Iron Condors involve four option strikes in one expiration series. One of each of the following: a long put, a short put, a long call and a short call. Combined they provide a strategy that has limited risk and reward. As a seller of this strategy we would be selling the inside short put and call and buying protection puts and calls against them. Our maximum risk is the distance between the strikes less the premium. So if we take in a $2.00 credit for selling the Iron Condor, then our max risk for a the $10.00 wide spread would be $8.00. Our maximum gain would be the $2.00.
As time goes by and the stock sits between the strikes the spread starts to decay because of theta. As this starts to occur our risk reward adjusts. For example after three days our spread gets marked at $1.00. This is 50% of the premium collected and a 12.5% return on risk if we closed the trade. The trick is to close the trade. Most traders look at this spread and say I have another $1.00 to go and I will make 25% on my money. As time goes by and the spread decreases in value(in our favor) we have increased risk until we exit the trade. The increased risk is due to the profit that we are not taking off the table. For example if the spread decreased to $1.00 then the maximum we can lose is still the $10 between the strikes less our premium we have taken in, but now we have to add in the theoretical profit. If the spread is at $1, then our risk is $9.00. As the spread decreases and our risk increases, traders have to find their happy place where the risk is not warranted any more. That may be trying to collect $0.50 while risking $9.50 or $0.25 while risking $9.75. Either way the spread has to be exited or go to expiration to lock in the profit.
One of the exit strategies that the Time Bandit Option Trading Service has been using is called “Legging”. This involves taking off half of the trade as the stock moves in the opposite direction. So if the stock were to drop in value then we would buy back the short call spread and leave on the put spread. Once the stock rallied back up we could take the put spread off for cheap. It also works in reverse if the stock were to rally first.
This past week, with the extreme movement in the overall market we were able to “Leg” out of the Time Bandit Iron Condor and all four of the Iron Condors in the Time Bandit Pro. All four would have expired inside of the range and would have max profit, but traders removed their downside risk only 2 days after entering the trade. In a market that has been in a volatile state of mind, this is comforting to know that you have removed all downside risk.
Subscribers reported “legging” out of these trades for 70-87% of the premium that was originally collected.
These legs resulted in Return on Risk of between 12-18% in a week!