Simple Iron Condors | Ken Rose, CMT | 12-05-19 | Advanced Options Strategies

tip a little bit in these types of
market conditions what type of option strategies come to the forefront wellö investors and welcome to our
advanced option strategy session here today today is December 5th it’s a
beautiful day here along a lot edge front hopefully things are nice forever
you folks are at as well so the markets kind of kind of had a little bit of a
pullback here the last few days a little bit of a recovery looks like it’s Tippin
here a little bit today and these types of market conditions we want to take a
look at what implied volatility is doing we want to look at the trends and those
types of things and from those make look at some considerations with regards to
some potential strategies and doing that in order to accomplish the goal here our
overall goal then would be that everyone will have an understanding of kind of
assessing the market looking at some of the key variables and then choosing a
strategy from that so with regards to accomplishing that our goal today our
agenda today will include a review of the market taking a look at the S&P 500
as well as the VIX the underlying implied volatility related to that look
at related strategies one that one that kind of tends to to stand out in these
types of conditions or iron condors will look at it will look at watchlist
criteria related to iron condors look at the use of Bollinger Bands with regards
to assessing potential candidates for iron condors look at a study called
Bollinger percent B and talk about how that could fit in with regards to with
regards to looking at potential iron Condor candidates also look at
probability columns look at the relationship between probability combs
and Bollinger Bands and how you can use those in combination to identify
potential candidates and of course will look to paper traded candidate so with
regards to sort of sort of our overall goal here today it would be that
everyone will understand not only the structure of iron condors but also
platform setups that can be used in identifying locating and analyzing
potential candidates with regards to iron condors before we get too far along
though let’s go ahead and run through our disclosures and in the way of disclosures are
just a reminder that in order to demonstrate the functionality of the
platform we need to use actual symbols however TD Ameritrade that does not make
any does not make recommendations or determine the suitability of any
security or strategy for individual traders any investment decision you make
in your self-directed account is solely your responsibility
transaction cost commission and other fees are important factors and should be
considered when evaluating any trade options investors options are not
suitable for all investors a special risk inherent options trading makes
those investors potentially rapid and substantial losses spread straddles and
other multi leg option strategies can entail substantial transaction costs
including multiple Commission’s which may impact any potential return also in
order to demonstrate the function of the platform we need use actual symbol so I
would do keep in mind that successful virtual trading during one time period
does not guarantee successful investing of actual funds during a later time
period as market conditions do change continuously so our paper money trades
aren’t necessary reflection of what could occur in the future here so again my
name is Ken rose and been here for close to 15 years great place to work a lot of
opportunities to learn and apply different things related to options and
both fundamental analysis I mean here I work I specialize in fundamental and
options in these different areas just just love looking at all this kind of
stuff you also may see me occasionally as a contributor on the on the TD
Ameritrade Network so here’s a little review of our deltas as we’re going
through this process we’ll take a look at deltas and we’ll take a look at
Greeks before we get too far along though let’s go ahead and take a look at
the market and discuss some considerations in regards to the markets
so here we have the S&P 500 I’m actually going to shift our style up here a
little bit just so we can primarily look at price movement here there we go so
we’re looking to chart this primary price what will actually shift back over
that other chart but we’ve got one year I’m going to decrease our timeframe here
so just we’re looking in the last six months that’s primarily what we’ll be
focusing on here for right now so what we can see here I’m especially want to
come over here and take a look what’s occurred just recently noise just
recently here we are on Thursday this today here we are on Wednesday we are on
Tuesday notice this big gap that we had to the downside on Tuesday also notice
this run to the downside that we had on Monday also notice that we had
some weakness going on here at the close last Friday so right here now it does
look like this little gray area here means that we’ve come off of the high
here today but we haven’t broken into this candle right here so this date
today appears to be somewhat neutral but this moved to the downside notice right
down here we have implied volatility and what I’m going to do here real quick
