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

Note to readers:

When reading this blog, you will notice that I provide a great more detail than most people care to read. Options are not a get-rich-quick investment tool and it’s important to understand what you are doing and how a specific strategy can be used to make money. It’s also vital to understand the risks involved with any investment, and to know what to do if things don’t work out as expected.

Those details are for your benefit. I appreciate the fact that rookies are anxious to begin trading and making money,but in my experience (>30 years) as a professional options trader, I’ve seen people put their money on the line by trading before they were ready. Some were lucky, but most were not. That’s simply the wrong way to go. If you have a bit of patience and take the time to understand what you are trying to accomplish with a given strategy before you start trading, you will make far more money over the years.

I believe in educating investors on how options work, how to use options, and how to manage risk. Managing risk is the key skill required to give you the best chance of long-term success. My goal is to help you learn both risk management and how to choose (and use) options strategies that are appropriate for you and your tolerance for risk. The objective is to help you meet your investment goals. That’s the approach taken when I wrote my books, and that’s the style of this blog.

When adopting an iron condor strategy, there are several decisions to make:

  • Decide if now is a good time to adopt the iron condor strategy.

Note: when the markets are very volatile and moving higher and/or lower in big chunks, iron condors are more risky.

But you don’t have to sit on the sidelines. Other option strategies are available if you decide iron condors are not appropriate.

  • Choose the underlying stock or index
  • Choose an expiration month
  • Choose strike prices
  • Decide how much cash you want to collect when opening the position. This will be your maximum profit for the trade

Is this enough profit potential to compensate you for the risk you are taking?

NOTE: Don’t be frightened by my frequent use of the word ‘risk.’ All investments have some degree of risk. The purpose of posing the question is to be certain that you can earn enough money for a given trade to justify the risk. Would you make a trade in which your maximum profit was $20 and the maximum loss was $5,000? That wouldn’t make much sense, no matter the odds of winning

To Be Continued…

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