Iron Condors

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• Iron Condors
• This trading plan is similar to (but not exactly
  the same as)
• the TOS Iron Condor Trading Strategy
• Steve Fought
• stevefought_at_aol.com

File Iron Condor Strategy 3-29-09
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• DISCLAIMER
• This is not an investment or trading
  recommendation.
• The losses in trading can be very real, and
  depending on the investment vehicle, can exceed
  your initial investment.
• I am not a licensed trading or investment
  adviser, or financial planner.
• You should make your own decisions based off your
  own research,
• and tolerance for risk.

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• Just a Side note
• Distinguish between
• Trading vs Investing
• Short term Trading account
• vs
• Long term Investing account

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• Investing vs Trading
• Trading
• My Trading account is just a small Portion of my
  IRA
• The larger portion of my IRA account is now in
  the cash fund VMMXX
• TAXES
• For time being, just to keep it simple, All my
  trading is done inside the IRA so no profits need
  to be reported to IRS each year
• But then at the same time, no losses or business
  expenses can be deducted each year either.
• Once I get trading strategies perfected, then I
  will open another account outside the IRA to be
  able to write off business expenses and Losses.
• Probably will set up DBA business at that time.
• Investing
• My Long Investing account is my whole 401K
• The Bulk of my past money is now in the
  cash fund.
• They call it the Money Market Stable fund
• Return is around 1 or so APR
• But each paycheck, all my future money is going
  into stock funds now.

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• One Long term Investing Strategy
• The next slides shows how one Investools trading
  strategy helped save me tens of thousands of
  dollars during the market crash of 2008.
• i.e. It helped me get out of a lot of my 401K
  stock positions and into the 401K plans Cash
  (Money Market) funds before the market crashed

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Penalties in some 401k funds for trading too
frequently
THE 10 YEAR CHART
Tricky area.
Red Line is Simple Moving Average 30 bars (Months)
Invested money is in 401 K. Went to the cash
fund on Red arrows. Will go back to stock funds
later on the Green arrows
Trading the Red and Green Moving Average
arrows Market Timing on Long Term Invested
Account (401 K) Use the 10 year chart
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MONEY MANAGMENT

• Keep your risks low
• Only risk 3 to 5 on each trade.
• A lot of good traders report blowing up their
  accounts a few times before they learned how to
  trade.
• See the Classic Reminiscences of a Stock
  Operator, Edwin Lefevre , 1923
• Try not to blow up your account during the
  learning curve.
• For a good video series on Money Management, see
• http//www.informedtrades.com
• Click FREE COURSES
• See box on BEGINNER COURSES
• Click INTRO TO TRADING BY AIRELON
• Watch the 20 videos in MODULE 2 MONEY
  MANAGEMENT

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• The Iron Condor Trading Plan
• This trading plan is similar to (but not exactly
  the same as)
• the TOS Iron Condor Trading Strategy
• Steve Fought
• stevefought_at_aol.com

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The crash of Nov 2008 was not profitable for my
Condors. So my new trading idea (still
testing) is an attempt to try and reduce the
number of the infrequent huge losses which might
occur My plan is an adjustment procedure
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• GENERAL TRADING PLAN OUTLINE
• Generally, I am sticking with the TOS Iron
  Condor strategy
• The TOS Iron Condor strategy is the plan you
  will hear if you go to a TOS advanced options
  class
• Don Kaufman is typically the class instructor
• Brian Cox has MP3 from seminar at XSPROFITS web
  site of this seminar
• My only change (still testing) is to pull the
  plug (buy back the position) when the trade
  starts to lose money
• i.e. after market touches or passes the short
  strike
• This is an adjustment procedure
• Exactly how much if any loss I take before
  pulling the plug is some math I am still working
  on.
• Statistically, I think TOS says my idea wont
  work -
• but I am going to test it anyway.
• There might be periodic months of small loses
• but I want to take protective action in the
  future to prevent the big loses I took in Oct and
  Nov.
• The last TOS seminar , Joe did not really have a
  solid answer for when to pull the plug

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• Next 3 slides are some other places you can get
  even more in depth info on the TOS trading
  strategy

