How To Adjust the Iron Condor.pdf

How To Adjust the Iron Condor

KerryW.Given,Ph.D.(Dr.Duke)ParkwoodCapital,LLC

©2011ParkwoodCapital,LLC.AllRightsReserved.

2©2011ParkwoodCapital,LLC.AllRightsReserved.

Disclosures and Disclaimers

BuyingandsellingstocksandopAonsinvolvesrisksandmaynotbesuitableforallinvestors.PriortobuyingorsellinganopAon,

theinvestormustreceiveacopyofthebooklet,CharacterisAcsandRisksofStandardizedOpAons,fromyourbrokerorfromThe

OpAonsClearingCorporaAon,1NorthWackerDrive,Suite500,Chicago,IL60606.

TheinformaAoninthispresentaAonispresentedforeducaAonalpurposesonly.ItshouldnotbeconstruedasarecommendaAon

orsolicitaAontobuyorsellopAons.ManyexamplesofopAonstradesarepresentedinthispresentaAonasillustraAonsofthe

principlesbeingtaughtinthiscourse.TheseexamplesarenotrecommendaAonsorsolicitaAonstobuyorsellanystockoropAon.

TosimplifythecalculaAons,commissioncostshavenotbeenincludedintheexamplesinthispresentaAon.Commissioncostswill

affecttheoutcomeofanystockoropAonstradeandmustbeconsideredpriortoenteringthetransacAon.

NorepresentaAonisbeingmadethatanyaccountwillorislikelytoachieveprofitsorlossessimilartothosediscussedinthis

presentaAon.ThepastperformanceofanytradingsystemormethodologyisnotnecessarilyindicaAveoffutureresults.


Agenda

•  BuildingtheIronCondorSpread

•  PuttheProbabiliAesOnYourSide

•  TheProfitEngineoftheIronCondor

•  RiskManagementfortheIronCondorSpread

•  Back‐tesAngtheAdjustments

•  DevelopingaTradingPlan

•  VerAcalspreads:thebuildingblocksofmorecomplexopAonsstrategies

•  CreatedbybuyingoneopAonandsellinganotheropAonatalowerorhigherstrikeprice

•  Creditvs.debitspreads

•  Buildtheironcondorwith:

•  Abearcallspreadplacedabovethestockprice,and

•  Abullputspreadplacedunderthestockprice


Building the Iron Condor


Building the Iron Condor

•  PCLNat$458on3/16/11•  Notestrongsupportandresistancelevelsat$443and$475,respecAvely•  EstablishtheApr430/440putspreadforacreditof$2.55•  EstablishtheApr475/485callspreadforacreditof$3.35•  Maximumprofit=$590/contract;maximumloss=$410

•  CondorSpread(debit)vs.theIronCondorSpread(credit)

•  Lookforchannelingstocksascandidates.

•  Tradethebroadindexeseverymonth.

•  Strikepriceplacement–nearorfar?

•  TimetoexpiraAon?

•  ArespreadsestablishedsimultaneouslyorbyleggingintotheposiAon?

•  OpportunisAcmodelvs.Insurancemodel


Many Different Condors Are Possible

•  Twobroadcondorstrategiesarecommon:

1.  TheOpportunisAcModel‐Lookforachannelingpaferninastockorindex.

2.  TheInsuranceModel‐Tradeeverymonthtogenerateincome.

•  WithineachofthesestrategiesareseveralpossiblevariaAons:

  Strikepriceplacement–nearorfar?

  TimetoexpiraAon?

  ArespreadsestablishedsimultaneouslyorbyleggingintotheposiAon?


The Most Common Condor Strategies

Asiso?enthecaseinopAonstrading,thereisn’ta“beststrategy”.EachvariaAonhasitstrade‐offs.Findwhatsuitsyourstyle,risktolerance,andAmeavailabletomanagetheposiAon.

•  Lookforstocksorindexesyouexpecttotradewithinachannelforthenext30days

•  CalculateonestandarddeviaAon(σ)fortheunderlyingstockorindexwiththecurrentIVandthenumber

ofdaystoexpiraAon.Lookatthestockorindex’spricechart;hasitmoved>1σinthepastseveralweeks?

•  Acondorwithahighprobabilityofsuccess(>85%)willhaveshortstrikeprices≥1σfromthecurrentprice

•  LookforlevelsofsupportandresistancetoposiAonyourshortstrikes

•  Somesokwarecanscreenforchannelingstocks

•  ThisisadirecAonaltrade,basedonyoursidewayspredicAon


The Opportunistic Model

•  Usethebroadindexes,e.g.,SPX,RUT,NDX,etc.

