that by choosing appropriate strike prices for the options
spreads you choose.

Many investors (that includes
me) cannot predict the future and are willing to own positions that profit when
the market holds steady, trades within a range that’s not too wide, or if the
market does move significantly in one direction, does so at a slow and steady
pace.

 

Underlying

It’s generally safer to trade
iron condors on indexes because you never have to be concerned with a single
stock issuing unexpected news that results in a gap of 20% or more. True that can happen with an index if there
is world-shattering news – but it’s a much less likely event.

Most indexes in the U.S. are
European style vs. American style. That
means they cannot be exercised before expiration – and that’s to your
advantage. We’ll discuss the differences
between these option ‘styles’ another day.

 

Expiration Month

Most iron condor traders
prefer to have positions that expire in the front month (options with the least
time remaining before they expire). These options have the most rapid time decay, and when you are a seller
of option premium (when you collect cash for your positions as opposed to
paying cash), the passage of time is your ally and rapid time decay is a
positive attribute for your position.

However, there are negative
factors associated with front-month options:

  • With less time remaining,
    iron condor positions are worth less than if there were more time remaining. here were more time remaining,mma chanes
    gamma.ma, it'iiton. which money is lost more time remaining, and you collect less ca
    Thus, you collect
    less cash when you open the position.
  • If the index
    undergoes a substantial price change, the rate at which money is lost is
    significantly greater when you have a front-month option position. It’s too early in your education to discuss
    why this is true in detail, but it’s because they gain or lose value more
    rapidly than options with longer lifetimes. This is effect of gamma, one of the ‘Greeks’ used to quantify risk when
    trading options. Because there are so
    many topics to discuss, I will not be getting to the Greeks for quite awhile.
  • When you sell
    options that expire in the 2nd or 3rd month, you collect
    higher cash premiums (good), have positions that lose less when something bad
    happens (good), but there is more time for something bad to happen (bad). When you have iron condor positions, you
    don’t want to see something bad (and that’s a big market move). The more time remaining before the options expire,
    the greater the chance that something bad happens. That’s why traders who sell* iron condors are willing to pay you a higher
    price for them.

*Optionspeak (the language of options) comes into play
here. It may not appear to be
reasonable, but when you sell the call spread and sell the put spread, you are
BUYING the iron condor.

Summary: Here’s a statement I am going to make
repeatedly when discussing options trading: There is no ‘right’ choice. As an
investor, you want to hold positions that are comfortable for you. The best way to discover your comfort zone is to trade. But, please use a practice account and do not
use real money until you truly understand how iron condors (or any other
strategy) work. Some traders always trade
the near-term (front-month) options, while others (myself included) prefer
options that expire in two, three, or even four months.

Continued

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