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BEYOND THE BASICS WORKBOOK
The TOS SEMINARS WORKBOOK
If you email Don Kaufman after the seminar, he
will help you with your question but he will oft
times also send you sections from this workbook
as backup information. So this workbook is
more or less the written version of the TOS Iron
Condor strategy along with other strategies
HERE ARE 2 WAYS TO GET YOUR OWN COPY OF
THIS STUDY GUIDE 1. Go to the educational
classes on the TOS web site tabs Go to SUPPORT
OPTION SCHOOL CLASSES then click ALL
OPTION PLANET SEMINARS SEE THE SCHEDULE - then
click Complex Strategies for Traders 2.
Just plug in this link
http//www.optionplanet.com/assembled/complex_stra
tegies.html Then go down to the middle of the
page and click OPTIONS FOR TRADERS
WORKBOOKS It might ask you to register or put in
your email address Then click BEYOND THE BASICS
WORKBOOK and it will download same info in the
COMPLEX strategies workbook
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• Plus, Here is a relatively new Video
• with Don Kaufman showing step by step
  instructions on one way to enter an Iron Condor
  and then a little on Analyze tab.
• Go to TOS web site
• click SUPPORT tab and you will see this new icon

Click this ICON Then click TRADE tab and then
pick IRON CONDOR to watch Don Kaufmans 6 minute
video on Irons plus Analyze tab
NOTE This video does not describe well any
Condor EXIT strategies. See next slides
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Best way to get overview of this trading strategy
is go to a TOS seminar(Typically Don Kaufman is
the instructor but it can change)

• Seminars are free for the time being
• To get the next seminar location and time
• Go to https//www.thinkorswim.com
• Click SUPPORT
• Click OPTION SCHOOL
• Click CLASSES
• Click ALL OPTIONPLANET SEMINARS SEE THE
  SCHEDULE
• See schedule for COMPLEX STRATEGIES FOR TRADERS
  for next seminar in your area

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A Step by StepProcedure for Entering
and Exiting Iron Condors(My version of Dons
TOS Iron Condor seminar ideas)
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When to Enter Trades

• Never enter during Expiration week
• Pick the Option Month which has 30 to 70 days
  left in the option before expiration
• 40 to 50 days seems to be working best for me
  recently.
• Try to get into Condors when the Volatility is
  relatively high per next slide.

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(No Transcript)
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Click the TRADE tab
Enter your underlying here (The SPY has high
liquidity , tight bid to ask , and inexpensive
for beginners compared to the RUT. SPX not
recommended for beginners
Pick your Month. 30 MIN 70 MAX (days left in
the option before expiration) 40 to 50 days
probably better. Never pick the RED quarterlies
This is the days left in the option before
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Right click in this box in the BID column right
at color break which is the strike price closest
to current underlying price. Then click
SELL . Then click IRON CONDOR
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Your initial defaulted set up will look something
like this.
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TWO POINT GAP IN YOUR VERTICALS You want to
adjust the position to get a 2 points between the
long and short side of each vertical i.e. a
2 wide spread (The logic is explained in the
TOS workbook BEYOND THE BASICS) Example , In
this case short call (-) is 136 and long call
is 138 And the short put is 122 and long put is
120
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An initial defaulted credit is not recommended
(it this case it is .99 ) You need to adjust the
distance between your verticals to get a better
balance of Probability of success verses risk
. Shoot for .60 to .80 as PRICE here (
Recently, I have been seeking .73 to .78 here
)
THE MID PRICE
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• Calculating Probability of success with Condors
• MID PRICE
• Adjust the distance between the call vertical and
  the put vertical to get a mid price of .70 to .80
• REAL RISK
• The  2 wide vertical spreads the credit to open
  trade (say .70) real risk of only  1.30
• 2 - .60 1.40 or your real risk
• 2 - .70 1.30 or your real risk
• 2 - .80 1.20 or your real risk
• PROBABILITY OF SUCCESS 
• The real risk from above of  1.30     /   the 2
  wide verticals    65 is  the  probability of
  success.
• 1.40 / 2 70
• 1.30 / 2 65
• 1.20 / 2 60
• DELTA NEUTRAL - To start off Delta Neutral, you
  want your short put and short call to be equal
  distance away from the current price of the
  underlying.

