Iron Condor Options Trading Strategy - Best Explanation

what you are looking at is an option chain of Netflix and these options have 37 days until they expire here are the out-of-the-money calls and puts and we know that these options remain out of the money they will gradually go to zero and I'll just show you an example here let's just reference the 90 strike put it's trading at 335 by 350 now let's fast-forward to the options that expire in just two days you can see that they are all much cheaper and if you look at the 90 strike put that expires in two days it's only at 11 cents by 15 cents whereas the 90 strike put with 37 days to expiration is at 335 by 350 so each and every day time premium is sucked out of these options now if you buy options you already know that you are constantly fighting this time decay instead of fighting it we prefer to let it work for us and make us money let me show you one of our favorite option strategies that you can start utilizing immediately to put time decay in your favour even with a small account we can achieve this by trading an iron condor so what exactly is an iron condor don't let the name intimidate you it's actually very simple the first part of an iron condor consists of selling to open and out of the money put and simultaneously selling to open and out of the money call we would do this in hopes that between now and expiration the stock will stay in between the strikes and the options we sold will go to 0 if this is the case we will keep the entire price we sold these options for but since short naked options can have a lot of risk and can require a lot of capital we are also going to buy a further out of the money put and call for protection these 4 option trades are collectively called an iron condor but we're selling 2 options and buying 2 options so how does this work well let me show you stock XYZ is trading at $75 per share let's sell the 85 call for $2 and we're also going to sell the 65-foot for $2 and our idea is that the stock will stay in between these strikes and options we sold will expire worthless but again since naked options theoretically have unlimited risk we are going to buy some protection so we're also going to buy the 90 call for a dollar and the 60 put for a dollar and I know that keeping track with all of these individual option trades seems like a lot to keep up with but we can actually trade an iron condor with one order and view it as one trade and I'm going to show you how to do that and the end of the video but for now just stick with me let's say we initiated this trade with 30 days to expiration and as time passes and we near expiration let's say the stock doesn't move much and just kind of bounces around and trade sideways so as we near expiration these options remain out of the money and the price of each option gradually goes to zero if all of these options are worthless what does that mean for our trade well we make $200 on the eighty-five call and also on the 65 put because we are short those options and they are now at zero so we collected a credit and since they have no value we get to keep that credit okay but we also lost some money on the options we bought as protection we lost $100 on the 90 strike call and also on the 60 strike put because we bought these options and they now have no value adding all of these numbers up totals to a net profit of $200 because we made $400 on the short options and lost 200 on the long options so by trading an iron Condor we are simply betting that the stock will stay within a certain range and we treat it as one trade we lost money on the long haul input but that's exactly what we want to happen because we simply bought these options as protection it's kind of like we pay for car insurance but we don't actually want to crash our car so now that you know how we make money on the trade let me show you how we can lose money and also how much we can lose let's say the stock goes crazy and although it was completely unexpected it goes well outside of our range we wanted it to stay in and ends up at 96 dollars per share well we already know that both the long put and the short put are out of the money and are worthless so we made $200 on the short put and lost 100 the long put so this totals to a net profit of 100 dollars on the puts but what about the calls the 85 call is 11 points in the money so it's worth 11 and the 90 call is 6 points in the money so it's worth 6 we are short the 85 call at 2 and it's at 11 so this means we lost 9 points or $900 on that leg of the trade so that sucks but fortunately we bought the 90 call for protection we paid $1 for the 90 call and it's now trading at 6 so we made $500 on that leg of the trade this $500 and the $100 we made on the put side cancels out much of the $900 we lost on the short call adding up all of these numbers totals to a net loss of $300 on the entire trade now this is the cool part we lost 300 on the entire trade but that's the maximum amount we can lose on this trade no matter where the stock is it doesn't matter if the stock goes to 104 25 0 infinity whatever the case may be we can't lose more than three hundred dollars on this trade and the way we end up with this max loss is if the stock is outside of our long option strikes at the expiration date now I keep mentioning how we treat this trade as one trade when we trade an iron Condor we are usually just monitoring the price of the iron Condor as a whole check out this iron Condor we just opened in Facebook you can see that when we trade an iron Condor where the platform automatically calculates everything for us we are able to see the individual legs of the trade but we are also able to see