I hope everybody had a fantastic weekend! So I had a few questions last Friday about why we closed out our Iron Condor. In general people were wondering, since the strike prices of the Iron Condor were not breached, why close it out? Why not let it run and try to go for max profit? So let’s take a look at that Iron Condor we had open:
– The day we opened the trade on February 13th the S&P 500 was sitting at around 2658, which is marked by the green line.
– Last Friday the S&P had moved to 2747 marked with a red line.
The reason we closed the trade is because of probability. I’ve marked 1 standard deviation up and down on that chart with the white lines. As of today there is a 34% probability that the price of the S&P 500 will rise 1 standard deviation and take it right to the edge of the upper strike.
For risk management purposes we don’t want to allow the trade to get that close to the strikes, so it’s in our best interest to close this trade out and open up a new trade centered around the new price which we will do shortly.
That way we have once again centered our probability around the new information which is the current price. With Iron Condors we are trying to maximize our probability of profit, and the best way to do that is to be completely neutral on market direction and set up trades that have a lot of room both up and down. If markets chop around in the middle ground we can hold them for longer, but if there is a directional move it’s often necessary to close them a little quicker.
In this case we closed out our trade early for a 4% return on capital. Anytime we can make a profit and get into a stronger trade, that’s a win win.
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