IRON CONDOR: PRE-TRADE CONSIDERATIONS

IRON CONDOR TRADING
There are several items to consider when using this strategy. You will discover that there is no blueprint for an exact, rule-based position that suits your needs. You can afford to be flexible when trading the iron condor.
UNDERLYING
Diversification is important for any investor, and especially when selling premium (i.e., collecting cash for an option spread). If you prefer to trade individual stocks, I suggest owning four or five simultaneous positions.  
I prefer to trade index options because that eliminates the risk of trading individual stocks which are always susceptible  to an unexpected news release.  Another benefit is that trading a single iron condor on an index makes it much easier to manage risk (i.e., adjust positions) -- if and when the market is undergoing a significant price change.

USE OPTIONS TO EARN PROFITS MORE OFTEN

OPTIONS ARE YOUR FRIENDS
I exchanged e-mails with a new trader who wanted to discuss his trading strategy. He uses technical analysis to decide which stocks to buy/sell -- and has been losing money. He asked about using options. The following is a major part of my reply.
INVESTING VS. TRADING
Traders tend to ignore the nature of the business and rely only on their ability to predict short-term price movements.
Investing is different. It is based on your ability to understand the basic financial condition of the company, compare it with its peers and make a good evaluation of how well-poised this company is for the future. That's research. When you find a business that is worthy of making an investment, you buy shares and wait for your good judgment to pay off. But you do not wait idly. Investing requires periodic re-evaluation of your holdings because the world changes and you do not want to be married to a poor investment.
OPTION TRADERS
Option traders are not investors.
Nor are they very short-term traders. The option markets, with their wide bid-ask spreads, are not designed for day traders.
·         Option buyers require that the stock make a move -- in the right direction -- in a relatively short period of time.
·         Option sellers require time to pass and for the options to decay without the stock moving in the wrong direction.
Option traders also have built-in risk-measuring tools (the Greeks) that make it more efficient to use options than stock. The Greeks include Theta (the risk of holding as time passes), Vega (the risk of holding a position as implied volatility changes) and Delta (the risk of being too long as the market falls; or too short as the market rallies).
These Greeks allow traders to get a good estimate of how much money is at risk -- as well as the potential reward -- that comes with their market prediction.
Why is this important?  Too many traders ignore the following question:  
WHY DO I BELIEVE THAT I CAN CORRECTLY PREDICT WHICH STOCKS ARE MOVING HIGHER OR LOWER?
Even when traders lack proof of any ability to correctly predict direction, they still take bullish and bearish positions with a high expectation of making money.
That is not reasonable. 
Predicting direction is difficult. Most professional money managers cannot consistently beat the market averages. And they are paid big bucks for that inability. Instead of trying to do what they cannot do, why not trade with a much improved chance of success? Options allow you to do just that.

BINARY OPTIONS EXPLAINED

A Binary Option is more like a wager with a bookie than an investment tool. Nevertheless, binaries are advertised as a method for traders/investors to make money from a correct prediction on the future price of a stock-market index, commodity, or currency pair.
The payoff is all or nothing, but the payoff is too small.
The typical bet with a bookmaker requires the bettor to risk $55 for the chance to win $50.
That represents a payoff of 91% ($50 ÷ $55).  The best payoff I could find for binary option trading platforms is 85% (for some trades), and other platforms offer much lower payoffs.
From my perspective, betting on a football game is similar to buying a binary option. If you want to wager that your favorite team will defeat (after adjusting the final score for the point spread) its main rival, you can buy a call option on your team.
·         It your team wins (after accounting for the point spread), the option is "in the money" and the bookie owes you $50.
·         It your team loses, the option is "out of the money" and you owe the bookie $55.?
BINARY OPTIONS ARE EUROPEAN STYLE AND THAT MEANS
·         They cannot be exercised before expiration arrives (i.e., until the game has ended). 
·         They are settled in cash.
That is all there is to a binary option. Pretty simple stuff.
However, some trading platforms (the online website where binary options are traded) accommodate traders who require simplicity and do not allow binary options to be sold. By offering a binary option on both the "over" (the stock price will be equal to, or above, the specified price at the cutoff time) and the "under" (the stock price will be below the specified price at the cutoff time), there is no need to sell binary options.
Binary Options -- compared with stock options -- are probably easier for some traders to understand. And that's not good for inexperienced traders who tend to trade first and ask questions later.

NAKED OPTIONS AND RISK

When you anticipate that a stock (or index) will undergo a bullish or bearish price change, there are several (very basic), limited-risk, option strategies that you can adopt. These involve buying option premium.
·         Buy calls or call spreads when bullish.
·         Buy puts or put spreads when bearish.
The more experienced trader may also want to consider selling option premium in order to collect time decay (Theta is one of the Greeks that helps traders measure and manage risk).
·         Sell call spreads when bearish.
·         Sell put spreads when bullish.
·         Sell naked (cash secured) puts when bullish -- but only when you are willing to own shares of the underlying stock.
NOTE: The more sophisticated reader knows that buying a call spread and selling a put spread are equivalent positions (with essentially identical profit and loss parameters) when the underlying asset, strike prices, and expiration are identical.
Likewise, selling a call spread and buying a put spread are equivalent positions. 
Selling naked (unhedged) call options is considered to be too risky for most investors for two very sound reasons:
1.    The sum at risk is theoretically unlimited, and too many inexperienced investors destroy their trading accounts when adopting this strategy. Thus, very few brokers allow their inexperienced traders to sell naked call options. It is just as easy to go broke when selling naked put options, even though most brokers allow their customers to adopt this strategy.
 2.    Careful, skilled risk management is mandatory. It is very difficult for the novice trader to realize how unprepared he/she is to handle the risk associated with being naked short call options as the price of the underlying asset rises day after day.
Advice: If selling naked options is attractive to you (I shudder), please be certain that you sell an appropriate quantity of option contracts. Unexpected market events occur far more often than statistics predict -- and you must never own a position so large that it can jeopardize your entire brokerage account when one of those events does occur.
P/L Graphs illustrate Ultimate Risk
Buying options: Gains are unlimited whiles losses are limited to the cost of the options bought.
Risk Graphs: Buying calls and buying puts.
Buying spreads: Both profits and losses are limited, but the potential loss is reduced when compared with the strategy of buying options.
Risk Graphs: Buy call spread;  buy put spread.
Selling spreads: Selling call spreads;  selling put spreads.
Naked Options :  Selling naked calls;  selling naked puts.