because I’m going to get our drawing tools here go up here they should be
here in just a moment we’ll give them just a second to get going here it looks
like we’ve got a little bit of a issue with these a little bit earlier maybe
we’re not going to be able to pull them up here but I’m gonna try one more time
it just makes a little bit easier to highlight things but right now I’ll just
use our pointer here but notice as the market moved down this is a graph of
implied volatility implied volatility move to the upside why does that happen
particularly when we’re looking at the SPX so the SPX is an index you can’t
actually buy the index but you can buy options on the index when investors go
in and start buying these options it increases demand for the options when
that increase in demand occurs we see that by a movement up of implied
volatility it kind of makes sense because if the markets moving down
options are popularly used as a hedge and so you could have institutional
investors moving in and acquiring some options in order to hedge their existing
portfolios and that increases this increases this increase in demand we see
that as an increase of implied volatility but when implied volatility
takes to move up like this and it’s starting to tip over and head down a
little bit then you think of strategies that benefit from falling implied
volatility in other words strategies that are Vega negative rather than Vega
positive to those strategies would be iron condors another strategy would be
butterflies we’ve we’ve done a fair amount of butterflies over the last two
or three sessions so I thought today we may go back a little bit and look at
look at look at iron condors and particularly look at iron condors from
the standpoint of setting up a platform in relationship to that you know there’s
there’s a lot of different things that you can do here on the thinkorswim play
that form there’s a lot of different tools you can use and we’re going to be
looking at using those tools and adding them to our charts specifically in an
effort to more effectively analyze stocks in a relationship to iron condors
okay so here we see this let’s go ahead and pull up let’s let’s take a look at
the VIX you see this graph right here if we wanted to see the VIX in candlestick
form we could just put in the symbol up here VIX and we’re basically looking
here at the at the Vixen candlestick form you can see right here as the
market weighing down here’s our pop up in the VIX now it’s starting to head
down a little bit but we’re still relatively high from where we were I
mean this is where we were at right now we’re still a little bit on the hind
side of where we’ve been for the last two or three weeks so that could mean
some possible opportunities with regards to iron condors now we’re not as high we
want to note that we’re not as high as we were back here okay so we’ve
definitely been higher all right we definitely been higher but it’s but that
still may open up the door for some potential opportunities we’ll go through
the process because who knows if the market does continue to move down if it
does see if it ratchets down moves sideways ratchets down and moves
sideways look at this move here to the downside how we got the VIX all the way
up here this moved to the downside the VIX all the way up here notice that
there’s a bit of tendency the last the last couple times where the markets gone
down kind of go sideways for a while before continues to go up but it has
continued to go of course we don’t know exactly what could occur in the future
but let’s let’s look at the let’s look at the iron Condor in some detail here
then as far as the structure now folks this it this is considered to be an
intermediate to advanced session it is assumed that you do have somewhat of an
understanding with regards to these option concepts in other words it’s
assumed that you know you understand what a call option is you understand
what a put option is you understand what a vertical is a short vertical and long
vertical because we’re going to be talking today about iron condors which
is it’s at which in essence is simply two short verticals and be looking at a
short put vertical we’re going to be looking at a short call vertical if you
don’t have an understanding in those areas then I would also
to encourage you to attend our getting started with option session okay
look at that getting started with option session that is that is taught on Friday
at 11:00 a.m. Eastern time by our very own Barbara Armstrong so take that into
consideration as well okay but moving right along here then with our
discussion here so this is showing you half of our iron Condor this is a short
putt vertical now on a short putt vertical for those of you that may not
have some familiarity and by the way you’re all welcome to be here you know
whether you whether you have advance knowledge or not you’re welcome to be
here I do try to structure things so so it has been it so our discussion is
beneficial to everyone but what what it what in essence a short putt vertical is
is we’re selling a higher strike price up in that area looks like that little
drawing isn’t going to help us out there all the shoes the pointer here okay so
here’s our short putt vertical notice that we’re selling a higher strike price