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Here is the Credit after the distance between the
call vertical and put vertical was adjusted.
I normally shoot for a price of .73 to .78
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• Recently, the distance between my Vertical
  shorts from the SPY has been about from 7 to 9
• Adjust the distance from 6 to 10 until you get a
  CREDIT of .73 to .77 which is good balance
  between probability of success and risk
• KEY IS set up your initial position as DELTA
  NEUTRAL.
• So the short strikes are equal distance from the
  underlying
• Below is an example of distance 7 on SPY priced
  at 129
• -1 SHORT - SEPT 136
• 1 LONG SEPT 138
• SPY today 129 (129 7 136)
• SPY today 129 (129 7 122)
• 1 SHORT - SEPT 122
• 1 LONG - SEPT 120

I use an Excel file to assist in the set up my
strikes . Just send email if you want to see
the Excel file
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This Mid price is just a starting point for your
sale price. I start off entering a trade at
MID price. If it does not fill in 5 minutes,
I will Right click the BLUE button, and choose
cancel and create duplicate order , then
enter a trade at 1 tick below mid which here
would be .72. If that does not fill in 5
minutes, I will try .71. Generally, I have
never had to go more than 3 ticks. Some traders
are more aggressive and drop in the trade for .74
and just let it work all day - Problem is , it
might never fill and you might lose your current
volatility and/or price advantage.
MID price
MID price
The BLUE button
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• PROBABILITY verses RISK Discussion
• Normally in investing , if you risk less money
  you would think your probability of success would
  increase. This is because , the less money you
  have on the line, generally speaking , you are
  risking less
• You might see some web sites selling a condor
  strategy with the wording like
• We only enter high probability condors or
  spreads that have very little probability of
  expiring in the money. In other words, we only
  enter trades with a very high probability of
  success.
• What they fail to mention is (with condors) as
  your probability of success (or staying in a
  price range) increases , so does your financial
  risk.
• It is an interesting twist on words.
• Success in terms of an Iron Condor means your
  underlying price stays in a range see chart in
  following slide
• The range is between your short strikes
• You want the underlying price to stay in a range
  between your short call and short put strikes
• As the probability of success increases with a
  condor so does your financial risk.
• This is because with Condors, the higher the
  probability of success, the less premium you
  collect up front. That premium is what you use
  to reduce your financial risk.

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• The goal of every Condor manager is to
• Collect as much money up front as possible
• Generally , shoot for a 60 to 70 chance of
  success
• 68.27 is one standard deviation in a normal
  distribution
• Let time and volatility cause the options to
  decay in value
• Then, Try to buy back the position as cheap as
  possible later.
• When you enter a trade, TOS will tell you what
  your Max possible loss or Risk
• It is a defined risk trade
• When you sell a Condor, you collect some money up
  front. This is the premium.
• Max Loss Possible The premium Your actual
  possible loss or risk
• So as your premium decreases, your max possible
  financial loss increases.
• The less you collect up front, the higher the
  probability of success.

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The Range Your want the underlying to stay in a
range like below If it stays in this range, you
make money with condors. During the life of the
trade, they price can move in and out of this
range, but to be profitable, you need to get out
of the trade when the price is in the range
I have an April Condor now with 66 short put
strike and 85 short call strike. So I want the
SPY to stay in a range between 66 and 85. The
probability the SPY will stay in this range was
62.5 when I entered the trade
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• WHEN TO EXIT CONDORS - Page 1
• (Below is pretty much right from the TOS BEYOND
  THE BASICS workbook)
• Always Exit 4 to 10 days before Expiration on a
  consistent basis is statistically the best plan
  according to TOS / Don Kaufman
• My adjustment since Nov 2008 is to exit when the
  underlying price crosses the short put or call
  strike.
• The plan is to sleep better
• Take small losses to prevent the big losses
• like I incurred when the market crashed in Nov
  2008

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• WHEN TO EXIT CONDORS page 2
• (Below is pretty much right from the TOS BEYOND
  THE BASICS workbook)
• There are other cases when it might be prudent
  to close out the position before expiration
• VERTICAL PRICE DROPS TO .015 OR LESS
• As noted earlier, If either the call vertical
  or put vertical is trading at a very cheap price,
  say 0.15 or less, it may be an opportunity to
  close it out. Stocks rarely move in one direction
  non-stop they typically reverse after a move up
  or down. If the put or call vertical decreased in
  value substantially because the stock has moved
  away from the strike prices, it may be best to
  take that spread off before the stock begins to
  retrace that movement.
• LEAVE OPEN CHEAP LONG OPTIONS
• If the long option in any spread is trading very
  cheaply, at say 0.05, do not close it out. Only
  buy back the short option. You will now own a
  long option that may become valuable should the
  stock make a dramatic move.
• BUY BACK CHEAP SHORTS
• Normally, you will just buy back the whole
  vertical before the short positions get cheap
• NEWS
• c. If news is coming out, such as an earnings
  announcement or economic or political news that
  could dramatically increase the overall market or
  the underlings volatility, it is usually wise to
  close the trade.
• 80 PROFIT

