We’ll be closing out our current Iron Condor for profit today. I often get questions about the levels we are looking for to close them out. Is it based on time? Is it based on profit and loss? What is the reason we’re closing it out? Let me go into a little more detail about my option trading process.
As I’ve mentioned in the past, option trading is very diverse and no two traders will have exactly the same style. While I would definitely say there are better ways and worse ways to go about it and there are many aspects that are pretty much universal across all successful traders, technically there are no right and wrong answers. So hopefully through my explanations of our trades you can learn the fundamentals and then perhaps in time with enough experience start adding in your own style.
It’s like learning to cook. It’s best to learn from professionals on the basics and follow their recipes pretty much exactly for a while until you understand what goes into the preparation and flavors. Then with time and experience you can start adding in your own ingredients and tweaking the recipes to match your palate. So if you’re new to option trading, consider just following my recipes for a while. If you’re more advanced, feel free to throw in a little metaphorical turmeric or cinnamon if you’re feeling feisty 🙂
– Some iron condor traders follow a strict time schedule. They may open their trades with the same number of calendar days, say 50 days out to expiry and then close them with the same number of days left, say 10 days out.
– Some others follow a price formula. Open this iron condor at X$ premium and then close it when profit of 50% of the original premium is achieved.
– Others may be structural. Open iron condor at 1.5 standard deviations and close it out if the underlying gets within X distance to the short strike.
There’s many ways to be completely structural and mechanical with iron condor trading and I’d say in the beginning that would be best for people to adopt. Strict formulas for success which do work if you use them consistently over time and have discipline to follow them in good times and bad. The option market is very mathematical and there are ways to consistently arbitrage that volatility risk premium through strict rules based trading.
However to really get a market crushing rate of return it requires going above and beyond the basics. I’ve been doing this for a long time now and have a pretty good understanding of how they work in all market environments, so I don’t follow those structural rules as closely as I used to.
I treat every iron condor as an entity on it’s own and no two are ever exactly the same. I open them when it’s the ideal time with the highest probability of success and I’m extremely patient with my entries. I’ve always believed that 80% of an option traders long-term success is good entries. As you’ve probably noticed, I don’t mind waiting in cash for the right opportunities to arise. A good iron condor recipe is higher volatility and a defined price range. A good bull put spread recipe is testing resistance and short term lows. The best recipe for broken wing butterflies is to ride a continuation of a trend. The list goes on, but it’s all about the entry.
For this latest iron condor, we opened it when the price range was defined and volatility was high. Here was the chart on the day we opened it:
The original premise was to capture some of that volatility crush and wait until the S&P 500 finds a trend again. That’s happened. Volatility declined nicely and the short-term trend has shifted from neutral to up. In my eyes no matter what the trade is at the original premise has been achieved and it’s time to get out. Fortunately it’s also for a nice little profit but it’s not being closed out for any price reason. It’s because we’ve achieved our trade thesis.
When I open a trade because I think the probability of X happening is high, when X does happen it’s time to exit and allocate that capital to the next opportunity.
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