now a put option gives you the right to sell something so if we sell a put
option we’re selling someone the right to sell a stock to us at the strike
price of course the higher the strike price they can sell it to excuse me the
the higher the strike price they can sell the stock to us for the more
valuable that option is the lower it is the less value the option is so because
on a short put vertical we’re selling the higher strike price and we’re buying
the lower strike price in other words we’re selling someone the right to sell
us the stock at a higher strike price and we’re buying the right to sell the
stock to someone else at a lower strike price because we get more funds here
than what we pay here this results in a credit that’s why sometimes short put
verticals are referred to as credit spreads because typically they result in
a net credit in other words we take more money in from what we’re selling than
what we’re buying notice notice the risk graph here on the short put vertical we
have extensive risk over here to the left hand side over to the right hand
side we have profit and really on the short put vertical we just can go
sideways out here infinitum it doesn’t matter how high the price goes we just
continue to make profit here however our profit is limited here this is where our
profit caps up on a short put vertical well the second side on an iron condor
is the short call vertical and then I on a call option what a call option the
owner of a call option has the right to buy the stock at a certain strike price
or at a certain price when you think about it the lower the price you can buy
the stock the more that option is worth so if we’re doing a short call vertical
and we sell the lower strike price that’s going to be worth more than than
a higher strike price so the short call vertical we sell the lower strike price
let’s just say for example we’re selling someone the right to buy the stock from
us for ten dollars and we’re buying the right to buy the stock for fifteen
dollars well we’re selling the right to buy it at fifteen we’re buying the right
to buy it at ten and we’re buying the right to buy it at fifteen we’re getting
more of a credit for here than the debit that we pay up here so that results in a
credit notice the risk graph here though it’s pointing the other way now we have
risk over here on the right-hand side that can be extensive but on the
left-hand side it’s just flat here and it doesn’t matter how far down in price
the stock goes we still capture a gain here but our gain does cap off here well
if we put them both together it looks like this so what what occurs here then
what occurs here is now we have two credits instead of one we have two
credits instead of one so there there is there something to note here and one is
notice our risk here we can only lose on one side or another the price can’t be
down here the price can be up here at the same time we can lose up here if we
get up here higher we can lose down here if we get down here low we can only lose
on one side or another so what this trade results in is we get two credits
instead of one with essentially close to the same amount of risk but actually a
little but less risk because of the second
credit so our risk is our risk is is lessened a little bit and our credit in
other words our reward is basically doubled so we’ve doubled our reward and
we’ve increased our risk by a little bit but now we have these breakeven points
here no longer is it as far as the stock can go as high as it wants and we still
have profitability that’s no longer the case because now we have a short call
vertical up here no longer can the price go as low as it wants and we still have
profitability that’s no longer the case because now we have a short put vertical
on here so by adding the two we increase our return on risk but we decrease our
probability of profitability because we’ve we’ve we basically created a limit
to both the upside to the downside with regards to the break-even point over
here at zero so why do some option traders trade iron condors anyway what
would be the reasoning behind this well one would be here to look to take
advantage of sideways price action if you look at that profit and loss graph
it goes like that right so we want the price to stay above that
level and stay below this level so if we have sideways price action then it’s
more likely to stay within these two levels right here also trade with higher
probabilities so it’s not as high as it was with the verticals okay but by using
the appropriate deltas probabilities related to deltas we can still have a
probability here that can be greater than 50% and we keep weekend week and we can go
as great as we want we just want to keep in mind there’s a relationship between
the probability and the reward to risk ratio and the higher the probability the
lower the reward in relation to the risk so the so there’s always going to be
that trade-off and would also be looking to take advantage of the passage of time
in other words if we’re sitting on a portfolio if we’re sitting on a stock or
even a portfolio stocks and the market starts to go in a sideways trend like
this well we can stay in that portfolio stocks and we can continue to collect
dividends possibly if they pay dividends or maybe we get some upside movement or
