Chicken Iron Condor Strategy Tutorial | Options Trading Concepts

everyone and welcome back to another segment of Mike and his whiteboard my name is Mike this is my whiteboard and today we're going to discuss a variation of the iron Condor which is called the chicken iron Condor and this was actually created by a viewer I believe where they were a little afraid of losing a max loss so what they did was bringing their strikes a little closer and collect a larger credit which inherently it reduces the max loss and we back tested it and we found that it's actually a very effective strategy so let's break it down and we'll compare it to the regular iron Condor so when we're looking at a regular iron Condor we're essentially selling a put spread along with selling a call spread so the put spread is out of the money that's going to be below the stock price for puts and the call spread is out of the money as well that's going to be above the stock price for calls again with call contracts it gives the owner the right to buy 100 shares of stock at a certain strike price so if I sell the right for someone else to sell it above the stock price and then I buy the right to define my risk that's going to be considered out of the money because the investor can purchase the stock at a lower price at 100 as you see here and with put contracts that gives us the owner the right to sell 100 shares of stock so out of the money is going to be below the stock price and that's because they're not going to sell it below 100 when they can just do it in the market for a better price so a regular iron Condor is essentially a short put spread and a short call spread which is going to be traded for a credit so we're going to trade this we're going to collect a credit initially and we're going to have to buy back the spread at expiration or before expiration for a lower month and we sold it forward to be profitable now with a normal iron Condor we usually look to collect around 1/3 the width of the strikes so if we had a $3 wide call spread here and a $3 wide put spread I would be looking to collect around $1 and we always say one-third the width for a normal iron Condor simply because we know that that's going to give us essentially about a 70% probability of profit or 70% of being correct on this trade so we're comfortable with that because it's above 50% and collecting 1/3 is pretty much a good amount when we're looking for total credit so if we have anything like a dollar on a three-point wide or close to a dollar 64 five-point widespread anything that's about 1/3 the width is what we're going to be looking for with a regular iron Condor and just like any other iron Condor the max profits going to be realized if the stock price is between these short strikes at expiration now if we switch this over to a chicken iron Condor what we're going to do is bring in these strikes a little bit and we're going to see that our profit is going to actually be higher and that's because now we're collecting 1/2 the width of the strike so with chicken iron condors we usually look between 40 to 50% maximum for collection on the width of the spread we don't want to go anywhere above 50% and that's because if I know that the the width the spread is 5 points wide and I'm collecting over two dollars and 50 cents that means that my probability of profit is probably going to be below 50% and that's not what we want to do when we're selling premium in a strategy like this we always want to keep it above 50% so we'll usually look to collect about two dollars and 40 cents to two dollars and 50 cents for a five-point wide iron Condor so with a chicken iron Condor as you can see we've brought the strikes in and that's going to increase our total credit so let's say we had a five point wide regular iron Condor if we were collecting 1/3 the width of the strikes we could probably go farther out just like you see from the stock price and we could collect maybe a dollar 60 a dollar 65 and that would give us that same probability of profit of about 70% however when I look at a chicken iron Condor if I have the same five-point wide spread so that would mean I have a five point wide call spread and a five point wide put spread and I can collect two dollars and 50 cents that's a much higher credit and it's going to give me a bigger profitability if I'm correct now there's a few things that we want to take into account when we're comparing chicken iron condors to regular iron so let's go to the next slide and we'll break it down a little bit further so when we're talking about regular versus chicken iron condors like we talked about the chicken and condor is going to be narrower strikes but it's going to give us a higher profitability and the regular iron Condor is going to be further away strikes but it's probably going to give us a bigger probability of profit so there's always going to be that trade-off there and as we can see we've got the higher dollar amount for the chicken iron condor and the lower dollar amount for the normal just because of the fact that the farther we get away from the strikes the lower the premium will be in those short options that we're selling as we know the highest extrinsic value is in the ad the mone options so the further we get away from that the lower the overall credits going to be however we're creating a much wider zone to be correct and that's going to give us a higher probability of profit now with a chicken iron condor like we were talking about the probability of profit is going to be lower than a normal iron condor and that's because like we were talking about with the break-even prices and the strike selection when we narrow our strikes we're giving ourselves a smaller margin to be correct however we're getting paid more to be correct if we are essentially right so the probability of profit on a chicken iron condor is usually going to be lower maybe 50 to 55 percent when we compare it to a normal iron condor which will be closer to 65 70 percent if we set it up correctly with that one-third with strike selection and collecting about one-third the widths of the strikes so with the chicken versus the normal our max loss is going to be smaller on the chicken compared to the normal iron Condor and that's because the more we