•  DevelopandconsistentlyapplyaprobabilisAcmodeltoselectstrikeprices

•  ConsistentlyuseasimilarAmetoexpiraAon

•  Sefleonanadjustmentmethodology,includingtriggercriteria

•  Thisisanon‐direcAonaltrade;youarereacAngtowhatthemarketgivesyou


The Insurance Model


Put the Probabilities On Your Side

StandardDeviaAon(σ)

•  GaussiandistribuAons

•  Blueshadedarea=84%probabilityofsuccessforacreditspreadoneσOTM

•  DisAnguishprobabilityofclosingvs.probabilityoftouching


The Profit Engine of the Iron Condor

60 45 30 15 0

DaystoExpiraAon

TimeValue($)

•  AconAngencystoplossorder

•  Adjustmenttechnique

•  Anadjustmenttrigger

•  AAmestop

•  Aprofitstop


Risk Management for the Iron Condor

•  HerearesomeguidelinesforselecAngtheconAngencyordertriggerprice:

•  WatchthedeltaoftheshortopAon;whenitreaches35,Ishouldbeoutofthetrade.

•  Forexample,on12/15/09withtheRUTat$606,Iestablishanironcondorwiththe510/520putsandthe680/690

calls;the$580puthasdelta=33,soIsetmyconAngencyordertotriggeratavalueof$26(606–580=26)abovemy

shortputstrikeprice.SomyconAngencystoplossorderwouldtriggerifthepriceofRUTdropsbelow$546(520+26).

•  JudgmentCall:

  Settriggerfartherdown=greaterriskofloss

  Settriggercloser=greaterriskofbeingwhipsawedoutofthetrade


Risk Management For The Iron Condor Contingency Order Triggers

1.  The200%Rule:a)  Monitorthedebitrequiredtocloseyourspreads;whenthedebittocloseis≥200%oftheoriginalcredit,

closeallofthespreadsonthatside

2.  ClosingSpreads:a)  IfthedeltaofeithershortopAon≥18,closeonethirdofthespreadsonthatsideb)  IfthedeltaofeithershortopAonhits30,closetheremainingspreadsonthatside

3.  TheBuyBack:a)  IfthedeltaofeithershortopAon≥18,buybacksomeoftheshortopAonsb)  IfthedeltaoftheshortopAonreturnsto15,sellopAonstorecreatethespreadsc)  IfthedeltaofeithershortopAonhits30,closethespreadsonthatsideandselltheextralongopAon(s)

4.  TheLongHedge:a)  IfthedeltaofeithershortopAon≥18,buylongopAonsattheshortstrikeinthenextmonthb)  IfthedeltaoftheshortopAonreturnsto15,sellthelongopAon(s)c)  IfthedeltaofeithershortopAonhits30,closethespreadsonthatsideandsellthelongopAon(s)

5.  RollingSpreads:a)  Whenyoucloseallofthespreadsonaside,youmaychoosetorollupordowntoconAnuethetrade


Risk Management For The Iron Condor Adjustment Techniques


•  The200%Rule:•  Simpleandeasytouse.

•  AveryconservaAveadjustment;raretolosemuchmoneywiththisadjustment.

•  Downsideisbeingfrequentlystoppedoutoftrades.

•  TheClosingSpreadsAdjustment:•  Reducesone’spotenAalloss.

•  Strongdeltaimpact.

•  Minimalthetadamage.

•  TheBuyBackAdjustment:•  FlafenstheR/Rcurve(bigadvantage).

•  RequireslesscapitalthantheLongHedge.

•  Smallerdeltaimpact.

•  Worstthetadamage.

•  TheLongHedgeAdjustment:•  FlafenstheR/Rcurvebest.

•  Strongdeltaimpact.

•  Moderatethetadamage.

•  Increasesthecapitalatrisk.



•  WhenmakingadjustmentstoyourcondorposiAon,trytoreducedeltawithoutreducingthetatoomuch.

•  IftheproposedadjustmentcausesthetatogonegaAve,thenclosetheposiAon.

•  IfusingtheBuyBackorLongHedgeadjustments,watchtheneartermrisk/rewardcurve;wewanttoflafen

theslopesothataddiAonalmovementoftheindexagainstusdoesnothurtustoomuch.

•  Whenyouradjustmenthasplayedoutandyouclosethespreadsonthatside,youmayrollthosespreadsupor

downtoconAnuethetrade.

•  Youmayalsowanttoconsiderrollingthespreadsonthe“good”side.Butthisisincreasingyourrisk.

•  Sometradersincreasethenumberofcontractswhentheyrollthespreadstorecoverthelossofclosing;

butbewareofthistacAc–youareincreasingthecapitalatrisk.

Thekeytosuccessintradingtheironcondorismanagingyourrisk.

Ifyouarecarefultominimizeyourlosses,yourgainswillcome.


•  DeltameasurestheriskofyourposiAontoapricemove,e.g.,ifmyposiAondelta=‐$125andtheindexincreasesby

$12tomorrow,myposiAonwilllose$1,500.

•  Therefore,keepdeltasmall;Iwatchthetheta/deltaraAomorethantheabsolutevalueofdelta.

•  YouradjustmentcriteriawillfuncAontokeepyouwithinsomedeltalimits,orcoulduseposiAondeltaasour

adjustmenttrigger.

•  TheposiAvethetavaluemeasuresthebeneficialeffectofAmedecayonourposiAon.

