foreign with our little everything you need to know series on all the strategies that we deploy in our trading so we're going to be taking a look at iron Condors today and give you everything you need to know on iron condors so an iron Condor it's a it's a delta neutral option strategy it's made up of of a combination of a short out of the money put spread and a short out of the money call spread um you if you've heard Condor before it's the same sort of setup as a condor but you're trading all out of the money spread so a condor would be like an in the money call spread long call spread with a short out of the money call spread iron Condor is just out of the money option so you replace the long spread with a short opposite spread so a short put spread instead of the long call spread set up for these trades so of course we're looking for high ivr or and I should say high IV um and high implied volatility your net short premium you're selling two spreads you want to be selling as juicy a premium as possible so we want that implied volatility to be high typically we're looking to sell that around you know one standard deviation to up to the 30 Delta option for the short option it's a you know there's no perfect strike it depends on your risk tolerance depends on how much Capital you want to deploy but we stay somewhere in that range from the 16 to 30 Delta for the short option and then the width of the spread depends on how much Capital you want to deploy how much risk you want to put on all that good stuff but it we will talk about spread width as kind of a really big important part of iron Condors typically or specifically in reference to con number of contracts verse width of the spread we're going to go into depth on that but for the setup if you're doing this as a you know 30 Delta short options we want to collect about one-third the width of the strikes if you're going say five dollars wide or ten dollars wide we Target around one-third the width of the strikes and that's in the total position so you might sell a dollar in premium on the call side and a dollar or and two dollars on the put side net net we want to collect about three bucks in premium for that whole position on a ten dollar wide sizing I want to keep in mind where our risk is uh when we're looking at adding contracts versus widening spreads it will go more in depth on that on the last side and one more point just with Futures now and especially because we were talking about some of these Futures contracts we're trading keep in mind that with Futures you have spanned margins so you you get relief on the buying power being used on the position so you're not putting up the full Max risk but as things change with that with that Futures Contract meaning the price of the the underlying moves and gets closer to one of your spreads or volatility increases or time passes you can see that buying power expand and get closer to your max loss so just keep in mind with Futures contracts you have a much more Dynamic buying power than you will with you know something like spy where the the buying power used is going to be equal to the risk on the position all right so here's just a quick look at a setup for an iron Condor you're selling the money put spread selling the money call spread directional assumption is neutral you can get a tiny bit of Delta on some of these especially if there is skew in whatever product you're trading you'll have uh typically have uh Delta relative to the non-skewed side so something like spy if you go to the 30 Delta on each side sell 10 wide spreads you'll typically have a little bit of short Delta IV environment of course high and you know your max profit is whatever you sell the spread for with the spread minus the credit received is your risk and we typically Target 50 of the max profit but we're going to dive a little bit deeper into that on the next slide here so for the profit targets typically somewhere in the 25 to 50 percent of Max profit range uh your max profit's gonna be the credit received but the big key here is to consider how many days till expiration are left and how many you've been in the trade I reference this best practice on the right side which is a fantastic uh segment that they did a couple years back and this one was looking at straddle specifically so I use straddles as our iron Condor proxy here but um you know when you have a a position that's reached a high amount of of profit in a short amount of time you've either been correct on volatility or um or or time you know time has passed if you're getting 20 or 40 percent of of the max profit you have to be right on volatility or time and so at a certain point it makes sense to to manage those positions early if you get profits really quickly and this is kind of you know a good expectation and good point at which to consider managing those profits at a less than 50 percent clip there you got to consider volatility and how fast that position has moved that speaks to the the right side there you know defined risks Divine risk trades are naturally going to be much slower moving so you have much less exposure to the Greeks you know these are going to be much more dependent on either a very large volatility contraction or the price of the underlying at a given point in time so you know you're one dollar wide or three dollar wide iron Condors those won't move all that much in the first 20 days 30 days you're going to really have to hold that much longer on the right side the the little uh table that we have there that's more applicable to something like a 10 or 20 or 30 dollar wide uh iron Condor where you have a little bit faster moving trade and of course another consideration is going to be diminishing margins of return and your risk reward of continuing to hold the position so if you have a dollar to make on on whatever position you have and you have eighty dollars of profit on the table you now have more risk and less reward than what you started with you have to consider that with all defined risk TR trades and all defined profit trades and it's the reason why we don't hold you know five cent puts into expiration because you might wake up with a day like today and you're nickel put that you were stingy about closing yesterday is now trading at you know dollars and that's what we're looking to to avoid with all of our positions mm-hmm I've left you quiet but um management so you tend to need to hold these positions uh for longer than you would with any sort of naked position right so you anytime you define the risk the trade-off is uh it's going to be a slower moving trade you have less exposure to the Greeks you got to hold that position and kind of let that position work out over a certain amount of time one of the things you can do though is rolling up or down the untested side you know the side that is further out of the money from where the stock price is so if the stock has gone down the call spread would be the further out of the money spread that would be the spread you would roll down if the stock went up your put put side would be further out of the money that's the side that you would roll up but it's not much of a Delta adjustment because when you have spreads and especially tighter spreads you don't really have any Delta on the