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Advanced Iron Condors
Doc Severson
Legal Disclaimer
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No claim is made by Trading Concepts, Inc.™ that the (option) trading strategies shown here will result in profits and will not result in losses. Option trading may not be suitable for all
recipients of this Training Program. All comments, trading strategies, techniques, concepts and methods shown within our Course are not and should not be construed as an offer to buy or
sell stocks and options – they are opinions based on market observation and years of experience. Therefore, the thoughts expressed are not guaranteed to produce profits in any
way. All Opinions are subject to change without notice. Each option trader/investor is responsible for his/her own actions, if any. Your purchase of the Advanced Iron Condor
Workshop constitutes your agreement to this disclaimer and exempts Trading Concepts from any liability or litigation.
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Housekeeping
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• I have three solid hours of material and I’m going to need your help to finish this material in that timeframe.
• I will stop at the end of a section to take questions, and occasional bio breaks.
• I may have to move your question offline….
Housekeeping
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• YES I will be recording today’s session so if you cannot attend the entire workshop, you’ll be able to view the material later.
• The recording will be produced in a format that can be played on just about any device.
• And you can refer back to it as often as you want. • I will also provide links to the slides and materials
that we’ll use today.
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Housekeeping
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• If you have a problem with sound or video then try logging off/back on again.
• If my voice cuts out when I move to a different slide, let me know and I’ll slow down.
• All materials that you see today will be available to you via an email that I’ll send when I’m finished producing the video segments.
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Who is this “Doc” guy?
• Chief Options Mentor for Trading Concepts
• Have produced a daily Market/Options newsletter since 2005.
• I have mentored thousands of students during this time.
• Husband and Father of three. • My passion is to cycle for charity to
raise funds for Cancer research.
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What Are We Covering Today?
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• We’re going to be covering Advanced Iron Condor topics which expand on the Introductory Workshop concepts that we finished recently.
• I will use different examples for Options to illustrate how to apply this methodology, but this workshop will not be a basic primer on how to trade Options.
• We’re going to be laser-focused on teaching Iron Condor techniques today.
My Goals Today?
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• I want to show you how you can use some professional-level skills to help manage risk better on your trades.
• We all know that anyone can ENTER a trade…. • But when & how to do so to IMPROVE your odds….. • …and how to better manage your risk when you ARE in a
position…. • …is the focus for today!
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How to best use this course
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• If you have not used the Greeks before, this is going to be a little bit like drinking from a fire hose.
• Many concepts will be covered today….some new, some you already know.
• We have limited time together so don’t get frustrated if you don’t get everything on the first go-round.
• Go back to the replay videos until it makes sense!
I would like to ask a favor….
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• There are going to be a lot of very sharp, experienced traders attending today.
• Perhaps you’ve already learned this material in a different manner.
• Please understand that I’m NOT asking you to ditch your current techniques.
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I would like to ask a favor….
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• Neither am I challenging your current system. • If it works for you, great! • Perhaps there is something that you’ll learn today that you
can use to strengthen your current position management. • Please keep an open mind, and let’s not waste time
comparing “A” vs. “B.”
I would like to ask a favor….
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• Please keep questions short!
• One sentence at the most!
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I would like to ask a favor….
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• If I see a full paragraph I will have to just skip over it, it’s not fair to other attendees as well as the people listening on the replay.
• If there is something that requires more interaction, please reach me via email!
We have a LOT of material to cover today so I will NOT be
monitoring the chat box before question breaks.
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Agenda
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• I. Intro to Advanced Iron Condors • II. Advanced Entry techniques • III. Greeks Examples • IV. The Defensive Pyramid • V. Active Delta Management • VI. Dynamic Risk Management • VII. Active Risk Management • VIII. Low Probability Iron Condors
I: Introduction to Advanced Iron
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First off, let’s review what we covered in the “Introductory” session.
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Introductory Iron Condors
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• Entering the Iron Condor • Set up both sides on same day • Separate entries
• Defending the Iron Condor • Used Static Risk Management • Enforced a $.45 net debit on one side to limit risk to 1:1
• Exiting the Iron Condor • Four different exits possible
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Let’s imagine that we’re talking to a
student of that first class, after several
cycles of trading the Iron Condor.
