Iron Condor Option Strategy: Trading Them the Right Way. // 101 income example explained david moadel
welcome to looking at the markets with David Modell today I'm going to give you
my particular strategy for selling iron condors and I'm sure somebody else's
thought of this strategy somewhere but I've seen a lot of YouTube videos and
I've never seen anybody else recommended this particular strategy that I use for
iron condors and this is going to be an advanced video so we're going to assume
that you already have some knowledge of iron condors alright but basically an
iron Condor is just selling a call spread and selling a put spread
now most people sell both at the same time the call spread and the put spread
but I usually don't do it that way I will usually leg into an iron Condor I
might sell the call spread first and then if I see a good set up I'll sell
the put spread later on or I might do it the other way around I might sell the
put spread first and then if I see a good setup I might sell the call spread
later on but I usually don't sell both at the same time and the reason is
because a stock is not going to go up too much too fast and down too much too
fast at the same time it's going to be one or the other I don't generally
speaking I will not sell a call spread unless a stock goes up too much too fast
and I will not sell a put spread unless the stock goes down too much too fast
and it's not going to do both at the same time and so I'm not going to sell
the call spread in the put spread at the same time but I might do one and then
the other for example if a stock goes up too much too fast and I expect it to
retrace then I'll sell I could sell a call spread and then later on if the
stock turns around and starts to retrace and go downwards and it goes way too far
down too fast in my opinion and then I think it's gonna retrace back
upwards then I might sell a put spread alright so I would leg into it or the
other way around I'm if I see a stock go down too far too fast in my opinion and
I think it's gonna retrace and start to come back up I might sell a put spread
first and then if it does retrace starts to go up and up and up and up too far
and too fast then I might sell a call spread at that point and that would be
legging into once again an iron Condor alright so I'm gonna try to show that
visually what that might look like or I drew a crude looking chart here alright
and so this is the price of the stock let's say and this is the passage of
time and of course you want time to pass and you want to reach expiration if
possible okay now a lot of people will you know they'll liquidate their iron
Condor they'll take off their position you know when when they achieve 50%
profit or whatever so you don't have to go you don't have to go all the way to
expiration a lot of people don't and it's fine all right so let's say this
the stock price starts here okay and then you see it start to go up and up
and it just keeps going up without any break it's going up you know
really fast okay and you think well you know what
I don't think it's gonna go up much more okay because probably talking about
probabilities here of course it could just keep going up and up and up but the
probabilities are that it's gonna get exhausted there's gotta be exhaustion
and there's a good chance that it's either gonna go up a little bit more but
then start to turn around or or maybe it'll go sideways or best of all it'll
just turn around it and just retrace and start to go downwards either way you win
you only lose if it just keeps going up and up and up all right which is kind of
unlikely especially after it's already gone up a lot really fast again no
guarantees it could keep going up and then you lose money so you know there's
always risk all right and if you let's say you sell okay so you see go up
really fast and really far and so you sell a call with a strike price
right let's say right here okay you sell the call with strike price right here
and then now could just keep going up and up and up and you could lose more
and more money and so this is selling a naked call alright or an uncovered call
and so let's say you want to make it a call spread and so you buy a call here
just for protection okay just so you have a limited loss here alright great
and so then let's say the exhaustion does start to happen it starts to peter
out you know and then it starts to go sideways great okay you know maybe you
could even take off your position here because some time has passed and you
know or you can wait until expiration your choice now again it's gone up too
far so I'm not going to tell I'm not gonna sell a put spread at this point
cuz it got it hasn't gone down here and I expect it to retrace but what if it
does retrace and it starts to retrace really hard really fast and really far
well now it's gone down too far too fast so now I can leg into an iron Condor I
can if I choose to I can sell a put option here let's say and right now it's
just a naked put if you just leave it like that okay so for protection I'm
gonna buy if I choose to if I don't want to sell a make it put I'm gonna buy for
protect for protection a put option with the price here below it okay so now it's
an iron Condor alright and hopefully since it went down now too far and too
fast too soon hopefully it'll start to might go down a
little more but hopefully you'll start to go sideways and start to retrace and
hey you made it all the way to expiration congratulations and now you
collected a premium here on the call spread and a premium on the put spread
alright so again it's only going to do one or the other at any given time it's
either gonna go up too far too fast or down too far too fast not both and so
I'm going to leg in to the iron on door okay and let's say all right so
here's the beginning of the time period we're looking at and let's say our stock
price is going along and then woo down too far too fast right I mean it's just
really quickly going down and you're thinking okay this is getting out of
control especially if it's a good company all right if it's a company that
you've researched and you know that the fundamentals are fine and this isn't a
market crash or a recession or bear market it's normal market conditions and
you think it's going to retrace or at least you know when something goes down
too far too fast too quickly too soon chances are it's either gonna go down a
little bit more but start to go sideways or maybe it'll just go sideways
immediately or maybe best best of all is when it starts to retrace and go back up
and that's normal again no guarantees it could just keep going down and down and
down the company could even the company could go bankrupt or whatever so there
no guarantees all right but let's say it goes down too far too fast and so you
sell an option with a strike price down here okay all right there you go and
then now that's a naked put you're selling a naked put and you know it
could just keep going down and down and down the price and then you're losing
more and more money there's a limit to what you can lose unlike with a naked
call where there's no limit but still you can lose a lot of money if you just
sell a naked foot so let's say you make it a spread where you also buy a put
option with the price down here let's say okay great so now you've got a
limited loss here all right and you know what that limit is all right great okay
so let's say things work out well and hey great okay it starts to the bleeding
stops or slows down starts to retrace great and now you know it's over here
and you could you could take off your position and just take your profits or
you can wait until expiration your choice but let's say oh it starts to go
up but it goes up way too far way too fast it's just out of control right and
you think wow it's probably gonna now either go sideways or go up a little
more but not much or start to retrace again
and go downwards again there's no guarantees it could just keep going up
and up and up and that's why there's always risk when you sell options which
you have to be aware of alright but now you might want to leg into an iron
condor again now you might want to sell a call spread okay let's say it's right
here and then for protection you could buy it you know you sold a call but you
don't wanna make it a naked call necessarily and so you now buy a call up
here with the price up here to protect yourself all right
otherwise if you just sold this call here then it would be a naked call
uncovered call so let's say you sell a call here and then buy a call with a
strike price above it and now you have a defined risk and lo and behold
your prediction was correct and it starts to go sideways maybe even go down
a little bit and hey you reached expiration you win great okay so that's
how I'll egg into an iron Condor again it's only gonna go up too far too fast
or down too far too fast not both at the same time and so usually I'm not going
to sell both the call spread and the put spread at the same time alright but if
it goes down too far too fast and then later on up too far too fast or vice
versa up too far too fast and then down later on too far too fast
I might leg into an iron Condor there and you could potentially double or
almost double your profit potential that way all right now of course you're
taking some risk there so do this really carefully don't do this unless you
really know what you're doing and you always want to study the fundamentals of
the underlying equity whether it's a stock or whatever or whether it's oil or
whatever it is okay if it's a company if you're selling a put spread you want to
make sure it's a really good company that's not going bankrupt you want to
make sure that you're not in the middle of a bear market or a recession
something like that if it went up too far too fast you want to make sure
there's a reason you believe that it's going to retrace or at least go sideways
or go up but not much more all right you always have a reason for
every single trade you know why you're making the trade and with the call
spreads and the put spreads you're defining your risk
you're limiting the loss that you can take all right so that's my explanation
of how I do iron condors and I really appreciate you watching and listening to
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thanks a lot and I'll talk to you again soon