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Iron Condor With NO Potential For Loss? - Options Trading Strategies - Neutral Options Strategies - YouTube
Channel: Option Alpha
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Hey everyone.
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This is Kirk, here again at optionalpha.com.
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And in this video tutorial, I want to talk
about a really cool trade adjustment that
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we made to one of our custom naked put trades
in DIA.
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And we basically created a new iron condor
in DIA that has absolutely no possibility
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of losing money, and it's causing us nothing
as far as margin is concerned.
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So, we were able to hedge this original position,
turn it into an iron condor that costs us
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absolutely no money with a lot of upside potential
as far as profit.
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So, we're going to go through the trade here
in detail.
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So, this is the trade that we're actually
looking at.
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It's the DIA.
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And you can see, this is a live trade that
we're making and that we're currently in.
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So, here's the original position that we had
made.
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We did a custom naked sell of a put.
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And so, what a custom naked sell is - For
our purposes in the way that we teach it here.
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And again, you can see a video tutorial of
this inside the membership area under the
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bullish strategy section.
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We go over this exact order and how to place
these.
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But what we're basically doing is selling
a call spread above the market.
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So, we sold the 179/178 credit call spread
above the market that takes in a premium.
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That also means that we're short implied volatility,
so this strategy really works well when implied
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volatility is high.
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Now, at the same time, what we decided to
do was to sell a naked put.
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And so, basically what we do here is we sell
that naked put and add the credit from the
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naked put to the credit from the credit call
spread.
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If that difference in all of the credits that
we received - In this case, it was $133.
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If that is more than the width of the credit
spread that we sold above the market, then
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we have no risk to the upside of this trade.
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So again, if the credit from selling all of
these different things, the call spread above
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the market and the naked put option below
the market is more than the width of the call
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spread above the market which is only $1,
you can see we have no upside risk on this
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trade.
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So, when we originally put this position on,
we took in $1.33 in credit, so that means
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that if DIA continue to move all the way higher
to whatever price in the future, we can still
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make about $.33 because of that $1 that's
subtracted out of there.
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Now, here's the actual trade that we make.
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Again, you can view the trades right here.
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So, with these trades, you can see that we
placed this trade on 1/16.
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So, I'm just going to show you guys the chart
here.
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What's so cool about this is that the stock
hasn't moved anywhere since the trade.
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So on 1/16, we placed this trade.
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And you can see we then made our adjustment
trade on 1/28.
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So, those are the two different timeframes
that we have.
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And again, I'll show you the adjustment that
we made.
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So, let's first go to the chart here.
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You can see DIA on 1/16 was right here.
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So, this exact day (this green day right here)
is where we actually placed the opening order.
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And you can see implied volatility at that
time was really, really high.
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Well, since then, implied volatility dropped
a little bit, but it's actually come back
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up.
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But the stock is basically going nowhere because
yesterday is when we actually made that adjustment
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to that trade.
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And actually, yesterday the stock closed down
which is actually bad for this position because
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we should be bullish, right?
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This is a bullish trade.
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We're selling a naked put below the market.
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We're selling a call spread above the market.
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We want the stocks to move higher.
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That's kind of our profit window.
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But you can see, the stock basically moved
sideways from the time we entered the trade,
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to the time that we made the hedge.
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So, there's no directional advantage that
we had in making this trade.
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It was all just time decay and volatility
premium that's getting out of this security.
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So, this is a look at what the original position
looks like in thinkorswim.
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So again, we have this long side here for
the short naked put.
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And then we have a nice big profit window
and it dips right here at 179/180 because
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that's our call spread that we sold.
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So, you can see that's where the profit loss
diagram dips.
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But everything stays above zero even beyond
that.
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This is where we make our $33 credit even
if DIA continues to move higher.
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So at this point, now that we're in this trade,
we basically want DIA to trade basically between
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179/180 and about 159 which is our breakeven
price, a very wide window of opportunity to
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make about $100 on this trade, so a good profit
window as far as we're concerned.
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But now, what we saw is we saw that as the
market has kind of evolved and gone through
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the process here.
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The last couple of days, it's traded sideways,
we've gotten a little bit closer to expiration,
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implied volatility has gotten down just a
little bit, it's back up today though.
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But implied volatility has gotten a little
bit closer to expiration, so the decay in
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these options is pretty substantial.
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So, what we decided to do was to go back and
create an iron condor out of this position.
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So remember, we have the call spread above
the market and just a naked put at 160.
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So to create an iron condor, we want to just
mimic of that call spread above the market
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by creating a very similar put spread below
the market.
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This means that we had to buy the 129 puts
which are just below the 160 puts.
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And you'll notice all we did was buy one because
we were just short one of 60's.
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But here's where the key comes in.
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We took in an original credit of $1.33 on
this trade.
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So, the key here is that we have to spend
less than $1.33.
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So, if we spend less than $1.33, we're still
taking in an overall credit.
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But even more so than spending less than $1.33,
remember we originally said that we want to
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have that credit be equal or greater than
the width of the call strikes.
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And that width of the call strikes is $1.
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So really, we want to maintain the fact that
we have no risk in this position, or if we
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want to maintain no risk in this position,
we've got to use $1.33 and buy a put option
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for less than $.33 to maintain that $1 overall
profit.
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And that $1 overall profit means we have no
risk on either side of this trade.
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So again, if we have $1.33 in credit, we want
to spend the money, but keep $1 at the end
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of the day.
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So, we went out and we bought the 159 puts
which we're trading for $.30.
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So, we take 133 minus 30 and were still left
with $1.03 in credit.
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Now, that $1.03 means that the width of our
strikes is completely covered by the $1.
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We have absolutely no risk on this trade whatsoever,
and we still keep the difference between the
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width of the strikes and our credit received
which is $3 if the stock moves outside of
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our strike ranges.
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So again, here is what the new position looks
like.
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So, I've just activated it here on the platform
here on the analyze tab.
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And you can see on either end of this new
iron condor here, we have absolutely no risk.
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This is the zero line.
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All of our red line which is the profit loss
at expiration, absolutely, emphatically no
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risk on this trade at all.
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So, that means that all the margin that we
were carrying originally is completely gone.
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We still have a huge profit window between
160 and basically 179 where we could make
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about $100.
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So, we've already made the vast majority of
that.
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We're sitting at about an $84, $85 profit
now.
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But at this point, the trade is not costing
us anything, and it still got a very large
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profit window (again, 160 to 179) that we
could make money.
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So, here's what DIA is, and you can see here
- I'm going to actually zoom out, so you can
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see it.
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Here's our profit window, all the way up to
about 179/180, and all the way down to 160.
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So, as long as DIA stays inside of this range,
we get to make all the premium on this trade,
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and at this point, it's not costing us anything.
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So hopefully, this was a really cool example
of how we're using options.
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And again, being a little bit strategic, very
smart about how we're doing it.
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The key here and takeaway here is that you
just have to take your time with understanding
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these positions.
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It's all about the credits and debits that
you receive.
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Again, if you understand how much money you're
taking in and how much it costs to protect
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the position or hedge it, then it makes it
very, very easy for you to look for the appropriate
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hedge.
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And in this case, it was a hedge that was
able to completely reduce the risk of the
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trade 100% and keep all of the upside potential.
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So again, I hope you guys really enjoyed this
video.
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If you found it really helpful, please share
it online on Facebook, on Twitter, on YouTube.
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Help spread the word about what we're trying
to do here at Option Alpha.
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And until next time, happy trading!
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