Kerry W. Given, PhD (aka Dr. Duke), is founder of Parkwood Capital, LLC, a business that consists of stock and options coaching, a monthly newsletter, a small hedge fund, and two trading advisory services. He writes a monthly column, "Ask Dr. Duke," and conducts monthly Webinars with, SFO magazine. Dr. Given speaks frequently at trading conferences and on behalf of various option brokerage firms. He is the author of No Hype Options Trading published by John Wiley and Sons. Dr. Given earned his BS from the University of Florida and his PhD from the University of Minnesota.
Iron condor option trading can be profitable but most traders miss an important piece of the strategy. Learn what that is from Kerry Given.
A very popular option strategy these days is the iron condor, but you may be missing a piece of what makes this successful. My guest today is Kerry Given to talk about that. So Kerry, iron condor is a very popular strategy, but I think maybe some traders may be missing a really key piece of this. What is it?
It is how you manage the trade. Unfortunately, a lot of people find that they read a book or somebody teaches them how to put on the condor and they think wow-this is a great trade-and it is fairly simple to put on. Unfortunately, the worst thing that can happen to you is you put on the first couple for the first couple months and make money; but then the market drops or else runs up very strongly and you can lose an awful lot of money.
I know you have to adjust in part of that management. How do you adjust an iron condor?
Well generally speaking, the best adjustment that I know of that I use personally is to buy a long call or a long put in the next month out; so if the market is trending up like it has been lately, for example, and it is pressuring your call spreads, then you go out to the next month and buy a call. I usually buy one of those calls for every ten condor spreads that I have. Then what happens; if the market continues to move up, your call spreads are losing money but your long call is gaining money; so it moderates your risk and moderates your losses while you are waiting for the market to either pull back or slow down.
And should that long call that you go out and buy be the exact same strike price as part of the spread?
Well generally speaking, I start with the strike of the short option and I also start with one option for every ten condors. I actually experiment with options analysis software to look at what seems to be the optimum because generally speaking, if you bring that strike down a little more in the money, you get a stronger hedge; but what you also sacrifice is some of your positive theta in your trade, so you have to find the balance.
What software do you use to do your analysis?
I use Platinum, but OptionVue and a lot of the brokers' Web sites, now have very good options now with the software where you can do the same thing.