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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

June 27, 2017

Lumentum Holdings (LITE) Is Coiling For An Up Move

This week we are looking at another company listed on the Investor’s Business Daily (IBD) Top 50 List. We use this list in our portfolio to find stocks that have been strongly trending higher and this week's stock is an outperformer which has done exactly that. The Terry's Tips ’ portfolio that uses this list as its source for underlying ideas is now up 90.3% for the year to date.

Terry

Lumentum Holdings (LITE) Is Coiling For An Up Move

Lumentum Holdings hit all-time highs earlier this month and analysts believe there's further upside ahead. Here are two articles that reveal where Lumentum could be heading and why - Lumentum (LITE) PT Raised to $80 at Needham & Company; 3D Sensing Could Double LITE'S Value and DA Davidson Starts Lumentum (LITE) at Buy.

The technical outlook for LITE is solid. The stock has been trending higher for over , , .

June 21, 2017

Is Alibaba (BABA) Ready to Accelerate Higher?

This week we are featuring an option trading idea based on a stock on the IBD Top 50 List that just delivered robust earnings guidance. We have added this spread to the Terry's Tips portfolio which trades vertical credit put spreads on selected IBD Top 50 companies (this portfolio has gained 77% so far in 2017).

Terry

Is Alibaba (BABA) Ready to Accelerate Higher?

Alibaba, broke out to fresh all-time highs last week following better than expected financial results both on the top and bottom line. Prices have been forming a bull flag pattern which is a pause that refreshes higher.

If you concur with the views expressed by these analysts, consider making this trade which is a bet that BABA will continue to advance (or at least not decline very much) over the next five weeks:

What impressed investors even more than the company’s financial result, was the company’s forward . . .

June 20, 2017

Is Arista Networks (ANET) Ready For An Acceleration To The Upside?

This week we are featuring another option trading idea based on a selection from Investor’s Business Daily (IBD) Top 50 List. I hope that it is of interest to you.

Terry

Is Arista Networks (ANET) Ready For An Acceleration To The Upside?

Arista Networks is up 56.3% YTD and recently published articles indicate the stock is poised for more upside. Here are two of them - With legal risks fading, Barclays raises Arista Networks target and Needham: 100G upgrade cycle is a boon for Arista Networks.

If you concur with the views expressed by these analysts, consider making this trade which is a bet that ANET will continue to advance (or at least not decline very much) over the next five weeks:

Buy To Open ANET 21Jul17 145 puts (ANET170721P145)

Sell To Open ANET 21Jul17 150 puts (ANET170721P150) for a credit of $1.80 (selling a vertical)

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TastyWorks

Tastyworks is a new brokerage firm from the brains behind tastytrade and it is our top choice of options-friendly brokers. Their commission rates are extremely competitive - options trades are only $1 per contract to open and $0 commission to close (all options trades incur a clearing fee of $0.10 per contract). The tastyworks trading platform quickly became our favorite platform for options trading and it keeps getting better with new features released each week. Terry uses tastyworks and loves everything about them!

TD Ameritrade

This Chicago brokerage firm with the unlikely name thinkorswim, Inc. by TD Ameritrade is considered by many to be the best option-friendly broker. For openers, they have extremely good analytic software and their option trading platform is exceptional. Thinkorswim Mobile has been called the best mobile app in the industry. In 2017, TD Ameritrade received 4 stars out of 5 in the annual Barron`s* Best Online Brokers Survey. TD Ameritrade was tops as an online broker for long-term investors and for novices. The company is the only broker that receives the highest 5.0 score for research amenities among all firms participated in the ranking last year.

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