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Iron Condor Spread

The (Short) Iron Condor Spread is my all-time favorite spread when I think the market will trade within a fairly small range for the near future.  It is a little complicated, but worth the effort to learn.

With a name like this, it's got to be a great spread.  I know what a condor is, but I wouldn't recognize a short one if I saw it, and I've never seen an iron one - all the condors I know have feathers.

If you really want to impress your friends, you can tell them you own a Short Iron Condor Spread, or wow them even more by saying you also are long a strangle and short another strangle which is more in the money. Or you can say you have a bear call spread and a bull put spread, or else a short vertical call spread and a short vertical put spread.  They all mean the same thing, but who really cares what they call them?

The Iron Condor spread involves the simultaneous purchase of a put and a call for the same expiration month (usually only one or two months of remaining life), and the sale of a put and call for that same month but at a strike price which is closer the to current stock price than the options you purchased.

The result is that you end up with two vertical spreads, one of which uses calls at the higher strikes (called a bear call spread) and puts at the lower strikes (called a bull put spread) with all positions in the same expiration month. The number of call spreads is equal to the number of put spreads, and the increment between the strike prices is the same for both spreads.

Typically, an iron condor spread is sold rather than bought (so it should really be called a short iron condor spread).  Since both the puts and calls which are sold have a higher value than those being purchased, it is a credit spread.  It is placed when the investor believes the underlying stock will end up inside of a certain range of prices.  If it does, all four options will expire worthless and the investor will pocket the original credit she received when originally placing the spread.

The iron condor is so named due to the shape of the profit/loss graph, which loosely resembles a large-bodied bird.  In keeping with this analogy, traders often refer to the inner (short) options collectively as the "body" and the outer (long) options as the "wings".

The word Iron is used (for no apparent reason that I have been able to find) to describe a spread where one part of the overall position is a spread at strike prices above the current price of the underlying stock and the other part of the overall position is at strikes below the current price of the stock.  An iron butterfly is another example of using iron in this manner.

Six reasons to love Short Iron Condor Spreads:

  1.     The stock can go up, down, or stay flat, and you can still make a profit.
  2.     Exceptional profits are possible every month
  3.     Extreme flexibility is possible in creating a comfortable risk level
  4.     You can precisely determine your maximum potential loss (or gain) before you make the investment
  5.     If the stock closes anywhere in a broad range at expiration, a guaranteed pre-determined profit is made
  6.     You only have to wait a maximum of 30 or 60 days to learn how much you have made or lost.

One reason not to like Short Iron Condor Spreads:

  1. You can lose your entire investment in less than 60 days.

For this reason, the best way to carry out the iron condor strategy is to be willing to take a small loss at times because it eliminates the possibility of incurring a larger loss, and only investing a portion of  your capital at one time.  Theoretically, if you only risk half your capital at one time, you will never run out of money to invest.

 

Terry's Tips Stock Options Trading Blog

January 20, 2019

Consider Cadence Design Systems (CDNS) Following the Technical Breakout

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Terry

Consider Cadence Design Systems (CDNS) Following the Technical Breakout

Several analysts expect more upside from CDNS, here are two of them – Disney and 4 Other Stock Picks from a Parnassus Fund Manager and Why Should You Retain Cadence Stock in Your Portfolio?

CDNS is seeng breaking higher from a triangle pattern which signals a continuation of the broader uptrend, often with a pick up in upside momentum.  In addition to the technical break, the stock is one of few on the IBD Top 50 List, and in the broader markets for that matter, that is on the verge of breaking to record highs.

[caption id="attachment_2320" align="alignnone" width="300"]CDNS Chart January 2019 CDNS Chart January 2019[/caption]

*source Tradingview.com

If you agree there's further upside ahead for CDNS, consider this trade which is a bet that the stock will continue to advance over the next four weeks, or at least not decline very much.

