Tight Iron Condor Introduction

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Tight Iron Condor Introduction

• Presented by Doug Allen

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Disclaimer
All trades and trade ideas discussed in this
presentation are for Educational Purposes ONLY
and are in NO way a recommendation of a strategy
or product. Always make sure you understand
the full extend of risk you have on any trade
BEFORE you place it.
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Presentation Outline

• What is a Tight Iron Condor?
• How does it differ from a Regular Iron Condor?
• Why would you sell a Tight Iron Condor?
• Pros and Cons
• When do you sell a Tight Iron Condor?
• When and how do you exit?

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Regular Iron Condor

• Goal Have Price Stay Between Short Strikes
• RUT July 790/800/660/650, Sell 10 Contracts and
  receive a 1.60 credit
• 10 Points Wide, 130 Points Between Short Strikes
• Max Gain 1600 / Max Loss 8400
• Probability of Success at Expiry about 90
• Probability of Success Before Expiry Very Good

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Regular Iron Condor
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Tight Iron Condor

• Goal Pick Area Where Price is Likely to Be 10 to
  4 Days Before Expiry (Stay Close to Price Action)
• RUT Jul 740/750/730/720, Sell 10 contracts and
  received an 8.50 credit
• 10 Points wide, 10 Points Between Short Strikes
• Max Gain 8500, Max Loss 1500
• Probability of Success at Expiry about 15
• Probability of Success Before Expiry Very Good

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Tight Iron Condor
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Why Sell a Tight IC?

• Take advantage of time decay without requiring a
  large capital investment (1500 vs. 8400 margin)
• Reasonable ROI in 3-4 weeks with lower overall
  risk then a Regular IC
• Wide profit range PRIOR to expiry
• Low maintenance
• Easy to exit if youre wrong

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Regular IC July 3
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Tight IC July 3
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Tight IC July 8
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Dollar to Dollar Comparison
Theoretical Profit/Loss of July ICs at RUT
Strikes on July 8th
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Regular IC July 14
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Tight IC July 14
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Pros Cons

• Pros
• Low Overall Risk
• Low Capital Requirements
• Surprisingly Wide Breakeven Area
• Low Maintenance
• Low Stress, very Delta neutral
• Short Trade Duration 3 to 4 Weeks
• High Profit/ROI Potential

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Pros Cons

• Cons
• Requires Good Technical Analysis Skills
• MUST be done on Cash Settled Product to avoid
  early assignment (example is the RUT)
• May require early exit for loss if breakeven is
  breached prior to exiting at profit targets

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When to Sell a Tight IC

• First perform technical analysis to determine
  best guess as where price action will be 10 to 4
  days before expiry.
• Sell 4-5 weeks from expiry. Can sell further out
  but then price has more time to move out of your
  range.
• Sell for minimum 8.50 credit to insure proper
  risk/reward ratio. May take a few days to get
  filled, but be patient.

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When to Exit a Tight IC

• Set reasonable profit targets, maybe a portion at
  50 ROI and another portion at 85 ROI.
• If you sold at 8.50 then your risk was 1.50
  making a 50 ROI 75 cents. You can enter an
  GTC order on your IC position to buy back a
  portion of your position at 7.75 thus locking in
  a 50 ROI on that portion of your position.
• If break-even area looks threatened or gets
  breached you can exit early to manage risk.

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When to Exit a Tight IC

• Best to exit 10 to 7 days before expiry.
• Can hold until 4 days before expiry, but gamma
  risk may affect potential gains.
• 3 Day Rule If breakeven area is breached you may
  want to wait 3 days to see if price action
  returns to the profit area. If after 3 days the
  price is still out of profit zone you can exit
  for loss and then look to see if it makes sense
  to sell in the new price area.

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3 Day Rule Example
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Summary

• Tight ICs are an alternative strategy to take
  advantage of time decay.
• Best to exit 10 to 4 days prior to expiry to
  avoid Gamma risk
• There are advantages and disadvantages
• Best in a sideways market
• Enjoys large profit area prior to expiry,
  exceptional ROI in sideways market

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Resources

• www.spxtrading.blogspot.com (sample paper trades)
• doug_at_alandari.com
• The Bible of Options Strategies, by Guy Cohen

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Thanks for Listening