position it's more about collecting more extrinsic value and reducing the amount of risk you have on the table the if you're rolling up or or rolling the untested side on a five dollar wide or ten dollar wide iron Condor the goal is probably to get out for a scratch or a very small profit you're not looking to to capture that value and profit it's really just a way to to adjust your risk on the position um of course keep in mind the proximity of the spread and the window that you have to hit on those positions so anytime you're rolling up or rolling down the spread if the Stock's going down you've got to you're going to hit it you're gonna have a tighter window to hit which is going to make it a lower probability of actually hitting that window so just keep that in mind for any of your iron Condors that you manage love it lastly my favorite slide I've referenced this a ton I've used this on Live Events I love this slide it's a perfect example of risk and and perceived risk that that people don't always consider so on the top here where so the the on the left side I reference the the market measure that's from it's a hidden risk of narrow iron Condors from May 30th one day before my birthday just putting that out there May 31st uh is my birthday if you want to send some gifts to the office let's say it again May 31st is the date yeah so hidden risks of narrow iron Condors on May 30th 2019 it looked at spy iron Condors from 2005 to 2019. so it's a really powerful uh table here on the top you've got the average loss the average actual loss or the average potential loss I'm sorry at the top average actual loss and then the actual loss as a percentage of the potential right so what you're looking at here is that on 1 dollar widespread you're collecting half the width you basically have the same risk reward if you if your potential loss is 47 cents your your potential profit is 53 cents same you know risk one to make one type trade but you'll see that your actual loss on these positions is very much the max loss right so there's no wiggle room this sort of trade is a 50 50 shot and if you are right you make the full amount if you're wrong you lose the full amount As you move further over to the right and you look at the three dollar and the five dollar once you get to that ten and twenty dollar wide spread you see where the big positive comes into play here and that's the actual loss that you realize as a percentage of the max loss so when you look at the 20 wide spread and you say okay I'm putting up 1700 bucks in in Risk that's my Max loss you're going to lose uh 1700 bucks much less often than you would the 1700 bucks on 20 contracts of the one dollar wide so the this is really the big key with spread with versus upping the contracts is is that although your your risk on five one dollar wides is notionally less than one twenty dollar wide the probability of you realizing that amount of risk is way way higher on the one dollar wide relative to the 20 wide that has synthetically more rich risk on the table so on the second part of this of this table you're looking at the percentage of the losers that were Max loss at expiration this is really what I was talking about and you know just a minute ago is that those one dollar wide spreads you're basically losing the full amount you know if you're if you're losing on the position it's you know you're losing the the 47 cents 60 of the time on the 20 wides and keep in mind that the Spy was trading at a much lower value so the 20 wide is much wider relative to what it is today but the the same sort of applies here when you're going out to those much wider spreads you're not hitting that Max loss you're not getting that you know two grand in Risk relative to the two grand and risk that you're putting on a one dollar wide spread and that's all because of the you know the probability of that spread expiring fully in the money exactly and this is why when we uh are talking about managing iron Condors or even setting up iron Condors for us when we're setting up iron condors and why we like to think of them as high IV trades isn't necessarily because we have a big exposure to short Vega or an implied volatility contraction it's not really that it's more about the ability to create a wider iron condor in a high heavy environment than you can in a low IV environment and collect the same amount of premium and when you couple that with this where when you can set up a wide iron Condor with a nice wide range and have the ability to do a wider spread maybe than a more narrow spread that's going to be a scenario where the realization of Max loss on that spread is going to be significantly lower than doing a one dollar wide spread multiple times and also speaks to why if we're tested on an iron Condor which is going to happen from time to time instead of moving those one dollar or three dollar five dollar wide spreads in closer to the stock price and moving our proximity closer to the stock price where we can actually be profitable collecting Pennies on the dollar relative to strangle we're likely just going to close that untested side and just remove the risk from that side entirely because like we see here if you have a narrow spread you're you should realize that your max loss potential is significantly higher than if you have a 10 or 20 wide spread so keep that in mind and if we have a 10 or 20 widespread we can we're more apt to move those strikes in because we're not only not expecting to realize that Max loss for the strike going fully in the money but we're going to collect significantly more to actually take on more risk for sure one other final point just with the the spread with it's not so much about the width it's about the the Delta of that long option that you're buying in the the value of that option right so a 5 or 10 or 20 point wide spread in spy you're you're selling a 30 Delta option and you're buying of 15 or 20 Delta option those are that's a heavy Delta if you're looking at us at a spread in say Oracle there's no difference between going ten dollars wide and fifteen dollars wide because the option that you're buying is a one or two Delta option so when you think of spreads think of it in reference to the Deltas of the position and not so much about the width so you know the this study still applies but just consider that you know if you're buying 10 cent long options to define the risk you don't need to go further out of the money you can opt the contracts but if you're looking at a spy 20 Delta long put that you're buying for four or five dollars then it makes sense to roll that further out in time because it get you know that value drop off becomes bigger yeah so instead of having instead of buying a five dollar wide long option for 10 cents and moving it to a ten dollar wide for five cents there's no reason to do that because you're not you're not giving yourself any benefit to doing that but in spy if you're buying the four dollar wide or you're buying the four dollar option at five dollars wide and you're looking at moving it to a ten dollar wide and you can save yourself two dollars yeah that's a big difference yes exactly love it so that's it for iron cobbler's good little segment there we'll be covering more of these to come in the near future