Buy To Open CDNS 15FEB19 43 Puts (CDNS190215P43)
Sell To Open CDNS 15FEB19 46 Puts (CDNS190215P46) for a credit of $0.65 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when CDNS was trading near $47.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers).  Each contract would then yield $62.50 and your broker would charge a $300 maintenance fee, making your investment $237.50 ($300 – $62.50).  If CDNS closes at any price above $46 on February 15, both options would expire worthless, and your return on the spread would be 26% (380% annualized).  Note:  Options on CDNS are fairly illiquid, with large bid-ask spreads.  It would be especially important to place a limit order rather than a market order here.

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

[caption id="attachment_2321" align="alignnone" width="300"]IBD Underlying Updates January 17, 2019 IBD Underlying Updates January 17, 2019[/caption]

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

January 13, 2019

Can CyberArk Software (CYBR) Continue the Upside Momentum?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Terry

Can CyberArk Software (CYBR) Continue the Upside Momentum?

The Investor’s Business Daily recently published an article picking out CYBR as one of the 5 best companies that stand to gain as the market rallies, view the full article here.  As well, take a look at this article published on Zacks that details CYBR as an outperformer among its peers.

From a technical perspective, the main appeal to CyberArk’s stock is that it’s trading within a rising trend channel while a majority of stocks remain within a declining trend channel, which is an indication of strength.  In fact, looking at the CYBR chart alone, it would not be apparent that the broader markets had such a volatile decline in the last two months of 2018.  The stock price ended last week near highs and looks to be threatening a break above the December top.

[caption id="attachment_2315" align="alignnone" width="300"]CYBR Chart January 2019 CYBR Chart January 2019[/caption]

*source Tradingview.com

If you agree there's further upside ahead for CYBR, consider this trade which is a bet that the stock will continue to advance over the next four weeks, at least a little bit.

Buy To Open CYBR 8FEB19 75 Puts (CYBR19028P75)
Sell To Open CYBR 8FEB19 78 Puts (CYBR19028P78) for a credit of $1.33 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when CYBR was trading near $80.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers).  Each contract would then yield $130.50 and your broker would charge a $300 maintenance fee, making your investment $169.50 ($300 – $130.50).  If CYBR closes at any price above $78 on February 8, both options would expire worthless, and your return on the spread would be 77% (1124% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

[caption id="attachment_2316" align="alignnone" width="197"]IBD Underlying Updates January 10, 2019 IBD Underlying Updates January 10, 2019[/caption]

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

January 6, 2019

Will Five9 Inc (FIVN) Break Higher From It’s Range?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Terry

Will Five9 Inc (FIVN) Break Higher From It’s Range?

Take a look at what these analysts have to say about Five9 – IBD 50 Stocks To Watch: How Cloud, AI Shape Five9’s Software Future and Lookout for these Two stocks: American International Group, Five9 Inc.

Five9 has consolidated higher since hitting a low in late October and is seen trading within a range.  The stock is an outperformer as most stocks posted losses in the last two months of the year.  A technical pattern is emerging as a triangle can be drawn around the recent consolidation.  To the upside, a break above $44.40 would suggest a bullish breakout.  There is a confluence of downside support deriving from a rising trendline, the 50-day moving average, as well as a horizontal level.  The horizontal level, which resides at $39.55, is considered well respected as it has acted both resistance and support on several occasions since the initial test in June.

*source Tradingview.com

If you agree there's further upside ahead for FIVN, consider this trade which is a bet that the stock will continue to advance over the next six weeks, or at least not decline very much.

Buy To Open FIVN 15FEB19 35 Puts (FIVN190215P35)
Sell To Open FIVN 15FEB19 40 Puts (FIVN190215P40) for a credit of $1.18 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when FIVN was trading near $43.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers).  Each contract would then yield $115.50 and your broker would charge a $500 maintenance fee, making your investment $384.50 ($500 – $115.50).  If FIVN closes at any price above $40 on February 15, both options would expire worthless, and your return on the spread would be 30% (281% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

[caption id="attachment_2311" align="alignnone" width="266"]IBD Underlying Updates January 3, 2019 IBD Underlying Updates January 3, 2019[/caption]

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

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