some downside movement but if our forecast is for this sideways action so
in essence we’re not really looking to make a lot of capital appreciation then
we can use these iron condors to create some income during some of this sideways
movement that we would have going on when you consider play volatility when
implied volatility is high we talked about this a little bit earlier so why
would an iron Condor make sense when implied volatility is high well when
we’re talking about those two credit spreads you know in essence in essence
when you’re looking at those two credit spreads you have the call credit spread
and you have you have the short call credit spread you have the short put
credit spread when implied volatility is relatively high the options themselves
tend to have higher premiums so there’s a tendency it’s not always the case
where there’s a tendency to get a higher overall credit when implied volatility
is high because the demand for options has pushed up the demand has pushed up
the price for those options which can frequently result in higher credits so
you tend to have a situation where you have a higher return on risk when
implied volatility is relatively high this is just a graph show and they said
that this actually kinda looks like the graph we’re looking at here today right
I have this little pop-up of implied volatility over here it’s not at some of
these huge highs but still we do have this little bit
a pop up there to the upside again when price action is sideways we talked about
that look at those breakeven points you have the breakeven points you’d like the
price action to be relatively sideways to stay within those breakeven points
that you’re looking at what are some what are some
considerations with regards to watch list criteria well on iron condors you’d
like to have stocks because you’re talking about multi leg Multi leg
strategies you’d like the securities to be liquid and usually those liquid
securities are going to lend themselves well to narrow tight bid aspirins in
other words the slippage the difference between the bid price and the asset
price of the options isn’t it is is isn’t unsatisfactorily wide okay and
we’ll talk about that when we look at a sample watchlist that also usually
correlates with heavy trading volumes key areas to look for is penny increment
bid and ask spreads that’s whenever you look for another area to look for is
stocks that have weekly options available that also tends to lend itself
not only with regards to liquidity but also with regards to versatility another
key area to look at is to look at the it’s to look at the strike look at
available strikes and what is the what what is the latter with regards to those
strike prices are they do they come in 50 cent increments so they come in a
dollar increments do they come in two dollar and fifty cent increments do they
come in five dollar increments for four first many investors they’d like to see
those strikes come in 50 cent increments somewhere in the neighborhood of 50
cents to a dollar doesn’t necessarily kill the deal if they’re not in 50 cents
to a dollar but that is an area that a lot of investors will will frequently
look at okay let’s just take a look here with
regards to to watch list here and see where’s our little huh that’s
interesting folks I wonder if we have another glitch here let’s just check
this out here and see there we go okay so let’s just let’s just look at an
example with regards to a watch list okay we’ve talked about did a little
review of SPX iron condors we’re gonna talk now a little bit about watch list
criteria here we have a watch list I’m just going just going to run through
this relatively quickly okay one process you can use is you come up here to the
scan tab I mean first of all set this to our AO account compared to the scan tab
come down and roll over scan come down here and choose stock hacker and you can
put some you can put some some things in here I’m going to collapse this for now
so we have a little bit more real I’m actually going to take off what we have
here okay and rather than say scan in all stocks come to the public watch list
of penny increment options just come over here or click on this menu come
down to public look under the piece and choose penny increment options this
means all of the stock all the ones we’re going to scan in now are going to
be quoted in penny increments that tends to help the liquidity and come over here
and say intersect with again a weekly watch let’s say weeklies now they’re all
going to have penny err commence plus they’re gonna have weeklies then you
could add some then you can add some additional items here okay come over
here and add add that’s add some stock fundamental filters related to price
related to volume on different things we want to take the time here to do it here
but you but you could you could definitely do that okay then when you
run your scan and when you add things here with regards to price volume
average volume those types of things that will narrow it down further but
after you run your scan here you’ll get a listing of stock this is 268 this is
too many for many investors but when you add additional stock filters usually you
can get this down to down somewhere below 100 then once you have that you