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“Where can we get additional edge on the position? How
can we improve on this setup?”
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“It would be great to get our wings even wider than before, so we reduce the
drama.” www.optionsmd.com
After all, Doc said: “There is no replacement
for displacement!”
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“….and placing credit spread positions on both sides of the price feels like I have a bull's-eye painted on my position.”
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“….I sure would like to find a way to “fight back” against the price if I see it coming from a
long way off.“
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“….Static Risk Management is great to limit the risk on huge
moves that would have blown me out…..”
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“….but it seems like we get these moves all the time and I seem to be “rolling out” more
often than I’d like to.”
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“….I also have a difficult time knowing when to get out for a
profit. Sometimes I close out in a panic for way less profit than I
could have kept.”
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OK, let’s tally up her wish list….
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1) Greater “wingspan” through creating further
OTM credit spreads.
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2) Once she’s in the position, she’d like to find a way to fight back against an
incoming attack.
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3) She’d also like a more effective way to determine
when to close the trade early
for maximum available profit.
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Let’s tackle this challenge by first looking to improve our offense,
or our trade entries. www.optionsmd.com
II: Advanced Entry Techniques
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Let’s think about this for a minute. There’s more than
just getting maximum distance on our wings.
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We certainly want that. But there are also times where entering the Iron Condor carries an extremely
low probability of success.
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In this section we’ll cover what to do to get maximum distance, as well as what not to do so that
you can avoid trouble.
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Let’s start with the “Maximum Distance” goal.
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If we just enter the entire Iron Condor with one entry, or both sides on the same
day…it will be a compromise.
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If there is an uptrend, then we’ll soon have a liability on
our hands with the call spreads…..
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Or if there is a downtrend we’ll soon be in trouble with
the put spreads…..
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Typical entry with both sides
at once….
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Typical entry with both sides
at once….
Let’s discuss how we can “bias” the Iron Condor
entry…
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Biasing the Spreads
• If we can identify a dominant trend… • The first question that we have to ask is whether
it might be too strong to consider a “Neutral” strategy.
• The strongest parts to a trend are at the beginning and end, the “S” shape.
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Biasing the Spreads
• So assuming that we CAN identify AND enter inside this trend…
• We will look to place Bear Call Spreads at “resistance” and Bull Put Spreads at “support”…
• This DOES require the ability to “read” the price chart.
• Let’s see how we could have used this….
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Entering at Resistance….
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This method basically “biases” the range to accommodate the
trend direction.
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There is one more technique that we can use with the price action….leg in to the spreads
separately.
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Legging into Spreads
• We notice that price typically “breathes” in and out….
• Even strong trends typically have small pullbacks. • If you can sell Bear Call Spreads into a strong push
up to resistance… • …and then wait for the pullback for the put
spreads….
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Legging into Spreads
• There are Pros and Cons to this approach. • When you get it right, it’s awesome how large
your “wingspan” can be! • If the price never pulls back from the dominant
trend, you can end up getting a terrible fill. • Definitely a more advanced skill requiring you to
be in tune with the price action and your chart.
We just showed a couple of techniques for using the price
action to either “bias” the range, or increase the range.
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Now let’s shift gears and discuss some of the situations to avoid.
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Avoid Scenario #1
Very tight range contraction.
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If you’ve seen any of my materials, you’ll know that I chart markets by analyzing markets whether they are “expanding” or “contracting” their
range.
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This is where my Fractal Energy reads come in handy to identify
these states…..
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Conversely, there are times where the
“expansion/contraction” bias FAVORS our entries…..
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It definitely helps to understand the context of the current market that
you’re trading…whether it’s expanding or likely to start
contracting…..
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Avoid Scenario #2
Entering both “sides” at a volatility spike.
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A spike in “fear” which is shown on the VIX…is almost ALWAYS
“overdone” meaning that Markets rebound like crazy
afterwards….. www.optionsmd.com
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This type of event is a great example of where the odds are in your favor of
entering a bull put spread first, and then delaying the call spread entry until the
price hits resistance on the bounce.
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Avoid Scenario #3
The “converse” of #2, where Implied Volatility is very, very
low. www.optionsmd.com
This scenario is highly likely of seeing a “mean reversion” higher in vol which will almost certainly stomp on the put
spreads in no time.
