Friday, 26 February 2016

MORE IRON CONDOR BASICS

Opening and Closing the Position
USEFUL TERMINOLOGY
When you own an iron condor position, there are four different options in the position: It is important to describe a position because it is far too easy to enter a trade order incorrectly and therefore you must be able to tell your broker which specific options to buy and sell. There is more than one way to accomplish that:
An iron condor position consists of two call options and two put options.
·         You can describe the put portion of the iron condor as follows:
·         You sold a put spread
·         You own a put credit spread.
·         You own a bullish put spread.
·         Each of these terms describes a position where you bought a less expensive, farther out-of-the-money put option and sold another put  option (same expiration and same underlying asset) that is more expensive and less far out of the money. You collected cash when trading these two different put options.
·         You can describe the call portion of the iron condor as follows:
1.       You sold a call spread
2.      You own a call credit spread.
3.      You own a bearish call spread.
Each of these terms describes a position where you bought a less expensive, farther out-of-the-money call option and sold another call option with the same expiration, on the same underlying asset and which is more expensive and less far out of the money. You collected cash when trading these two different call options.
 The most efficient method for entering an order to trade an iron condor is to find your broker's method for trading iron condors on their trading platform. Call customer service if you have any difficulty. Your plan is to enter a single order with the following information:
·         The specific options that you plan to buy and sell
·         The quantity of each option to trade. It should be the same number for each of the four options
·         The minimum net cash credit (that is the limit price, making this a 'limit order') that you want to collect when trading one-lot of each of the four options. Never enter a market order.
EXAMPLE: 
Sell 5 XYZ Nov 100 calls
Buy 5 XYZ Nov 110 calls

Sell 5 XYZ Nov 80 puts
Buy 5 XYZ Nov 70 puts

·         Never indicate the price at which you prefer to buy or sell any of the individual option because the only number that matters is the total cash that you want to collect when trading a 1-lot of each option. Always enter an order stating the minimum price (premium) that you will accept when entering an order that nets a cash credit, and a maximum acceptable price when paying cash. Never enter a market order. Never enter a market order. Never enter a market order.
·         When you make this example trade and ask for a "net credit of $1.20 (the limit price) or better" than two results are possible:
1.       Your order cannot be executed and you will get a "nothing done" report.
2.      The order is executed (filled). You receive (before commissions) a minimum of $120 for each iron condor. In this example, you collect a total of $600 (or more) for the five iron condors. 
Please note that it not possible to get a trade report that you did not want. In other words, you cannot collect less than $1.20 per iron condor. You cannot wind up with a call position, but no put position because your order is for "the whole iron condor" or nothing. On occasion you may only get a fill on 1, 2,3, or 4 iron condors. That is known as a partial fill. When that happens, all is well because the price for each iron condor is never less than your stated limit price and you never discover that you own a portion of any iron condor.
 PROFIT OR LOSS?

To earn a profit, the trader must eliminate (exit the trade) the entire iron condor position from his/her portfolio. That can be accomplished in one of two ways:
·         Hold the position until expiration -- when all four options expire. The goal is for the options to remain out of the money and expire worthless. It is usually a good idea to prefer the alternative choice below.
·         Exit the position before expiration arrives by reversing the original trade (i.e., selling the options that you own and buying the options that you sold).  When the cost of exiting is less than the cash received when you opened the position, you earned a profit. When he cost is higher, you incurred a loss. Once again it is often appropriate to enter an order to exit all four options at the same time. However, when you have more experience, you may elect to exit the call spread or the put spread first and then exit the remainder of the iron condor later. It is seldom correct to exit a single call or put option.

 

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