can save this you come over here you can save it as a watchlist
then once you have the watchlist you’ll have a name then what you do is you can
come down to the bottom of the watch here click on the first stalk here come
over here open up the trade window and kool-aid tie your trade window to your
watchlist see this little menu right here that has these colors I’ve got this
link to red and over here I have my trade I’m going to link this to red so
that’s gonna automatically bring them up we know these all have weekly so maybe
go out a week or two open up the option chain strikes go with eight and just
just look at the at the money or the first one or two steps in the money
notice that on McDonald’s here we have is this is McDonald’s it looks like on
this one we have looks like we have two dollar and fifty cent increments right
here that’s on the weeklies how about here is that also two dollars and fifty
cents yeah these are two dollars and fifty cents as well so you have
representation it would be nice if these are fifty cents but that doesn’t
necessarily kill the deal look at the slippage the difference between the bid
and ask price here is four cents on both of these actually it’s two cents over
here four cents here as you go deeper in the money it ordinarily widens out which
is why it’d be nice to have 50 cent increments because I wouldn’t white out
so dramatically so you look at this if that’s acceptable leave it in there if
it’s not hit your delete key and they hit your up arrow key and go to the next
one and look at the next one this one does have 50 cent increments and work
your way through your through your watchlist here
deleting in other words culling out the ones that you don’t want then you’ll be
left with your watchlist and that’s basically the process that we used here
in developing this watchlist okay alright so then you then you’ve got your
watchlist together let’s go back here to our slides here for a sec why they’re
being tricky here on these slides them I’m wondering why it’s doing this it’s a
little bit odd that is strange
Wow let’s try this okay there we go and let’s play it
around for that looks like a kick trap expiration duration consideration use a
time frame that produces a satisfactory premium as we go in and look at an
example this will become more clear it’s like the trifle time frame that fits
technically so we will look at our technical analysis we want to feel
comfortable with our forecasts as we’re the preservation ship to where we feel
the price of the underlying security is going to be considerations when
selecting prices the price strike prices choose strike prices with Delta’s that
result in a good balance between probability and return and we will look
at an example of that with regards to the probability we want our probability
to be above 50% that’s that’s what we’re playing the part of that investor would
also like a return that is satisfactory to go along with that in calculating
that return what we do is we take the max gain which is the credit received we
take though we look at the max loss which is the width of the vertical minus
the credit received and we can calculate our return on risk okay which is the
credit received divided by the max loss and we will look at an example of that
okay let’s go ahead and end and go through the process here of looking at
an example so first of all let’s look at our setup here’s our chart part of what
we want to do is we wanted to discuss a nice setup when you’re evaluating on
your condors so I’m going to come up here to style because I have a style
saved here I’m gonna load it up and it’s gonna be iron condors right here here it
is so let’s talk about what we have here on the chart okay we have around the
chart first of all we have Bollinger Bands
why would Bollinger Bands come into play well right now we can see Verizon but
let’s just talk a little bit about what Bollinger Bands are okay Bollinger Bands
when you’re looking at Bollinger Bands you’re looking at the normal
distribution of price movement so so if if the Bollinger Bands if the stock is
if is the stock is up against the higher high Bollinger Band it’s up here in this
area on the normal distribution where the stock isn’t likely to stay
so the lower Bollinger Bands again it’s at an area where the stock is not likely
to say if it’s in the middle of the Bollinger Bands and it can go up or down
but it tends to be a tad more of a neutral position when we’re looking at
Bollinger Bands we’re looking to stocks right here we have Verizon it’s hugging
the upper band right here so could it say the upper band it could look right
here it hug the upper band here so we can stay there for a considerable period
of time but from a statistical standpoint it’s not likely to stay there
it’s more likely to move down more towards the lower band so we came down
here to the lower band we moved up to the upper band it’s typical you’ll see
lower band upper band lower band upper band if you can find Bollinger Bands
that are kind of starting to squeeze in a bit so we’re getting less volatility
and the stocks trading centered within the Bollinger Bands some investors some
inventor Sylvester’s will look at that as a potential setup because it can help
them in setting up their trading relationship to support and resistance