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And this condition is almost always accompanied by a “parabolic tail” of
the underlying price to a rally leg, which is the “finishing” move.
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The point here is that any put spread that you entered during that condition would almost certainly be
run through on the subsequent pullback.
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We want to be entering call spreads during those “parabolic” conditions, and then looking to leg in to the put
spreads on a decent pullback to support.
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Frame This.
The very best entries that you make with this strategy are the ones that
FEEL the worst to take.
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If an entry point “feels” really good, then chances are that you’re trading with the Herd and you’re about to
take some heat on one side.
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Section Summary
• We can apply our knowledge of the trend to “bias” the entry for the Condor range in one direction or the other.
• We can also apply our knowledge of the price action to “leg in” to the sides of the Condor separately, potentially increasing the wingspan.
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Section Summary
• We can apply our knowledge of price action expansion & contraction to identify better-probability conditions for “flat” price action.
• We can apply our understanding of volatility “mean reversion” to avoid placing both legs when we see a “spike” in implied volatility.
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Section Summary
• We can also apply our knowledge of Implied Volatility “mean reversion” to know when to avoid or “tread lightly” with put spreads during very low IV conditions.
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<break> Questions?
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III. Greeks Position Management
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Hopefully you were able to complete your homework that I
assigned this week….
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Everything that we do for the rest of the session depends on
you having some familiarity with the Options Greeks….
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If you only pick up ONE THING from today’s workshop…THIS is what I would recommend that
you learn….
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Would you fly a plane without understanding these?
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If this is new to you then it will definitely take some repetition before you’ll understand the power of these concepts….
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Let’s examine the Greeks on
this Iron Condor
position on the SPY for the MAR
cycle.
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Let’s focus on the Delta first.
What is a Delta of -23.65 telling us about the
position?
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We can evaluate this based on the sign
(negative) as well as the size of the Delta.
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The value and the sign are telling us that the next point HIGHER the price moves will remove
$23.65 of value from my position.
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Notice that I did not say it would remove $23.65 in profits; it only affects the real-time value of the
position.
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What would happen to the overall value of the position
should the price DROP by one point?
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Yes, the real-time P/L will RISE by $23.65!
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We can just look at the
real-time P/L graph (in
white) and SEE that if the price drops slightly, it will go higher
on the P/L graph and maximize
value. www.optionsmd.com
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Is that -23.65 value a large number or a small
number?
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That depends on the size of your account, the instrument that
you’re using, and the risk threshold that you’re
comfortable with.
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We’ll go more into identifying risk thresholds, or “delta thresholds”
in the next section.
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Last question on Delta; if the price goes higher with this Iron Condor, do my positional Deltas
increase or decrease?
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They will increase or get “more negative.” The Delta value is
telling you in more urgent terms that it wants the price to fall back
to reduce the risk of that next point move.
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The smaller the position Delta, the less risk the position will have
on any subsequent move from this point. Low values are “Delta
Neutral.”
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Using Delta in our Trading
• An Iron Condor trade will typically start off fairly “Delta Neutral”….
• With a small negative Delta bias due to the way that Options are priced.
• Can’t remember the last Iron Condor that I set up that did NOT have negative, or “short” deltas.
• This is what you want due to price action.
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Using Delta in our Trading
• The overall Delta of our position is showing us the risk of price movement.
• It’s like the speedometer in our car. • Is 25mph too fast? 50mph? 80mph? Depends… • For every position/account/instrument that we
trade… • We will need to know what a reasonable delta is.
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Let’s look at the Gamma next.
The Gamma shows how much the Delta will change after that
next point move.
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If I have a Delta of -23.65 and a Gamma of -13.44, what will the
Delta be if the SPY moves one more point higher?
If the price goes higher, the Deltas will go “more negative” or
(-23.65) + (-13.44) = -37.09
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If the price goes lower, the Deltas will go “less negative” or
(-23.65) - (-13.44) = -10.21
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The point here is that I can be PROACTIVE and prepare for what I might have to do after that next
point move.
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It’s similar to what you do when you see this road sign,
right?
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Gamma really shows the acceleration of loss that occurs with credit spread positions as
they are “attacked.”
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Traders that do not understand the Greeks are always surprised by how fast the loss accelerates
as the attack continues. They assume that the losses are linear.