collect in terms of the width of the strikes the lower our max profit is going to be so again with the five dollar point wide spread if I can collect two dollars and 50 cents on that and just collect half the width so that's my maximum amount I'm going to go to I know that if the stock price blows up to the upside or blows down to the downside I'm going to have to either buy back that call spread to the upside for $5 at expiration which is going to be its intrinsic value if both of those options are in the money now if I collect a 2.57 if I have to buy that back for five dollars I know I can use that original credit to offset my max loss so my max loss is only going to be about two dollars and fifty cents just subtracting that credit from the width of the spread same thing with the put side we can take that total credit if the stock price goes well below our put strikes I'll have to buy back those put strikes for five dollars which is intrinsic value at expiration but I can use that two dollar and fifty cent credit to offset that Max loss now when we compare that to a normal iron Condor we do have much wider range so the probability of this happening is happening is probably going to be lower but if the stock price does make a two or three standard deviation move to the upside and I have to buy back my call side I'm going to have to do the same thing so if we have a five-point wide call spread on the normal iron Condor but I only collect a dollar 50 I'll have to buy that back for five points but I can only use that dollar fifty to offset my max loss a little bit so my max loss would be three hundred and fifty dollars as opposed to the two hundred and fifty dollar max loss on the chiken iron Condor and same thing with the put side on the downside so for that reason the chicken iron Condor I think is great for earning so that's my favorite earning strategy I actually just placed one on the dofollow page I did it in Netflix and that was successful I tried to get into Amazon and Google for the after market today but I wasn't able to get feld so that'll happen sometimes but I like it as an earning strategy because two things number one if I'm correct and I can capture the expected move with earnings then I'm going to get paid more than if I were to sell a normal iron Condor and also when I'm dealing with higher price underlyings like Amazon and Google if they do move outside of the expected range personally I've seen it move pretty far out of the expected range so for me I'd rather cap my max loss and collect a larger credit if I'm wrong or be paid more if I'm right so for that reason I also like to use normal iron condors for non earnings trades so if I'm just placing a standard iron Condor and I'm not looking at earnings announcements I would like to have my wide breakeven points I want my strikes pretty far out and that's because I'm less concerned with the amount of credit I'm taking in and more concerned with my high probability of profit because at the end of the day like we talked about in a previous Michener whiteboard episode for a number of occurrences if I've got a lot of high probability trades like 75 to 80% and I've got a ton of occurrences then I can start to realize those occurrence numbers and start to see those expected probabilities that I'm going to be expecting from placing those strategies so for me I like the chicken iron Condor for earnings and the regular iron Condor for non earnings now that's not to say I won't use a regular iron Condor for earnings announcements but I'll usually lean toward the chicken iron Condor set so we've compared the regular iron Condor and the chicken now let's break away and do some takeaways for the chicken iron Condor so the first takeaway is that it's similar to an iron Condor but closer to the stock price so it is much nit more narrow in terms of strike selection but we do collect a larger premium so it offsets that lower probability of profit also the larger credit we receive the lower max loss there will be and that's because if the stock price blows all the way to the upside or to the downside if I have to purchase that spread back for the full intrinsic value the more credit I originally received the more I'll be able to offset that max loss and also the larger credit is going to equal generally a lower pop so unlike the straddle or strangle which is undefined we're at risk where I can pretty much collect a larger credit with a straddle and have those wide breakevens that are very similar to a strangle I'm going to have to buy the wings on chicken iron Condor or an iron Condor so usually when I'm collecting a larger credit it's going to equate to a lower pop when I'm talking about chicken iron condors and regular iron condors and last but not least I love the chicken iron Condor for earning strategies because of the fact that if the stock does explode outside of the expected move I've collected a larger amount to offset my max loss and if it stays within the expected move I'm going to get paid more than if I were to a place a regular iron Condor so this has been chicken iron condors hopefully you've enjoyed it we're done for this week but next week we're going to talk about why we sell premium as opposed to buy it so it's going to be a great segment that's going to be on Tuesday at 3:15 any questions or feedback at all shoot me an email at support at comm support at tastytrade comm or you can tweet us at tow trading at tastytrade or at doe trader mike and until next week have a great weekend thanks for watching if you like this video give it a thumbs up click below to watch more videos subscribe to our Channel or go to tastytrade.com

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Views: 97,406

Rating: 4.879581 out of 5

Keywords: iron condor, options trading, stock market, how to trade options, iron condor option strategy, iron condor strategy, options, investing, option strategies, options trading for beginners, learn to trade, stock trading, options strategies, finance trading tutorial, iron condors, trader, iron condor adjustments, options trading strategies, option strategy, trading options successfully, options trading concepts, chicken iron condor, tastytrade

Id: 2M3oGJsHQtg

Length: 11min 43sec (703 seconds)

Published: Thu Feb 04 2016