and probabilities we’ll take a look at that as well over here so here’s our
Bollinger Bands over here we have a probability count this probability cone
this is giving us an idea of this of where the stock will be on the
expiration let’s see how we have our probability cone setup right here I’m
just going to come over here to studies I’m going to come in here to edit
studies and look at our probability cone we have it so the probability range is
55% okay so the probability that cones are set in here so the probability is
55% that the price will stay inside of the cone right here and which is greater
than 50% which is why we which is why we have the probability cone right there is
because when we put this together we can use this probability cone to assess
whether or not our breakeven points on our trade match up with a 55 percent
probability okay if it matches up in other words if we’re able to keep our
breakeven points inside the probability cone then that’s another indicator
suggesting we have a probability that’s greater than 50% so how about finding
stocks that the the Bollinger Bands are starting to crunch in and also the stock
is currently trading at the middle of those at the middle at the middle of
those Bollinger Bands well that’s where Bollinger % be comes into play this is a
custom column you can add again our studies those who aren’t familiar with
it to add these studies just come up here to studies and it’s studies just
start typing in the name or look forward to alphabetically over here you’ll find
it click on it choose when you when you click on and identify just choose ad
selecting and you push it over there that’s how you add those studies for a
custom column over here once your looking at your watch list do a right
click on the symbol here in the upper left-hand corner choose customize come
over here and you’ll find over here in this column Bollinger percent B you can
start typing it in find a Bollinger percent B right there move it over and
you’ve got it okay we already have it so I’m going to take our Bollinger percent
B here and what I’m going to do I’m going to look at it so to be in the
middle would like to stock to be somewhere in the neighborhood of about
35 to 55 we’re probably not going to get something exact in fact one thing you
can do is remember we wanted to have those higher levels of implied
volatility you could sort by implied volatility which I did here first I
sorted by implied volatility The highest implied volatility here looks like sits
BBY but on the Bollinger Band it’s hugging the outside band at 75 if I pull
up the chart here for BBY let’s let’s narrow our time down here a little bit
further so we can focus a little bit more recent on recent price action so we
can see our Bollinger Bands notice we’re at the top here on Verizon how about BBY
notice again we’re at the top here kind of scheduled to move down or implied
volatilities awfully high right but it’d be nice if for a little bit more
centered have about twt wlo we come down here you can see one thing we can see
here’s a couple things I’m going to take this line off of here let’s clear our
drawing set here we may come back and use that same drawing set but you’ll
notice right here the investors if we look at this a couple things going on
here now again I’m not recommending twl oh I’m just recommending to you use this
process to see if this this is something that works out for you
notice our Bollinger Bands a couple things are happening one the price is
close to the center of the bands it’s not perfect but it’s close but also
notice that the bands are creeping to the inside what does that mean it means
the stocks becoming less volatile now some investors like a stock that’s
becoming less volatile because notice here the stock is the stocks start to
become less volatile here and then it went sideways for a while if it’s gone
sideways for a while what’s likely to happen well at some point it’s gonna
become more volatile okay we’re something for some investors they
kind of like it when it’s becoming a little bit less volatile there’s a
possibility not a guarantee there’s possibility potentially a more extended
site and more extended run moving sideways there okay so let’s let’s go
ahead and Willy will use twl low for further analysis okay I want to come up
here to the trade tab yeah let’s clear everything off let’s
start off here with the new let me take this off of here we’ll delete that this
we’re starting off with a brand new slate let’s say implied volatility is
relatively high so sometimes when it’s relatively high you can you can go with
the shorter timeframe do we feel more comfortable forecasting that sideways
movement for 22 days or for 50 days we’ll play the part of the investor that’s
more comfortable 22 days think of maybe 22 days will give us a will give us a
premium that’s also good would probably feel even more comfortable going with
one day we’ve go with one day there’s probably not enough time value on those
options to get a premium that is going to be reasonable unless of course maybe
have an earnings announcement or something that’s coming up that’s
possibility but let’s play the part of the investor this look in here 22 days
okay let’s look at the chart again when you look at this chart
