How I Analyze My Iron Condor Option Trades

11/10/2010 12:01 am EST


Josip Causic

Instructor, Online Trading Academy

Last week's article, How I Trade Weekly Options on ETFs, addressed the topic of complex spread order execution. Yet, according to the e-mails that I have received, not everyone understood the actual trade. The point of the previous newsletter was not necessarily to teach the strategy, but to explain how sometimes splitting the execution of an iron condor into two short verticals can produce a more desirable fill.

Now, the point of this week's article is to analyze that trade. In order to do that, I will dissect last week's trade into two pieces and explain the logic behind it. Let me start with the whole spread first.

Iron Condor on Weekly IWM Options

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What the above figure shows is the data from my actual index card. Rather than recording my option trades electronically, I have created a habit of recoding my open trades on 3x5 index cards. They are handy and easily portable. I use the front of it for recording my entries and the back for recording my exit and also the lessons I learned from that individual trade.

Some of the data from my card is omitted in Figure 1 on purpose. I intend to go over that data in detail here. To make the explanation easier, I will divide the IWM iron condor into two short verticals.

Part One: Bear Call Side

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The figure above shows that by selling the 72 call, which at the time of entry was two steps out of the money, the trade had breathing room of (70.31 to 72.00) 1.69 to the upside. The exact amount of 1.69 is considered a cushion, so if IWM went sideways or down, the maximum profit of 15 cents per share would be kept. Had IWM lifted less than 1.69, the max profit would still be the same. To recap, IWM could go any way it wants as long as it does not close above 72 at expiry on October 29, 2010. If it stays below 72, the trade would achieve its max profit.

Part Two: Bull Put Side

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By selling the 68 put while IWM was at $70.31, the cushion to the downside was exactly 2.31, so as long as IWM closed above the sold 68 level, a maximum profit of ten cents per share would be kept.

The bullish side of the trade did not have such a good max profit, for the credit was less than the credit of the bearish trade by a nickel per share. Nevertheless, if both short verticals are combined, then the maximum profit for the iron condor is 0.25 (0.10 from the bull put and 0.15 from the bear call), while the maintenance requirement is still the same, one point. The brokers should know that the trade cannot be wrong at both ends at the same time; at least those more progressive brokers know this. Hence, if the max profit of 0.25 is divided by the max loss of 0.75, the rate of return is close to 34%. Moreover, that is 34% in one week.

The chart below shows IWM at the close on Friday, October 29 and the price was at 70.25, or virtually unchanged. The trade would have achieved the max profit, but I closed both short legs just before the bell for a penny each. I bought to close my ten short 68 puts and 72 calls so I could reinvest the money into another weekly trade.

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In conclusion, the trade discussed here and in the previous article did not achieve 34%, but only 30% (23/77) in a week. Make no mistake about the importance of technical analysis when trading a tight range such as the one described above. Option trading involves substantial risk, and past performance does not indicate a guarantee for future performance. Know your technicals and utilize option selling in sideways environments.

By Josip Causic, instructor, Online Trading Academy

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