How to Trade Iron Condors (Theta Options Strategy)

what's going on option investors my name's henry and if you're new i'm continuing a series on options because that's my area of expertise when i was working at goldman sachs and in this video i'm going to explain to you guys a strategy that can profit in all sorts of market environments this is also a fantastic strategy for taking advantage of volatility and profiting off of market movements so while everyone else is panicking or selling you're making money regardless this is a strategy that's perfect for flat markets but also volatile markets that end up hurting many investors but at the end of the week or at the end of the month they actually end up moving almost nowhere and i know you have experienced those type of markets so this strategy is for you i want to show you loyal subscribers how to make money in any market because if you can make money in a tough market like that then the sky is the limit for you so this strategy is selling iron condors the beauty of this strategy is it takes so little capital to have a massive return as you will see later in this video i will do some trading you will see exactly how i make 15 20 and even 25 on an iron condor trade and they're actually not as risky as you may think my students and i are able to make these type of returns on a consistent basis and the reason i love selling iron condors so so much is because you take advantage of the time value of options now options naturally decay and this decay is called theta theta is the money that goes into your pocket like a magnet when you sell options that are approaching their expiration especially when you sell iron condors because as i will explain to you shortly the full process from start to finish iron condors sell both sides of calls and puts of a stock therefore you collect double the premium from both sides i also love that with iron condors you control exactly how much money you make you know exactly what level of risk you come in with and the level of reward up front now that you guys have a basic understanding of why i like iron condors and what they can do for you let me go over some live examples and give you guys a full explanation from a to z on exactly how you can open up an iron condor and you can use this strategy to your advantage the iron condor puts probability option time premium selling and implied volatility on the trader's side the iron condor option strategy is one of the best ways for an option trader to profit from an insignificant move in the price of the underlying asset many traders believe that a significant move upward or downward is needed for them to make a profit but that is simply just not true iron condors make money in sideways and volatile markets so long as the stock doesn't run up a huge amount like say 20 in the time period which may be one or two weeks so 20 would not be likely but even when that happens your winners will far outweigh your losers so you will end up with long-term profits all right now let's jump into my screen and talk about exactly how we can make some money off this alright guys we're gonna be taking a look at my screen right now i'm going to be showing you a real life example of an iron condor on amazon now i had a heavy debate between using amazon apple or a different stock but i chose amazon because it's actually very interesting to play iron condors since amazon is such an expensive stock it's very difficult to really do any put selling on amazon or any covered calls because you would need a whole lot of capital so instead there are other strategies that we can use without requiring so much capital and that is an iron condor so i'm going to walk you through an exact example of what i would do now i do want you guys to understand that it is after hours right now so the market is not open i'm just going to show you a hypothetical example of what i would do if the market was open but don't worry because you can use this type of strategy and i'm going to explain my full logic my thought process and how i think about option trading especially in terms of an iron condor so you can pretty much copy mimic the same thought process the same logic and use it on a different stock so it doesn't have to be amazon it can be any stock that you choose that you think is going to stay somewhat range bound that's not going to explode higher so what that means is very important that you do iron condors on stocks during time periods when they don't have earnings because of course an earnings event could really shoot up a stock either upwards or downwards which would hurt an iron condor position so with that being said let's go over this example with amazon so i'm going to go out a little bit in terms of time right now it is july 7th and it is not going to be appropriate to do july 9th that gives us absolutely no time to work with and since an iron condor does have four positions i do like to go out just a little bit farther so i do like to teach students to do weekly option income strategies however what i'm going to do is with iron condors the returns are so big they can be over 10 20 um even 30 in a single month i'm actually going to go out about one month i would pick august 6th but something that you guys might not know is that options historically actually expire the third friday of every single month so without going through too much time and wasting time here i'm not going to pick august 6 because i already know that amazon is going to have options for august 6th but they're not going to be as high volume they're not going to have as good of a liquidity um for august 6th so i'm going to go for august 20 and by the way just to prove my point you don't see september 9th or september 8th you see september 17th which is the third friday of september same thing for october same thing for november december january this is a very um specific reason that that happens i don't know the history itself but when i was working on wall street an option trader told me that so instead of going for august 6th i know it's not gonna have the best liquidity we are going to click august 20th guys and i just want to say stick with me if it doesn't make complete sense after i pick all four different options to create the iron condor i will have a visual for you guys on the side here in robin hood