•  Becarefulthatyouradjustmentsdonotremovetoomuchtheta.

•  IfthetaevergoesnegaAve,closethetrade.

•  WatchtheraAoofthetatodelta.RaAos>2:1aregood(thehigher,thebefer).

•  Whenthetheta/deltaraAoisapproximately1:1,thisisdangerousground.Mayhavetocloseorrollspreadssoon.


Risk Management For The Iron Condor Using the Greeks

•  2/5/10:MarRUT510/520and650/660ironcondorwithcredit=$2,800on20contracts

•  Adjustmenttrigger:whenthedeltaofeithershortopAon>16

•  2/12/10:deltaofthe650call=17;closingspreads,buybackandlonghedgeadjustmentstriggered

•  2/16/10:200%ruletriggered

•  3/1/10:allcallspreadsclosed;putsallowedtoexpireworthless.

•  Alladjustmentsheldlossto≤onemonth’sgains


Back-Testing Adjustment Techniques

Date Adjustment NewDelta

%Change NewTheta

%Change NetG/L

2/12/10 ClosingSpreads

‐$54 ‐44% +$78 ‐26% ‐$2,080

2/12/10 BuyBack ‐$62 ‐35% +$76 ‐28% ‐$2,750

2/12/10 LongHedge ‐$45 ‐53% +$77 ‐27% ‐$2,220

2/16/10 200%Rule n/a n/a ‐$700

•  7/8/09:AugRUT390/400and550/560ironcondorwithcredit=$2,960on20contracts




•  7/23/09:allcallspreadsclosed;putsallowedtoexpireworthless.

•  Alladjustmentsheldlossto≤onemonth’sgains(onaverage)




%Change NewTheta

%Change NetG/L


‐$71 ‐39% +$64 ‐26% ‐$3,400

7/15/09 BuyBack ‐$72 ‐38% +$53 ‐39% ‐$3,270

7/15/09 LongHedge ‐$56 ‐52% +$57 ‐34% ‐$2,750

7/15/09 200%Rule n/a n/a ‐$560

•  9/2/08:OctRUT660/670and810/820ironcondorwithcredit=$5,200on20contracts




•  9/15/08:allputspreadsclosed;callsallowedtoexpireworthless.

•  Alladjustmentsheldlossto≤onemonth’sgains




%Change NewTheta

%Change NetG/L


+$9 ‐75% +$75 ‐18% ‐$1,301

9/4/08 BuyBack ‐$10 ‐128% +$39 ‐58% +$580

9/4/08 LongHedge ‐$20 ‐156% +$48 ‐48% +$920

9/15/08 200%Rule n/a n/a ‐$1,000

•  The200%ruleissimpleandusuallygetsyououtofthetradeearlyforaminimumloss.

•  TheLongHedgedecreasesdeltathemostwithlessthetadamage.

•  TheBuyBackcausesthemostthetadamage.

•  TheBuyBackandLongHedgeadjustmentsallowyoutosalvageatrade.

•  TheLongHedgerequiresmorecapitaltobeputatrisk.



AlloftheseadjustmentsaccomplishthekeyobjecAve:minimizethelossesinthe“bad”

monthssoyoucanbeprofitableinthelongterm.

1.  Developandfollowaconsistenttradeentryprocess.

2.  ImmediatelyakerestablishingtheposiAon,enterthestoplossorderwiththebroker.

3.  Writedownthekeypointsofyourtradingplan:

  Whatisthestoplosspricetrigger?

  Iwilladjustatwhatpoint?Whatisthespecificmeasure?

  WhatadjustmentwillIuse?

  IsthereaAmestop?

  IsthereaprofitlevelatwhichIwillclosetheposiAon?

  IfIclosethespreadsononeside:

a)  WillIrollthosespreadsupordown?

b)  WillIincreasethenumberofcontractstocoverthedebit?

c)  WillIrollthe“good”spreadsatthesameAme?


Develop the Iron Condor Trading Plan

•  Theironcondor:

  IsanexcellentincomegeneraAngtradingstrategy

  Doesn’trequireyoutopredictwherethemarketisgoing

  Butriskmanagementiscrucialforlongtermsuccess


Summary

Would You Like To Learn More?

•  Dr.Duke’sCoaching–NewClassesBeginMarch22,only$499for13liveclasses

•  Dr.Duke’sTradingGroup,$49/mo,Auto‐Tradingalsoavailable

•  FlyingWithTheCondor™TradingAdvisoryService,$149/mo,Auto‐Tradingalsoavailable

•  Dr.Duke’sBlog

©2011ParkwoodCapital,LLC.AllRightsReserved. 24

Formoreinforma=on:www.ParkwoodCapitalLLC.com

Email:[email protected]

SpecialforwebinaraTendees:sendmeanemailandmenAonthiswebinartogetafree30daytrialofDr.Duke’sTradingGroupand/orFlyingWithTheCondor™

Documents

How To Adjust the Iron Condor.pdf