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Iron Condors: Establishing an Exit Point or Profit Target

hai mark


i just want to know about iron condor; which is the best to you??
for example,if the margin i use is $1,000 and
i trade an iron condor.


1. i collect $250-$300 credit;
so it will be 25%-30% profit from margin…
i will close my position when it reach 80% profit…
around $200

2.i will have the 40-50% range profit. it should be very tight, and i will close when reach 50% of my profit…around $200

3. i will have 10-15% profit from margin. it should be small return on margin.  i will close when 80% profit…around $80

-with these three strategies, which one is better?

-between number 1 and 2,  in your opinion, which will get to the closing price sooner?

-do you have another idea…

thanx mark…

soemardi

***

Hai Soem,

First, some comments:

You cannot group all iron condors together.  The premium you receive when trading the iron condor depends on the implied volatility of the options.  It depends on the strike prices. 

For example, you are asking about iron condors with strike prices that are 10 points apart ($1,000 margin). A $30 stock would be unsuitable.

Trading 10-point GOOG iron condors is not the same as trading 10-point iron condors on IBM. 

Iron condors are not created equal and it's a good idea to establish a set of  'rules' – but the rules apply to a specific underlying asset, or at least underlying assets that are similar in price and implied volatility.  If you choose stocks that are very different, you should have a different set of rules.

Now – your questions:

'Best' is impossible to determine.  Much depends on your personal comfort zone and which position gives you the most confidence that it will provide the profits you seek.

From my perspective, your biggest problem is that you seem to be ignoring the possibility of losing money. I want to tell you that some trades will lose money.  I guarantee it.  Thus, risk cannot be ignored.  I believe it's important to own a position that you can live with – and to be certain that any losses are not too large for your pocket book or your ability to take that loss.  If you lose too much, it can be devastating and kill all chances for trading successfully.  Please be certain you allow for the chance that positions will lose money.

What will you do if the position is in trouble?  It's important to know when you will close the trade, take the loss, and (maybe) find a new position to trade.  You have rules for taking profits.  You must also have rules for not allowing losses to grow too large.

I know every trader wants to concentrate on profits, but it's the losses that are more important.  Your job is to prevent large losses.

That's why you must make your own decision on how to proceed – it's a decision I cannot make for you.  You must decide how much risk to take for every trade and recognize that you will not always achieve your profit target.

1) Number one is an excellent strategy.  It is essentially the method I use.  80% of the profit potential is a very good goal, especially when you collect a $300 premium.  The major question is: at what point do you give up, if the trade is not working?

It is also not as simple as stating the iron condor will collect a '$300 credit.'  Which expiration month will you choose?  It makes a very big difference because gamma is much higher (and the risk of a quick loss is much greater) with front-month options. A $300 credit with front month options translates into selling options that are much closer to the money than when you trade 2nd or 3rd month options. There is nothing wrong with doing that, but you should choose which iron condor is more suitable for you and your comfort zone.  I cannot help with that choice.

2) Also a good choice.  But this type of trade is better-suited for more experienced traders.  Why?  Because the options you sell are going to be closer to the money (higher premium collected means higher delta) and it's very likely that the position will have to be adjusted at least once. 

You must learn how to adjust positions, but you may prefer to begin trading iron condors when the probability of making an adjustment is low, rather than high.

One problem with seeking a profit target of 50% of the premium collected is that you may find it temping to wait 'just a little longer' before closing the trade, seeking a larger profit.

3) I don't like opening 10-point iron condors for $1 credit in index options or higher priced stocks such as GOOG or even AAPL.  It's my personal preference to avoid this trade.  I want you to know that many iron condor traders do trade these spreads, collecting $1 – or less.  It's a very popular strategy.

These trades are more difficult to close than you realize.   There are few sellers when these spreads get down to ten cents each.

This trade comes with a higher probability of earning a profit, but because the premium is small, any losses (and there will be losses) will be large, when compared with the possible profit.

If you are talking about an individual stock with strike prices 5-points apart, then collecting $1 for an iron condor is more acceptable to me.

Your last question:  #2 will lose half it's value more rapidly than #1 will lose 80% of its value, and you will be able to exit position #2 more quickly.  But only if you survive.  These spreads are not far out of the money when you sell them.

Another idea?  There are as many ideas as there are traders.  Your examples represent good methods for trading iron condors.  Just remember these are not rules cast in stone.  If you decide to take 78% instead of waiting for 80%, there is nothing wrong with that.

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