that's a new feature that they have so i will explain to you a visual feature so do not worry if you don't fully understand first of all okay so the first thing to do when opening up an iron condor is we're going to be having four different legs so what happens is you sell a put option okay so for example we're gonna be selling a put option i'm just gonna go step by step with you guys okay step by step and give you an exact explanation so currently the stock price is at three thousand six hundred and ninety six dollars okay so what i'm going to do is i'm actually going to open up an iron condor for about 500 we're going to see it might be 1 000 i have to do some analysis on what is the best option here but it's probably going to be 500 worth of risk and we're probably going to collect a whole bunch of money it's probably going to be around 25 return but that is my prediction so let me actually do um the actual picking of options so the reason why i'm going down is because well first of all we're opening up a put credit spread and i'm going to making a whole video on put credit spreads very soon basically the first thing we have to do is we have to sell a put and buy a put sell a put and buy put that's how we get started on one leg of the option okay so we're going to pick a put that is far out of the money and the reason why i'm picking a put that as far out of the money is i want as little risk as possible i do not want to get executed on the iron condor i don't want it to go into the red territory and i will show you exactly where the red territory is in a couple minutes so first thing i'm going to do is i'm going to pick let's say the 34 50 strike and that is going to have a 24 delta that is good because that's a fairly low delta so here we go i'm going to sell this put um and there we go so now what i'm going to do and this is very important guys you have to do the opposite now you have to buy a put that is going to be a little lower and the reason why you do that is if you sell a put you have a whole bunch of risk but now if you buy a put no matter what happens to amazon if amazon goes to zero that would totally be fine because now you are kind of covering your butt now you have an exit if this option goes against you this option will go in your favor and it's going to close off the potential downside of three thousand four hundred and fifty dollars with this three thousand four hundred and forty five dollars and the difference guys is just five it's five dollars or in option terms it's 500 because each option is 100 shares so this is a 500 worth of risk okay guys and because this option is closer to the money and this option is farther from the money this option has more premium and this option has less premium so you're selling the option that has more premium and you're buying the option that has less premium guys so look now i completely closed off um the trade now we only have a 500 worth of risk okay you only need 500 here and check that out guys you're actually collecting 113 which may not seem like a lot but your maximum loss is only 387 the reason why it's only 387 it's really 500 but because you're collecting 113 in actual reality your maximum loss is only 387 dollars which makes it even juicier than 500 so um if you were to take 113 divided by 500 i'm just giving you guys the percentage return if you double 113 that's 226 so 22.6 return that is a 22.6 return guys and what is it about six weeks or so so 22.6 return is one leg by the way guys we're about a solid second leg so we're about to collect more premium but just from the put side of things we are collecting 113 dollars and our maximum loss is 387 dollars so so far if you actually do the math 113 divided by 387 we're going to be around a 30 return so this is going to be a very high return trade in six weeks guys very high so um the break even is 34.48 and the reason why it's saying 34.48 is because you guys won't lose any money at expiration until better yet if amazon goes down to 34.48 because well unless it really touches this option we're good we it really doesn't matter as long as amazon stays above 34.50 we're fine and that's why i picked 3450 because it is significantly below 36.96 so 34.50 is significantly below so we're pretty safe here okay and the break even is basically 34.50 it's saying 34.48 because we do collect some premium and because we collect some premium um we actually reduce the break-even point just a little bit from 3500 to you know so that is one side of the equation guys and this is gonna make a lot more sense when i open up the second leg of the iron condor because this chart right here it's going to change it's going to look different and i'm going to explain to you guys basically how it works how this iron condor behaves during the whole process from opening it all the way to expiration so now what we're going to do is i'm going to scroll back up to a higher price than what amazon currently is because this second leg essentially the first leg that we opened was a put credit spread we we sold the put we bought a put now what we're going to do guys is very similar we're going to sell a call and buy a call sell call and buy a call and the first call that we sell that first call is going to be closer to the money because it's going to be a little bit more expensive going to be a little bit more cash in your pocket and then we're going to buy a call that's a little bit farther out of the money again it's going to be 500 and because we're buying a call we're protecting ourselves we're closing off that trade because if you sell a call it's unlimited risk but if you sell a call and then buy a call just a little bit higher for that 500 we close off that risk you don't have unlimited risk anymore now we have 500 worth of risk again however it gets very very interesting because when you do an iron condor guys only one side of the leg can happen only the put side of things can happen or the call side of things can happen think about it amazon can't end up hurting you on both sides at expiration it's either going to be somewhere in between which is very very very likely or it's going to end up below or above therefore even though we are risking another 500 your account will not be um another 500 will not come out of your account basically it's going to be a total trade of 500 even