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Think of it as a ski slope….it’s
flat near the top and it’s difficult
to move around. The further
down the slope you go,
however, the faster that you
go.
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So for our purposes, the closer that price gets to a credit spread of an Iron Condor, the faster that
losses accelerate.
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And this effect GROWS as the position gets closer to expiration, which is why Weekly options can
be so difficult to manage dynamically.
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Using Gamma in our Trading
• If we are selling Iron Condors, then we will ALWAYS see negative, or “short Gamma” in our account.
• Short Gamma means that these positions do NOT want the price to come anywhere near the short option of our spreads.
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Using Gamma in our Trading
• This means that we need to manage that short Gamma…
• …by first being proactive to understand the impact of potential accelerating losses…
• …and secondly by employing positions that can somewhat “neutralize” those effects.
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Let’s look at the Theta next.
This is the easy one. If it’s a positive number, then our
positions are making money every day that time value erodes.
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If this is a negative number, then that means that we are “net
long” options and we’re losing value due to time decay every
day.
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For this position, we can see that it’s gaining about $7.56/day in value due to the
time decay of options.
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It’s simple; we just want to see this number positive as we
evaluate our portfolio.
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We’ll finish with the Greek Vega.
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The Vega of the position shows how the value of the
position would change if implied volatility changes.
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This comes into play when we see volatility rise, typically
during corrections/sell-offs….
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…and we’ll see volatility “come in” during complacent,
persistent rallies.
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In this case, we can see that our position will GAIN $49.79 if the volatility of our
options drops by 1%.
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Conversely, our position value will drop by $49.79 in value if
the volatility rises by 1%!
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Using Vega in our Trading
• If we trade Iron Condors we will always see negative, or short Vega.
• We just need to understand the concept of trying to sell “high” volatility…
• …and beware of conditions that will cause problems for our positions should Volatility rise AFTER we enter.
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Section Summary
• With Iron Condors we can have positive or negative Deltas showing for the position…
• …depending on whether the price is attacking the put spreads or the call spreads.
• We’ll need to know “how much is too much” and take appropriate steps.
• Iron Condors will always show “short Gamma.”
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Section Summary
• By understanding how the Gamma “accelerates” the Delta risk, we can be more proactive.
• We will also see positive Theta, which is good. • ..and negative, or short Vega on the position. • We need to understand how changes in implied
volatility will impact the overall position, and proactively defend against it.
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<break> Questions?
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IV: The Defensive Risk Pyramid
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In the introductory workshop, we discussed
Position Sizing and Static Risk Management.
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We did not want to see more than 2% of account
risk per position….
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….and we set our “stop loss” point where we would close & roll out the position based on
a 1:1 reward/risk point.
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Both of those were “Static” Risk settings that were defined
before we even entered the position.
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But as we discussed at the beginning of this workshop, we needed a more dynamic
way to manage risk.
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Risk Pyramid
General Risk Management
Static Risk Management
Active Delta Management
Dynamic Risk Management
Active Risk Mgt
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General Risk Management and Static Risk Management are the
two most “fundamental” levels of risk management…
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Now we’re going to add complexity to our defense by
learning to adjust position risk on the fly, starting with
Active Delta Management
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V: Active Delta Management
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One of the most important risk metrics that we can monitor is our positional
Delta Risk. www.optionsmd.com
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Risk Pyramid
General Risk Management
Static Risk Management
Active Delta Management
Remember, the Delta value of our position shows us the P/L impact to our position with
the next point move.
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The first thing that we need to figure out is “how
much is too much?”
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This is what we’ll call the “Delta Threshold.” It’s a level that we define ahead of time
as being a point where we need to act.
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And when I say “act”, I mean that this is the point where
we will reduce or “neutralize” the position Deltas.
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If the position is showing too many negative Deltas, we can
add positive deltas to neutralize the position.
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(I’ll cover neutralizing positions showing too many positive deltas at the end of
this section)
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Adding Positive Deltas
• Long Stock Shares • Long Call Options • Synthetic Long positions (short put/long call) • Long Futures Contract • Bull Put Spreads • All of these positions are “bullish” so they will add
positive deltas to a position.
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How do we determine WHEN this magic “Delta Threshold”
has been hit?
