When I first began trading the iron condor, my game plan was to leave the trade on all the way to the bitter end.
After I placed the trade, I would just leave it be until expiration day where the options would expire worthless and disappear into option heaven.
Back then I believed this was the best way to play the trade, because not only would I not have to pay my broker to take the trades off – I would also be able to keep the entire amount.
But I don’t think this way anymore.
After a lot of sleepless nights, too many close calls, a couple of near ulcers, I’ve changed the way I run my Iron Condor business.
Now – as soon as I place the trade, I set a contingent order with my broker to buy back the call spread – as well as the put spread – once I’ve made the majority of the profit in each spread.
Here’s an example: Let’s say I sold an iron condor on the index XYZ for a total of one dollar – or around fifty cents each side.
After I place the trade, I would set up two contingent orders with my broker. One would be to buy back the upper half spread of the iron condor for ten cents – and the other to buy back the lower half spread of the condor for five or ten cents.
Now a lot of iron condor traders might say this would be a dumb thing to do.
But after trading these every month for years now – I don’t agree.
Okay, maybe it’s true that doing this will cause me to make less profit than if I were to just hold the trade through expiration and let the options expire worthless.
But not necessarily.
And also let’s look at exactly how much we are talking about here. The amount of money we’re talking about leaving on the table here is actually not that significant.
What is significant – at least to me – is that by taking off those positions, I’ve LOCKED IN the lions share of the profit available in the trade.
AND – my risk in the trade has been reduced.
I have also given myself the opportunity to generate ADDED gains from my overall position – without adding any extra risk.
Let me show you what I am talking about here:
A lot of times, the value in options will evaporate really quickly during a trade. I’ve actually seen options lose most of their value in just a few days.
Going back to our example – let’s pretend that I put an iron condor on about 40 days until expiration. For the trade I receive around a 1.00 credit. Fifty cents for each credit spread on either end of the position.
Then, as soon as I put the trade on, our underlying starts to move down and continues doing so for a couple trading sessions.
4 days after I put the trade on, I see that I can buy back my CALL side of the Iron Condor for.10.
Now, if I don’t do anything and just let the trade continue to play – what I am actually doing is risking that upper side spread margin – for the next thirty six days until expiration – for just ten little dollars of additional potential profit. And that doesn’t really seem that worth it to me.
But – if I instead just spend the ten measly bucks to pull off that upper credit spread – I will LOCK IN the majority of the profit that was available in that spread – and earn a great return on investment in just four days.
Then, if XYZ bounces back up – which it will often do after a drop – I no longer have any risk on the upside.
And – for icing on the cake – if it DOES head back up we have the opportunity to ‘resell’ those identical credit spreads – the same ones we just bought back for ten cents – for potentially the same amount of credit we originally sold them for – or perhaps even more. Doing this it’s possible to wind up with an even greater ROI then were were hoping for when we first initialized the iron condor trade.
But let’s just say we didn’t ‘re sell’ any options. Let’s just assume that we closed the trade entirely when our contingent orders were hit. In this case what we’ve done is eliminated risk (good thing) – freed up capital (good thing) – enlarged our return on investment over the number of days we have been in the trade (good thing) – and gotten completely out of the market a while lot sooner than if we had to sit around and wait until expiration day rolls around (and in my opinion this is a good thing too!).
Trading this way lets me take a ‘vacation’ away from the markets until it’s time to put on another trade. It allows me to peel myself away from my trading monitor and get out and enjoy all the other things in my life I’m interested in – without always thinking about how my iron condor is performing – or fretting about what I’ll do if there is a sudden stock market crash.
And for me, being able to have that monthly ‘window of time’ away from the markets – that ‘break’ where I can completely clear my head and forget all about ‘options’, and ‘strike prices’ and ‘standard deviations’ and ‘deltas’ – being able to just get away from the computer and go out and do other things without having that little constant nagging ‘I have a current live trade on’ stress and worry – being able to go to bed at night without an ‘option trading care in the world’ and quickly fall into a thick, deep, snoring sleep – sound as a baby…
These things are priceless.
Or at the very least they are WITHOUT A DOUBT worth every penny of the ridiculously small .20 cents or so of potential profit left on the table in exchange for getting out of my monthly iron condor trade early – at what is STILL an incredible monthly return.