A Beginner’s Efforts

Iron CondorsITM Diagonals

A Beginner’s Efforts

Disclaimer!I am a beginner and only offer my current

understandings. I make no claim regarding the verity or authenticity of this presentation.

Iron Condor – What is it?An Iron Condor consists of a short call and short put

vertical that takes advantage of time decay in a highly liquid range-bound Stock or ETF.

The underlying can move up, down, or sideways and have a high probability of being a winning trade.

An IC can be used as a primary building block of an option inventory.

Iron Condor – P, V, TSelection of the strike prices for an IC is key to

success because of the range bound nature of the trade.

An IC is a Vega negative trade and is best entered when volatility is high.

An IC is a selling strategy and takes advantage of Time Decay.

Greeks for the IC: Delta Neutral, Gamma Negative, Theta Positive, Vega Negative

Iron Condor – Steps to EntryCheck Open Interest; the greater the better, but a

minimum of 20 times the number of trades entered.Decide on capital allocation for the month and

enter in five lots over four to five weeks.Begin scaling in at 50 – 20 days to expiration.Scale in on same day each week; accept 30%+ ROR;

when 30% minimum is no longer available, go to next month.

Iron Condor – Steps to EntryTo determine strikes, sell call at or above

resistance; sell put at or below support or use 20 – 40% probability of expiring or use Straddle to capture Market Maker Move.

Do two-point wide spreads as these save on commissions by including two one-point verticals; they also earn more daily Positive Theta

Iron Condor – Steps to EntryTo illustrate the advantage of two-point spreads

over one-point spreads:Sell -50 Sept 74/76/62/64 @ .66 creditCommissions 309.95; Theta +104.96Sell -50 Sept 74/75/62/61 @ .37 creditCommissions 309.95; Theta +50.89Sell -50 Sept 75/76/61/62 @ -.06 debitCommissions 309.95; Theta +16.27

Iron Condor – Steps to EntryComparison

Two-Point Wide SpreadCommissions: $309.95

Theta: (+104.96)Single-Point Wide Spreads

Commissions: $619.90Theta: (+50.89) + (+16.27) = (+67.16)

Iron Condor – Steps to EntryPosition Sizing: Use no more than 2% on a Stock IC;

Use up to 5% on an ETF IC. ($100,000 portfolio, risk no more than $2-5,000)

Compute IC Trade Risk: Strike width on one side minus the credit collected; Portfolio Risk/Per Contract Trade Risk = # of Contracts to sell.

A Double Calendar, Vega Positive, may be added to the inventory to neutralize the IC negative Vega.

Iron Condor - Steps to ManagementCheck trades every day for possible adjustments.If trade remains within the range of the two short

strikes, do nothing.If either side of the IC goes to 10% of the option

chain width, close; then, sell at a strike price with lower probability as long as there are 20 days left in the cycle. (No extra Buying Power is required as this is a replacement trade.)

Iron Condor - ExitsIf trade moves outside the expected trading range

with ten days left to expiration, considerScaling out: Exit 1/3 or ½ of the contracts at a

time Closing the tradeStaying to the end and trading the probabilities

When 80% of maximum gain is reached, exit.Close within 10 – 4 days prior to expiration.

Iron Condor – ExitsSome will stay in the trade until the end of the

cycle. Their rationale: the trade was set up with a 30% chance of being

worthless and a 70% chance of being profitableIf the stock moves through both of our strikes,

the trader has experienced maximum loss; however in checking the Probability of Touching, there is a chance of the stock reversing itself thus providing some profit.

ITM Diagonal – What is it?• An ITM Diagonal Spread is one that involves trading

options with different strikes prices and different expiration dates.

An ITM Diagonal sells a front month option that is closer to expiration and buys a back month option that is further away from expiration.

An ITM Diagonal combines a calendar, in the front month, with a vertical spread in the back month.

ITM Diagonal – Steps to EntryITM Diagonals are best done on upwardly trending

or range bound stocks or ETF’sTo select strike prices, begin by determining where

the stock/ETF will be trading by the expiration of the front month.

Use Greeks to support your choices.

ITM Diagonal – Steps to EntryChoose to sell the strike with a Delta of approximately 30-40

for the front month, keeping in mind that the stock must have room to move to the chosen strike and expire worthless. A check of support/resistance and pace of movement of underlying can also be of benefit.

Choose to buy a strike with a Delta close to .70 for the back month. This needs to be below where the stock is currently trading because we want it to behave like the stock.

Choose 40 – 20 days to expiration for the front month and 60 – 150 days for the back month. We want to slow down Time Decay against us and accelerate Time Decay in our favor.

ITM Diagonal – Steps to EntryIt is best to do ITM Diagonals when $VIX is low.A consideration to help balance an inventory that

includes ITM Diagonals may be to enter trades having negative Vega like long call and put vertical spreads.

Evaluate the advantages/disadvantages of an intermediate/long term Diagonal.

Greeks for an ITM Diagonal: Delta, Neutral, Gamma, Negative, Theta, Positive, Vega, Positive

ITM Diagonal - ExampleBuy +1 IWM Jan 12 60 CallSell-1 IWM Sept 11 71 Call

Debit $9.51Commission: $3.00

Greeks: +38.90 Delta; -3.39 Gamma; +3.27 Theta; +8.46 VegaStock/Option Equivalency:

Option: Controls 38.90 shares of IWM stock @ $9.51 = $370Stock: Owns/Controls 38.90 shares of IWM stock @ $67.50 = $2,626

ITM Diagonal – Steps to ManagementManage the short option as a calendar which

benefits principally from Volatility and Time Decay. If the stock trades at the short strike (calendar),

within 20-10 days to expiration, roll the position or part of it.

Roll the short option when it has 10% of strike width within option chain remaining.

Roll the short option within the 10-4 day window before expiration.

ITM Diagonal – Steps to ManagementClose the short option anytime you want to make $

$$ on the long option without capping your gains.Bullish, when the stock shows strength (MACD rolling

higher).Take action if the trade as a whole goes into Negative

Theta.Because this presentation is limited to ITM Call Diagonals,

no attention is being paid to rolling ITM Put Diagonals.

ITM Diagonal – Steps to ManagementWhen an underlying moves quickly, it may be

necessary to roll strikes within any one calendar month, thus taking money off the table or taking on extra risk. Do this if the trade moves to Negative Theta.

Keep in mind that the long option is the vertical part of the trade and therefore directional.

Roll down to .70 Delta, when the existing Delta has moved to .86 or .90+

ITM Diagonal – Steps to ExitKeep track of debits and credits throughout the

history of the trade.Should the stock have reversed significantly and

should evaluation point to further losses, one might consider closing out the entire trade at whatever point of gain and/or loss the trade has earned.

ITM Diagonal – Some ObservationsDiagonals can take more margin than CalendarsVolatility can work dramatically for and against the

trader; hence, the importance of managing the Diagonal in the context of an inventory.

In a strongly trending market, the Diagonal can be a powerfully profitable trade because it benefits from the Directional Trend and Time Decay

It is possible to skew the direction of the diagonal in the context of a changing trend. However, there are Tradeoffs.