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It comes down to many things, such as size of account, size of the
position, your sense of risk/reward, and your skills.
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For the purposes of our High Probability Iron Condors, I set up the threshold as being “Half of
the Credit Received on that side of the trade.”
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If we receive $300 of credit from the bear call spreads, then my Delta Threshold will be -150. These are for the SPY-based
Condors with $2-wide spreads.
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When my Threshold has been hit, I want to remove 1/3 to 1/2 of the Deltas to bring the position deltas back down UNDER the threshold.
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We don’t want to TOTALLY neutralize the Deltas! If we
did that we’d be whipsawed around the
place constantly. Does your home thermostat turn on the furnace as soon as it
drops .1 degree below the desired temperature?
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Example
• 10 Contracts Bear Call Spreads = $150 Credit • 10 Contracts Bull Put Spreads = $150 Credit • Risking $300 to make $300 for this trade. • Delta Threshold for upside attack is -75. • When the Deltas get up to -75, I want to remove
1/3 to ½ of the Deltas. • Adding +25 to +37 Deltas would accomplish this.
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Adding +25 to +37 Deltas?
• This would be adding 25 to 37 shares of SPY. • A long ES futures contract would add +500
Deltas…too much! • One contract of Synthetic stock would add +100
deltas…too much! • Could be some combination of long calls… • Or additional bull put spreads.
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Let’s see what this would look like by adding 25 shares of SPY:
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Notice how the position
has been given a positive
“bias” by the addition of the
long stock shares.
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If you were a novice skiing down a hill beyond your skill level,
wouldn’t it be nice if someone “flattened” out the hill for you?
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Greeks Before
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Greeks After
Note that adding the Delta hedge did not affect the other Greeks; this is because we
used Long Stock shares.
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What’s the downside to that method? We had to buy 25 shares of the SPY at about
$183/share. That’s a cost of $4575.
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Keep in mind that this is not an ABSOLUTE cost, but is more of a “capital outlay” to perform
the hedge.
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Now, what happens if the price goes back down? The hedge
position (long deltas) will start losing money, yet the overall
position will gain value.
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I put the STOP value for the hedge at the same value as the Delta
Threshold itself. So if my Threshold is -75, then I am willing to lose $75
on the hedge.
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If the price goes back down again, then my Deltas will be
back inside the “normal” range and I won’t need the hedge.
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What happens if the price KEEPS GOING higher? My Delta Threshold
could be hit again at -75.
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I will estimate the amount of room available before a Static Risk
Management “roll-out” exit, to see if it’s worth adding another +25
share hedge.
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Normally I can do TWO Delta Hedges before I must close down/roll out the bear call
spreads.
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Normally I can get about 20-25 S&P points of “value” out of the
first Delta Hedge, and 10 S&P points out of the second.
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2 SPY points x 25 shares = $50. 1 SPY point x 25 shares = $25.
We brought in an additional $75 from “hedging” the position on an upside
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If our Static Risk Management limits were a debit of $300 on a close/roll of the call spreads, we
just cut that figure down to $225.
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You do not want to think of Delta Hedging as “Taking a Losing Trade and Making a Winner from It.” You would be adding far too much risk
to the hedge.
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What if my Delta Threshold was smaller? What effect would that
cause? What if it was larger?
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A smaller threshold means that you’re adjusting earlier, yet more
prone to whipsaws. A larger threshold is more tolerant of
volatility, yet might not help much.
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Synthetic Stock Positions
• Another way to work in chunks of +100 Deltas is to use synthetic stock positions.
• If you sell a put option (bullish) and simultaneously buy a call option (bullish) at the same strike price it creates +100 deltas per contract.
• This will generally cost you a debit.
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Synthetic Stock Positions
• Again, this is not the “cost” of the position, it is merely the capital required to set up the hedge.
• The true “cost” is the differential between what you buy it for vs. what you sell it for later.
• You must clear this position before expiration.
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We talked about other hedges, such as long call options, or more
bull put spreads.
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Generally I do NOT add these to manage my Deltas on the position. There are enough moving parts in
my Condor position without adding more variables.
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If you are trading a small account and cannot afford to use stock to
hedge, and synthetics are too large, then you can consider long
calls in the back month.