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EXITING - Getting out of trades early PLAN A
BUY BACK THE WHOLE VERTICAL
Plan A As the market moves away from either you
call or put vertical, their bid prices will
decrease. Watch them daily. You can just
close the whole vertical if you can buy it back
for .15 or less Buying back for .10 or less is
where I try to get them.
Generally speaking, it seems like recently for
me, I have been buying back the verticals if the
market trends enough, rather than just buying the
shorts. It seems like the whole vertical gets
to .10 or less (buy back price) before the
short options get to .10 or less.
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EXITING - Getting out of trades early Plan B
BUY THE SHORT CALL OR PUT
TOS NOTE - If you can buy back the shorts (-)
for .05 or less, TOS will not charge
commissions
Plan B - Watch your short ( - ) positions. Buy
them back if you can ever get them for .15 or
less. Then just leave your longs () in place
in case the underlying takes off
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Overall Trading Strategy Idea

• Try to keep Delta as neutral as possible
• Try to keep Theta as high as possible
• Layer in Condor inventory over time to keep delta
  neutral.
• Enter Condors when volatility is higher.
• Ride the volatility down
• Layer in Calendars over time to keep delta
  neutral.
• Enter Calendars when volatility is lower.
• Ride the volatility up.

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• HOW TO DOWNLOAD YOUR ACCOUNT INFO INTO EXCEL
• This is a good way to check your overall returns.
• Downloads include ALL your costs including
  commissions, SEC charges, etc
• NOTE This is only practical if you are
  familiar Excel spreadsheets,

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1. Click ACCOUNT STATEMENT
2. Enter up to 370 day back 370 is the max in TOS
3. Click Cash Balance
4. Click EXPORT-PRINT button
5. Choose EXPORT Choose file type CSV and
EXPORT the file to the location of your choice on
your own hard drive.
STEPS TO TRACK YOUR OVERALL RETURN AND DOWNLOAD
DATA INTO EXCEL FILES Again, If you are not
familiar with Excel, you might want to take a
class before attempting this procedure
6. Open Excel. Open the CSV file and then save it
as an Excel file. Then you can play with the
Excel file to get your returns
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Processing the download

• Go to Excel. Save the CSV file as an Excel file
  first
• Just keep the top of the file which is your
  changes to cash balances.
• Delete the bottom data
• Establish a starting point for your account
  balance.
• Do not add or subtract any cash to the account.
• The only changes after the starting point should
  be your trading activity.
• If you add or take out large chucks of cash from
  your trading account, then the math for
  calculating return is beyond me.
• Maybe just take an average. Like my account
  started off x.
• Next , remove your current open Condors if they
  have not yet been at least partially closed.

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• SOME HELPFUL AND INTERESTING WEBSITES and BLOGS

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• CHARLES KIRK
• Good for a quick summary of current market
• http//www.kirkreport.com
• CONDOR OPTIONS
• Strategy is similar to the TOS - Don Kaufman
• http//www.condoroptions.com

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• AIRELON
• Daniel Shy Paul Young
• AIRELON (Dan TV)
• His daily blog is at http//investorandtrader.bl
  ogspot.com/
• His whole series of Vlogs is at
  http//www.informedtrades.com
• Daniel is another full time trader like Charles
  Kirk
• More philosophical and big picture.
• Swing trader and Position trader
• Also does a fair amount of futures trading
• He started with Ken Robert also ..in 1996
• Not as much into the details or step by step
  procedures on how to actually do trades.

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DAVID WARING

• http//www.informedtrades.com
• Dave has compiled a whole series of free
  education videos including the Airelon series
  plus many more.

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• Free VIDEO on Condors
• Using Iron Condors to Profit from Fear
• By Jared Woodard
• jared_at_condoroption.com
• 212-203-0693
• Here is the link
• http//www.commoditytradingschool.com/index.php?op
  tioncom_contenttaskviewid144Itemid76
•  Or another way to see the video is go to   
  http//www.condoroptions.com/
• Then click   BLOG - Then go to the Aug 8th
  article and click the link - or go to  
  commoditytradingschool.com - And click RECORDED
  CLASSES -
• Then just click     Condor Options with Jared
  Woodard July 31, 2008
• Jared Woodard is one of the principles of Condor
  Options.com   out of New York.
• Finding the people behind the Condor Options web
  site is not all that easy to do.

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• THE END
• Thanks !!
• stevefought_at_aol.com