the total net prices in this example you can see we sold this iron Condor at $1 12 it's currently trading at 82 cents and we have a profit of just $30 on the trade when trading an iron Condor our maximum potential profit is simply the price we sold the iron Condor for in this example we sold the iron Condor for a net price of 2 so our maximum profit is $200 our maximum loss is simply the width between our short and long strikes minus our net entry price so in this case our strikes are 5 points wide on both the call and put side and if we subtract our entry price from that we get a max loss of three points or $300 this $300 is also our capital requirement for the trade this is the reason the iron Condor is so powerful because we can sell option premium with very little risk and also without the large capital requirement now our breakeven prices that we need the stock to stay between is just our entry price plus the short call strike and on the downside it's our short put strike minus our entry price and at the expiration date if the stock stays within this range then we make money and if the stock is outside of this range then we lose money and I know this seems like a lot to keep up with but check this out before entering the trade the thinkorswim platform will calculate all of this information for you on this pop-up box you can see your max profit on the trade is $200 your max loss is $300 and the range you need the stock to stay between for you to at least break even is 63 and 87 so before you trade an iron Condor just be sure to check this pop-up box before sending the order and also if you are a member of our website we will help you with your first iron Condor trades to make sure you don't click any wrong buttons or mess anything up now let me show you how to pull up in order to trade an iron Condor let's say that we want to collect time decay and Tesla options but we aren't necessarily bullish or bearish on the stock to do this we're going to trade an iron Condor and the strikes we choose are going to give us a neutral stance on the stock first before we build the iron Condor we need to add the probability in the money column to our option chain if you are using a platform that doesn't have this feature then you can use Delta instead for this example we're going to trade an iron Condor with 30 days to expiration you are free to choose whatever expiration you want to trade in but we prefer to initiate our trades with 30 to 60 days to expiration now for starters let's find a call with a probability in the money of 13% that brings us to the 260 call we're going to right click on the bid click sell iron Condor in this case it defaulted to 5 points which is what we're going to stick with in this example so you see we're selling the 260 call and buying the 265 call for protection now we just have to select our put strikes since we want to place a trade that is directionally neutral we will find a put that has the same probability in the money as our call did scrolling up we can find the put that has a probability and the money of around 13 and that brings us to the strike of 187 50 so we're just going to adjust the short put strike on our order to 187 50 and then adjust the long put to 5 points further out of the money to 180 to 50 now if we click confirm and send we can see our max profit is 101 dollars our max loss is $399 and the range we need Tesla to stay between is 186 49 and 260 101 this gives us a nice wide range for us to make a profit so the trade has a very high probability of success but it has a poor risk to reward because our max profit is only 101 and our max loss is 399 what we could do is just simply move in our strikes a bit this will lower our probability of success because it will narrow the range we need tesla to stay within but in exchange for this we will collect a bigger credit for the trade which improves our risk to reward so let's move the strikes in ten points on both sides you can see our credit is now 170 rather than just 101 now let's see what this iron Condor will be trading at in the future if the stock price and implied volatility doesn't move to do this we can just look at the same trade but with only two days to expiration rather than 30 so we're just going to change the expiration of our order to the July weekly options that expire in two days you can see the net price of the iron Condor is just at one cent we could do one of two things we could close this position at one cent for a profit or we could try and let the options expire worthless as long as the stock stays still and the options remain out of the money the choice is yours and this is just one way to trade the iron Condor there are many variations of the iron Condor that you can about we are able to adjust our strike selection and even vary our expirations to achieve different things if you want to learn about these variations and also see which iron condors we are trading head over to our website if you like this video and want more like it on different trading concepts be sure to show us your support by clicking the like and subscribe button below also check out our website and join our email list for 3 exclusive free videos we even make a live iron Condor trade in the third video so I will see you there you

Channel: Sky View Trading

Views: 932,846

Rating: 4.9539828 out of 5

Keywords: Sky View Trading, SkyView, Adam Thomas, Iron Condor, Live Trade, profits, spreads, option time decay, option trading basics, Iron Condor Option Strategy, option strategies, options explanation, what are options, iron condor tutorial, iron condor explained

Id: Eg8IyTPoaQY

Length: 11min 45sec (705 seconds)

Published: Sun Jul 31 2016