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I mentioned earlier that I don’t use this so much to Delta-manage the put spreads. There are a couple of
reasons for that…..
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Tops are a process, bottoms
are an event.
Usually by the time you’re hedging the put spreads, the move is over.
Very difficult to delta-hedge a downside attack. Trades also start
with short deltas & “skew.”
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Active Delta Hedging
• Identify a Delta Threshold that you will use. • Mine is half of the credit brought in from the call
spreads….i.e. $400 credit = Delta Threshold of -200. • When that Threshold is hit, you will remove one-
third to one-half of the current position Deltas by adding positive deltas to the position.
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Active Delta Hedging
• If the price continues higher and the threshold is hit again, evaluate whether you have enough “room” to add another hedge position of the same size.
• The “stop loss” for each hedge position is a loss equaling the Delta Threshold itself.
• A Delta Threshold of -200 means that I can absorb up to a $200 loss on the hedge.
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Active Delta Hedging
• If the price continues higher and my Static Risk Management threshold has been hit, then I will not only close the call spreads & roll them out, but I will also close any hedge positions for a profit.
• An alternative to using the underlying stock for the Delta hedge is to use Synthetic Stock where each contract = +100 deltas.
This is very important….the system values that I discussed in this
section are ONLY for the SPY/IWM HP Iron Condors that I’ve discussed
with my system.
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Changing to different underlying stocks, spread widths, credits, etc.
will require a different defensive game-plan with different metrics.
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Let’s walk through an example on our analyzer tool…..
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VI: Dynamic Risk Management
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Risk Pyramid
General Risk Management
Static Risk Management
Active Delta Management
Dynamic Risk Management
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If we know that we have an upper position and a
lower position to the Iron Condor….
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Is there something that I can do at the VERY BEGINNING of the
trade to help protect against an attack against these positions?
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This is the purpose of Dynamic Risk Management. We are going to add
positions that grow in value dynamically during that attack.
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There are two things that we’re dynamically defending against:
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One: Remember how GAMMA
accelerates the losses as the price closes in on a position?
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Two: And recall how our positions do NOT like it when implied
volatility rises AFTER we enter? (short VEGA)
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We need 1) positions that gain value after a large movement,
and 2) positions that gain value with a rise in volatility.
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Let’s focus on the Gamma hedge first, specifically on an upside
attack. I’m going to use a Butterfly position as a Gamma
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Out of the Money Call Butterfly
Adding the Call Butterfly plus the Iron Condor spreads gives
a different P/L graph:
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Notice how the call
spreads are showing a “bump”
near expiration.
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Call Butterfly Gamma Hedge
• I will spend about TEN PERCENT of the credit brought in from the bear call spreads for this “insurance.”
• I will make this Call Butterfly “$2-wide” (i.e. SPY 187/189/191) and place the center of the Butterfly one strike INSIDE the call spread short strike.
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Call Butterfly Gamma Hedge
• If you buy this trade at around the same time as the call spread entry, it should cost about a $.20 debit per contract.
• So if I trade 30 contracts of Bear Call Spreads and bring in $450 of credit, then my budget is about $45 for this trade.
• That would be about 2 contracts of Butterflies.
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Characteristics of this hedge
• This position WILL NOT HELP against a very strong, early attack in the cycle.
• Butterflies must “blossom” into/around Expiration Week.
• …but that is when we would expect to have the greatest need for a Gamma hedge.
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Managing this Hedge
• We generally close it down if/when the bear call spreads require a Static Risk Exit/Rollout.
• If the price never attacks the upside call spreads, then we typically let the position expire OTM as it’s not worth the commission cost to close it.
What about a downside Gamma hedge for the bull
put spreads?
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I have used Butterflies for downside hedges as well, but
lately I’ve been using Put Calendar Spreads.
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The Put Calendar is
placed below the current price, OTM (usually at
support level) and has roughly the same 10%
budget allocation.
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Notice how this changes
the downside P/L curve.
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Notice something else regarding the Greeks for
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The Put Calendar is a combination Gamma &
Vega Hedge!
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This means that it functions as a Gamma/Price hedge on a
downside move, PLUS helping to guard against a spike in vol.
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Put Calendar Hedge
• This type of position is more expensive than an equivalent Butterfly thus is hard to “dial in” to 10% of my put credit for a budget.
