By Josip Causic, Online Trading Academy Options Instructor
In one of my previous newsletters, I utilized the Quarterly options for my Iron Condor trade, and in this one I will explain how the trade played out. Besides just providing a trade explanation in hindsight, I will also present multiple exits that were accessible to me.
An Iron Condor might appear to many novice option traders as a very complicated trade, for it has multiple legs, yet I believe that there is a fine line between something being complicated and something being complex. Often, complicated things seem to be impenetrable for the average person and are, as a result, frequently left completely alone. On the other hand, options are different, in my humble opinion. Options by their very nature are indeed somewhat complex, yet at the same time they are mathematically comprehendible. The complexity of the Iron Condor could be demystified by simplifying the basic concepts, so without any hesitation I will demystify the possible exits for an Iron Condor.
The position that I placed involved selling a (94/93) Bear Call Spread and an (83/82) Bull Put Spread. For those readers interested in the specifics, I suggest rereading the article mentioned above. Figure 1 of the weekly chart below illustrates the technical analysis which I had done on the underlying prior to entry. Observe the strong resistance at 93 and solid support at 83, as well as the yellow oval marking the point of my entry. There is no oval marking my exits, for it is evident from the chart that the price action has stayed within the two lines of demarcation; above 83 and below 93.
Figure 1 The maximum profit that I could have made on that trade was 0.29 cents, or $29, while the money that was placed at risk was 0.71 cents or $71. Once again, I do want to emphasize the key word: Maximum Profit. In this trade, I did not take the maximum profit, yet out of $29 I have taken $19 which is basically 2/3 of the maximum possible profit. I closed my trade for $10 prior to expiry. Now let me calculate the rate of return that I made on it. The spread was 1 point and I made 0.19 basically risking 0.81. If I simply divide 19/81 that would be 20% return on my money. However, I did pay commissions. In fact, all together there were six of them for 1.50 each which equals $9, so my actual profit is then not $19, but only $10. Hence, my true rate of return on my investment is a bit more than 11%. Moreover, I made that amount in a month. I don't know any U.S. financial institution that would currently give that rate of return (11%) on their Certificates of Deposits in a month.
The exact transaction included the closing of only one side of the Iron Condor, the Bull Put side. Looking back at the chart above in Figure 1, it could be easily observed that the price action was closer to the 83 zone than to the 93 zone; hence, there was no need to touch the 84/83 Bear Call. Once the broker exacted my order for closing the Bull Put side of the trade, my maintenance was still intact for the duration of the Quarterlies. Figure 2 shows the exact trade that I am addressing. The screen shot taken was on June 30, the day the Quarterlies stopped trading and I closed the Bull Put a day before, on the 29th. Observe that I did place some other trades during those few days, for I am a trader first and option instructor second.
Figure 2: Option Chain Having explained how I closed my position, I will next move on to the explanation of the multiple exit possibilities that I had at the time of my exodus. For simplicity's sake, I have presented the possibilities in two separate figures below. Figure 3 lists seven of them, while Figure 4 lists the other 4, totaling 11 possibilities. However, not all of those 11 were applicable to my trade. Due to the length of this newsletter, I will address all of them only briefly.
# |
Action & Commissions |
Specifics |
Option class involved |
1 |
Buy back (4 comm.) |
Entire Iron Condor |
All calls and puts |
2 |
Buy (2 comm.) |
Vertical (Bull Put) |
Both puts |
3 |
Buy (2 comm.) |
Vertical (Bear Call)
| Both calls
|
4 |
Sell (1 comm.) |
Single
| 82 put
|
5 |
Sell (1 comm.) |
Single
| 94 call
|
6 |
Buy (1 comm.) |
Single
| 83 put
|
7 |
Buy (1 comm.) |
Single
| 93 call
|
Figure 3
Let me start with the most obvious one. The first possibility involves buying back the entire condor with all four legs. This transaction would incur 4 additional commissions which certainly would reduce the profit. By default, an Iron Condor has 4 commissions at the entry, and if this, the most obvious choice is selected then there is a total of 8 commissions. Not the best way to trade. In my case I have paid 4 to get in, which were unavoidable, yet I exited only with two additional ones. In fact, possibility number 2 (Buy Vertical Bull Put) is the strategy that I did in the example above. As I mentioned earlier, there was no need for me to even touch the Bear Call (94/93) for the price closed at 84.66; however, the possibility was there and I could have unwound the Iron Condor in that way as well. Possibilities 4 to 7 involve getting out in singles. The only choice out of those possibilities that I would have considered taking was possibility number 6, or buying back the obligation on my 83 put. Had I done that, then I would still have the same maintenance as initially, yet my total commission number would only be 5. The other put of the original Bull Put spread, 82, would in that case expire worthless. Having briefly addressed the first seven possibilities, let me move on to the next four, which are presented in Figure 4 below.
# |
Action & Commissions |
Specifics |
Option class involved |
1 |
Buy (2 comm.) |
Strangle |
93 call and 83 put |
2 |
Sell (2 comm.) |
Strangle |
94 call and 82 put |
3 |
Buy (2 comm.) |
Combo
| 93 call and 82 put
|
4 |
Sell (2 comm.) |
Combo
| 94 call and 83 put
|
Figure 4
The strangles are composed of different strike prices and two different option classes; they could be either bought or sold. The simultaneous buying and selling of strangles virtually creates an Iron Condor, and as such the Iron Condor could be unwound in the same way. First one strangle could be taken off, and then the other one. The broker expects the option trader to buy back his or her obligation first, so possibility number 1 in Figure 4 is what must be done first, before the second possibility is executed. The last two choices involve combos in which one side is being bought for more money than the other. Specifically, possibility 3 involves buying the 93 call and selling the 82 put. The fourth possibility involves buying the 83 put and selling the 94 call. None of these strategies had much premium in them, so I simply ignored them. The last figure shows these very same possibilities listed at the moment of my exit.
Figure 5 In conclusion, I have given an example of closing an Iron Condor virtually within the same week of expiry. By closing it early I have given back some of my profit and also I have paid extra commissions; yet even with that, I have still received the majority of my maximum profit. I also briefly presented eleven possible scenarios for exiting an Iron Condor. As an option trader, I do have many options to choose from at any given time. Life is all about choices, so should be the trading as well. Have a good summer and do not oversize your trades.
- Josip Causic
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