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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

February 19, 2018

Is Floor & Decor (FND) stock offering an entry point?

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. The actual portfolio we conduct at Terry’s Tips using these trades has gained 36% over the first six weeks of 2018 in spite of losing money on one of the spreads.  The average of all our portfolios has gained 23.2% while the market (SPY) is up only 2.2%.

Terry

Is Floor & Decor (FND) stock offering an entry point?

Several analysts expect further upside for FND stock, one analyst has recently revised up price targets to $50 and this article discusses recent favorable coverage in the media.

FND is seen bouncing from a  notable confluence of support near the $43 price point.  The area contains a horizontal level at $42.43 that was previously major resistance that is not seen as support.  Also, the lower line of a rising trend channel is found near the horizontal level.  The combination offers strong downside support and price action so far has shown buyers to protect the area.

February 5, 2018

Is Alibaba’s (BABA) Post-Earnings Dip a Buying Opportunity?

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 portfolios to spot outperforming stocks and place spreads that take advantage of the momentum. By the way, while last week was the worst week for the market in several years, our most popular portfolio managed to gain 55% for the week after its underlying (Facebook) announced earnings.

Terry

Is Alibaba’s (BABA) Post-Earnings Dip a Buying Opportunity?

Several analysts believe there is further upside ahead for Alibaba, here are two of them – Alibaba PT Raised to $218 at Deutsche Bank and Alibaba PT Raised to $250 at Morgan Stanley.

Alibaba stock fell under pressure following last week’s earnings release and is seen trading near the halfway point measured from last month’s low to a high posted at the end of January. Strong support is seen near the psychological $180 price point as it confluences with the lower line of a rising trend channel as well as the 61.8% Fibonacci retracement of the leg higher from early December.

January 29, 2018

Consider Interactive Brokers Group (IBKR) After Their Earnings Report

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 option portfolios to spot outperforming stocks and place spreads that profit if the momentum continues, at least a little bit. By the way, the 9 actual options portfolios we carry out at Terry’s Tips had a banner week again last week, with an average portfolio gain of 8.8%, 4 times the weekly gain for the market (SPY) gain of 2.2%.

Terry

Consider Interactive Brokers Group (IBKR) After Their Earnings Report

Interactive Brokers Group stock rallied to all-time highs shortly after their earnings report which was released earlier this month. Analysts at Zack’s believe there is further upside and have recently published an article indicating Why Interactive Brokers Group Stock Might be a Great Pick. Another article published on Motley Fool breaks down why Interactive Brokers is “building a sustainably profitable business heading into 2018.”

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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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