• If I SPEND more than my 10% budget on this position I’ll make sure not to let the loss accumulate to more than 10% if the price runs higher.
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Put Calendar Hedge
• I like to park these positions at a “logical support level” which will increase the odds that price might “sit” there and help maximize the value.
• Like the Butterfly, it increases in value closer to expiration
• If there is a big rise in implied volatility, then I might NOT use this position since it’s long Vega.
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Managing this Hedge
• We generally close it down if/when the bull put spreads require a Static Risk Exit/Rollout.
• I will also close it down if the price gets to the center strike price of this trade, as it will show diminishing returns if the price goes lower.
My last Dynamic Risk Management hedge is
purely for crash protection!
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ESPECIALLY if markets are very complacent and low volatility, we need crash
protection to the downside.
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Any sharp price “distribution” will be accompanied by a big
spike in implied volatility, which is why we need a Vega
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The simplest way to accomplish this is with
additional puts on top of the bull put spread long puts to
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Notice how the extra
long put has “flattened out” the
downside risk curve.
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Long Put Vega Hedge
• Again, we’ll use a 10% budget for the position. • I try to get these for $.50/contract or less. • Sometimes I will wait for the inevitable (these
days!) rally after entering the Iron Condor spreads….to set up my long put Vega hedge for less $$$..
• If you wait for the crash, you’re too late.
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Summary- Dynamic Risk Mgt.
• If there is one fact that is true regardless of how you use these Dynamic hedges….
• It’s that you must add them before you think you need them!
• Traders “fall asleep” on Dynamic Risk Management entries because they forget about them when the price is going nowhere.
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Summary- Dynamic Risk Mgt.
• By the time you actually NEED them…the entry price will have appreciated in value past the point of making it worth entering.
• So think of them as “insurance” and keep placing them.
• The month that you STOP placing them will be the month that you NEED them!
<break> Questions?
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VII: Active Risk Management
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To this point with our defense we’ve been all
about being mechanical with our metrics and exits.
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But sometimes we lose sight of what we’re trying to
achieve; we need to apply some common sense or
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Risk Pyramid
General Risk Management
Static Risk Management
Active Delta Management
Dynamic Risk Management
Active Risk Mgt
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Is the Risk worth the Reward?
• Whenever my position is at 50% of realized profits or above….
• I NEVER want to see that position drop to “break-even” or lower.
• I can’t think of a more deflating thing to go through after you have worked so hard to “earn” those profits.
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Here’s a very typical example where just a 5-10 point move
in the S&P’s would take this position from a
50% realized profit down to
break-even.
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Make sure that the additional reward that you seek is worth
the additional time & price risk. In this example it did not.
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Acknowledging the Trend
• If I happen to step in front of a large trend… • ….then by definition the Iron Condor will have a
difficult cycle because it’s a non-directional strategy.
• I don’t have to let my sense of self-worth be defined by whether I was originally “correct” on my forecast.
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Acknowledging the Trend
• Just because the credit is in your account, don’t “fall in love” with it…it’s not yours yet until the obligations have been relieved.
• I will start by “thinning out” the potentially-threatened position by removing 1/3 of the contracts at a time at break-even or better.
• This works if the price pulls back regularly….
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Moved to a downtrend….
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Saved a Static Risk Exit!
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Technical “Squeeze” Levels
• There are times where price comes up to a specific price level where “shorts” might be camped out…
• And if the price gets past that level, all of those “shorts” will have to cover their positions, and it will cause a “short squeeze” which is a powerful move.
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Active Risk Management
• Never let a strong hand turn into a break-even or losing position.
• Is the reward of staying in the position to “earn more” worth the risk of staying in longer?
• Credits in your account do not count as “profits” until the short-option obligations have been removed.
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Active Risk Management
• What is the chart showing? Contraction about to turn into Expansion?
• Is there a potential short-covering “squeeze” about to hit?
• Really what we’re asking here is…”does it really make sense to stay in longer just to get a couple of additional dollars on the trade?”
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<break> Questions?
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VIII: Low Probability Iron Condors
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We’ve just spent the last couple of hours talking
about High Probability Iron Condors….