though the put side of things is 500 the call side of things is 500 only one can happen so you're still only risking 500. so although this has 387 max loss it's going to get better guys it's going to get way way better and you guys are going to be astounded when you see what happens so let's go into cell call all right guys so for the second part i'm going to show you how to open up a second leg and that's going to be by selling the call option and then a further out call option however guys i have a little bit of a tragedy here i put in so much work into this video but i realized that with amazon it doesn't have any five dollar spreads anymore for the call option side of things because it now becomes 50 spreads so it's not going to be a perfect example unfortunately amazon is such a large stock in terms of its price that 500 spreads are just too little actually most investors are going to need to risk maybe 1 000 or even 5 000 so this strategy is fantastic for stocks that are between um 100 200 and actually i'm gonna show you guys a trade on facebook real quick so i'm actually going to show you the full iron condor on facebook but this time it's going to be a little bit different but you know i do apologize i'm going to do the same thing i'm just going to show you guys an example so we're going to sell sell it put just like we did before now we're going to buy put just like we did before here the trade is 125 and the risk is 3.75 very very very similar to amazon however this time we're going to have more luck with facebook because facebook is a stock between 20 to 800 range so yes we have options that look good thank you thank you so much because i put in a lot of work to educate you guys and i thought that this video was going to just go to the trash so no we're going to sell you know for example the 425 now we're going to buy the 420. what you guys will notice here is that we actually have collected more premium and now our max loss has gone down and that's because we're selling both sides of our iron condor or essentially the put credit spread and the call credit spread so now we have collected an extra 13 here for facebook on the 425 430 425 430 is way way way far away from the current price and actually we can probably dial in the risk more and have a higher return if we go closer to 400 so let's say we sell the 400 instead and we buy the 405 and again we're closing off our risk from 400 to 405 we only have 500 worth of risk take a look at that guys we now collect a hundred and sixty four dollars and we're only risking 336 so basically we have a 50 profit because half of 336 is right around the 160 168. it's right around 168 or 163 so we have an exactly 50 return guys up until august 20 so in six weeks you can make 50 return as long as facebook stays within this range right here so basically if it stays between the range of our break even of 325 on the downside again we sold 325 so at 325 we start to lose money because um one side of the leg starts to go into the red this is what i mean by the red you can lose up to 336 dollars on the call side of things again our break even is around 401 dollars and the reason for that is because well you know we start losing money around 400 but because we collected 164 our real break even for this iron condor would be right around 401.64 so as long as facebook stays between this range right now it's 350 as long as it stays between you know three 325ish to 401 you have a profit on your hands and that is very likely to happen as long as facebook is trading within this within this range right here in the green you're going to be in the green and most of the time this is a very successful trade because both times when this option would start to lose money is when facebook would have a very fast and adverse move to the downside or a very fast momentum move to the upside so as long as we're in this range this is exactly where you want to be this is when your iron condor will be profitable very important final details about iron condors before you try them the logic behind employing the iron condor option strategy is to capitalize on theta decay while expressing a neutral outlook on the underlying stock you don't have to be completely neutral on the stock however you want to make sure that the stock doesn't have any big earnings events or doesn't have any big events coming up so the stock doesn't run up 20 on you or it doesn't crash 20 on you theta decay for iron condors is highly favorable typically one side of the iron condor will depreciate much faster than the other side due to changes in the price of the underlying asset when one side depreciates to the point where it's worth less than five dollars to buy back i will often buy back one side and i will open up a similar position so i can collect more premium commissions and fees are the biggest thing to be aware of when trading iron condors at a minimum you will be trading four option contracts therefore if you trade in a commission platform make sure you're collecting at least 20 or 25 dollars per iron condor that way the fees won't really add up to as much of a percentage of your total premium collected as they would if you were to sell maybe ten dollars worth iron condors are one of my top strategies that i deploy for high returns and i teach my students to grow small accounts using iron condors if you want to learn how to produce weekly income and create cash flow consistently and safely without taking a lot of risk i have some free training in the link below definitely check it out if you want help and guidance from me personally my weekly option income academy goes over all this type of stuff including option calls pics and plays in real time breaking down my thought process during market hours and you will also get very hands-on access with me as well as my team of six and seven figure coaches click the application link below to see if you qualify and as always guys be aggressive in learning but be one never safe me

Channel: Invest with Henry

Views: 20,298

Rating: 4.9346781 out of 5

Keywords: options, trading, iron condor, iron condor option, option trading, calls, puts, trading options, how to trade options, invest with henry, implied volatility, stock options, iron condors, options trading

Id: 1WPMpVhewds

Length: 18min 59sec (1139 seconds)

Published: Fri Jul 09 2021