what are you Filner you film it’s more likely to move down from here or so
we’re more likely to move up from here it looks like it found a base here then
it came up a little bit looks like we’re a little bit further from the upper band
than we are from the lower band okay the moving average line
essentially gone flat we came up here well you know it looks fairly flat I
don’t know that I have kind of a leaning towards up or down other than if I look
at the lower band here it’s moving up quicker it’s moving up quicker here than
the upper band so let’s say we’re a little bit where it’s slightly a little
bit more bullish on this than we are bearish on it that means is when we set
this up we might want to we might want to in looking at our deltas we might
shift our iron Condor just a little bit to the upside not too much but maybe
just a little bit so what would that look like then well let’s get our option
chain here I’m going to go ahead and select all so we’ve got all these now
the Delta right here is giving us a probability a probability that the
option will be in the money okay we’ll go ahead and use that let’s
also come out here and see here wonder if we can grab another let’s see let’s
come over here let’s pull probability in the money here as well those should be a
cinch they they should be pretty fairly fairly closely my primarily just use
Delta it looks like this one does it out to a couple of decimal points but we’ll
use Delta and kind of look at the relationship between them okay this one
here is it’s interesting this is 36 this is 39 so a little bit of difference
there probability in the money 39:36 well we’ll go ahead and stay with state
stay with Delta for our example I did want to I did want to look at this study
here as well though okay all right so so Delta’s giving you an approximate
probability that the option will be in the money on the expiration day and it
looks like this column is as well I want to research this a little bit further I
would think they’d be a little bit closer than that just wonder if maybe
there’s probability of touching in there a little bit that could be we’ll just
stay with the Delta here though so if we want a trade that has a probability of
success that is greater than 50 percent we’re going to want to sell our options
with Adele with a delta that’s less than 25 because we’re going to be set we’re
going to do a short put vertical a short call vertical the probability on those
options that the probability that either either one
of those options could get into trouble is going to be related to the option
that we’re selling and the Delta that we’re selling so if the short put
vertical were selling a delta of 25 and if on the short call vertical we’re
selling a delta of 25 both of those add up to a combined delta of 50 so we have
a 50% probability from a theoretical standpoint of being successful so we
want to sell so the combined Delta’s are less than 50 so that’s what we’re going
to be looking to doing here so but we’re going to we’re going to we’re going to
we’re going to lean it a little bit towards the upside so on our call side
then we’re going to go with a lower Delta then on our put side so on our put
side let’s say we’re okay on our put side going with a 26 Delta which is
higher than a 25 but on the call side we’re going to move that up to like a 22
because we want to shift this a little bit to the upside so here’s our 26
Delta’s so let’s say we want to go a dollar wide these come in 50 cent
increments so I’m going to do a right-click here I’m gonna choose sale
because iron condors are considered our credit transactions they result in a
credit usually you do want to do a sell when you’re doing a credit transaction
we’re gonna go deep and wide because we want to have at a dollar wide rather
than 50 cents you’re gonna go one month to strike prices iron Condor now what do
we know about our iron Condor here well we know our iron Condor were we know we
have the put strike price desired selling the 9250 and buying the 9150
there’s our there’s our iron there’s our short put vertical selling
the 9250 buying the 90 150 but the call side it’s just put in there somewhat
symmetrical so we need to fine-tune the call side we need to come down here on
the call side and pick a delta we said would come out here to like a 22 on the
Delta okay that was a 26 actually let’s come all the way out here to a well for
26 and 22 that puts us at 48 so we still have a probability that’s greater than
50 let’s go ahead and we’ll start here we could choose to move it out further
okay we’ll start here though so we want to do on the call so we want to
105 and by 106 so here’s our cell on the call let’s change this to 105 selling here and then right here
we’ll go with 106 buying and we have a credit of 40 cents so where where are we
at right now if we’re looking at it from a mathematical standpoint let’s let’s do
our math here okay we’re gonna do our math outside of commissions so what is
our what the length of time we’re in the trade we’re in the trade for 22 days
what’s our return on risk currently it looks like we could we could get filled
somewhere around you know if you look at the mints here 39 the naturals all the
way down here 29 I’m gonna come here about halfway not quite halfway but