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Why would we want to look at a Low Probability Iron Condor? Let’s look at
HP Condor Pros/Cons:
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HP Condor Pros/Cons
• Big Price Range to work with….but… • Takes FOREVER to turn “green.” • High Probability of Success….but.. • Reward-to-Risk is poor to begin with. • Can use many different forms of defense, but… • Adds a huge amount of complexity.
Now let’s look at the Pros/Cons of a Low
Probability Iron Condor:
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LP Condor Pros/Cons
• Smaller Price Range to work with….but… • MUCH quicker profits! • Lower Probability of Success….but.. • Reward-to-Risk is set to begin with! • LP Condor is not a good fit for a strongly trending
chart. • …so we need to be more selective as to when we
use it.
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This is a 1:1 reward-to-risk trade
right out of the gate. This
also has a 50%
probability of success.
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We’ll generally be selling the .30 Delta calls and
puts, using $5-wide
spreads on the SPX or
RUT.
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LP Condor Construction
• $5 Spreads on RUT or SPX • Must be European-settled options due to narrow
price range and likelihood of price moving outside of range temporarily.
• Must enter these in multiples of 2 contracts! We’ll see why shortly….
• Generally entering these 25-40 trading days before expiration.
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LP Condor Construction
• Prefer to see an “elevated” level of implied volatility. • Can NOT be entered during a strong trend! • With $5-wide spreads, minimum credit is $2.50. • It makes sense to locate the call spreads above
recent highs, and the put spreads below recent lows. • There is a very specific setup that we’ll look for….
The idea is that you do these trades “Random Walk” and not use the charts but that’s difficult in today’s market.
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Here is the specific setup that I’ll look for during a bull
market…..
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I’ll look for the S&P or RUT to go just
“gonzo” parabolic.
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Next, look for a “distribution day” that spikes up the implied
vol. This is your trigger.
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You’ll typically get 2-3 weeks of “sideways”
price action. Get in and GET OUT!!!
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LP Condor Exits
• If you do a good job with your entry point, you’ll be able to secure a 10% return on risk within two weeks.
• Set up your debit limit exit GTC and let it fire on its own.
• But there are going to be times where you step in too early and the price continues to move higher…..
The great part about this trade is that Static Risk
Management is baked in from day one.
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A Market Crash or other Black Swan cannot take more than 2% of your account if you’ve
sized it correctly.
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There is one Dynamic Risk Management adjustment that
I will make to these trades – “Butterflying” the spreads.
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Here is the standard LP Iron
Condor on the RUT….
When the Delta Threshold has been hit on this position, then
I will “Butterfly off” the call spreads.
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Here is the LP Iron Condor with the Butterfly
adjustment.
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Notice how we have
limited the risk of a
continued upside move.
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I will create this hedge by overlaying a “half-size”
vertical debit spread on top of the existing call spreads.
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LP Condor Adjustment • If I have a LP Iron Condor on the RUT with credit spreads at
1115/1120 and 1175/1180… • Then I will look for a Delta Value of -4.5 for every two
contracts as my Delta Threshold. • When this threshold is hit, I will “butterfly off” the call
spreads. • I will add a ONE CONTRACT 1170/1175 debit vertical call
spread.
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LP Condor Adjusted Exit • If I adjust the LP Condor in this manner, then I will
undoubtedly have to stay in the position until about a week before expiration before a similar exit can be achieved.
• Sometimes you have stepped in front of a very strong trend so you might want to consider just exiting on any deep pullback.
• With today’s “teenager” volatility you must pick your spots carefully and not be afraid to get out if the trade is wrong.
Before I go over a final example today, let’s
discuss “next steps” for a moment.
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Next Steps • Learning how to use the Greeks will not happen overnight. • Start with Delta first and evaluate every position that you
have from this day forward based on the Delta Risk. • Learn to incorporate Gamma into being more proactive into
guarding against accelerating losses. • Learn to incorporate Vega analysis as well so you can be
more proactively taking advantage of volatility events.
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Next Steps • Slowly incorporate the hedge trades that we discussed
today…learn on sim platform first. • If you need help, look over my shoulder for awhile as I use
the Greeks and these techniques in my newsletter every day: www.tradingconceptsinc.com/income
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Let’s show a quick setup on the
SPX/RUT:
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