right in there at about 35 cents so if we get filled with the halfway point
there our credit is 35 our max loss is what we talked about this before it’s
the distance between the strike prices minus the credit this is between the
strike prices is a dollar the credit is 35 cents the max loss is 65 cents take
our credit divided by the max loss of 65 gives us a return of 53 percent over 22
days okay so if we divide that by the number of days then talking about about
about 2.4 percent per day for I would say the many investors would consider
that to be a relatively high return which is probably going to mean the
probability is probably going to be we have it set up so it’s going to be it’s
it’s theoretically greater than 50 but not a whole lot greater than 50 right
because our probability of success we were selling a delta of 26 and we were
selling a delta of 22 right what’s this of 48 is our probability of getting in a
difficult so our probability of success is going to be the inverse of that you
have a 52 percent probability successful well look at the chart look at some
different things we may want to go out a little bit further
to increase our probabilities in other words go go with lower deltas but let’s
see what this looks like first after having looked at the numbers we can do
that we can go over to the analyze page let’s go to the analyze page we’ll take
our trade over the analyze page here we are here let’s reset everything over
here to begin with let me reset that and I also want to
reset this we set our slices also let’s delete simulated trace to start off with
just so we’re starting with a clean slate here let’s get some room here okay
then we’ll come back over to our trade and we’ll move this back over to the
analyze tab here’s our iron Condor right here it says show all on our position
and simulated trades we’re going to want to change that to hide positions just to
make sure that we’re only seeing this so here’s our iron Condor and a little bit
difficult to see here so I’m going to trace it here so we can see it a little
bit better over here that’s our breakeven line I’m tracing and I’m not
doing a very good job of it here’s our profitability line again I’m trying to
trace it not doing a super job at trying ok and so right here there’s a
break-even point and right here is a break-even point and between these two
points here is our max gain so we want to see what these points look like on
the chart we know what our probability is right our probability is 52% if we
widen these out that that should increase our probability build it will
decrease our return on risk so we can look at this on the chart let’s first of
all set this to our breakeven points we’re going to come over here and choose
set slices to break even on the expiration day which is December 28th
but I’m just going to add two more slices I’m going to set those of the Max
gain place and to do that I just clicked on the plus arrow
this little plus sign right here I just clicked on that to add a couple of
breakevens and there’s our breakevens right here okay so here we are now we’re
ready to take a look at this on the chart so come over here and say set
slices to charts right here there’s our slices we want to look at
our our expiration day okay so let’s go back what was our expiration day on
these the 27th of December so whatever what have we talked about day we’ve not
only talked about iron Condor the construction of an iron Condor what an
iron Condor looks at some of the things looked at we also talked about an
appropriate set up that investors will use we talked about Bollinger Bands we
talked about the probability cone we talked about Bollinger percent be how
you can take those those three or four indicators and use those to help to help
possibly improve your performance with regards to these iron Condor trades what
I’d like to encourage all of you to do is basically do what we just did you
know just just take what we did put together a little watch list the way
that we did it pick a stock out of your watch list look at implied volatility
look at Bollinger percent B choose a stock go through the process and do a
paper trade and then follow through on that paper trade to see how it performs
next time we get together we’ll go ahead and we’ll review to see how how how our
trade did here we’ll look at possibly managing this trade as as we go forward
from here okay alright investors so with that let’s go ahead and wrap things up
here today then just a reminder that in order to demonstrate the function either
platform we need to use actual symbols however TD Ameritrade does not make
recommendations already determine the suitability of any security or strategy
for individual traders any investment decision you make in your self-directed
account is solely your responsibility everybody just reminder again you can
follow me on twitter at KR o SC underscore TD a love to see over there
you can send me direct messages over there questions and the like I’m I’m not
able to address hall but I try to address as many as I possibly can I hope
you all have a fantastic rest of your week and also we can you know after
tomorrow have your weekend coming up bestest with success in your investing
and we’ll catch you later everybody see and thanks again

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