Case Study of the Week
This case study is based on actual trades using the strategies taught by the team at Options Money Maker. Our focus is to teach traders a consistent and conservative approach to trading credit spreads, debit spreads and other combination spread strategies to earn higher than average returns.
We believe that there is no better manager of your money than you, armed with the education and experience to create great returns and do it with peace of mind. We also believe that there is no better way to learn than to “mimic the masters” and then actually do it yourself! These case studies are designed to be a supplement to your education and show you real examples of the trades we open, close and adjust while minimizing risk, eliminating fear and growing a big account.
Not every trade goes as planned and every investor needs to be positioned with a set of management strategies to successfully manage their portfolio. The difference between Options Money Maker investors and the rest of the investment world is that we have consolidated and simplified an arsenal of management strategies that are logical to understand and have been proven to work. This creates confidence and peace of mind in a market place that no one can totally predict. One of those strategies is called a “Seed Iron Condor.” An Iron Condor by definition contains four legs, one Put Credit Spread and one Call Credit Spread. The spreads are on the same underlying index, have the same expiration, with the same spread but with different strike prices. We call this a Seed Iron Condor because we construct it in a manner that allows us to “harvest” profits off of the various spreads as the natural cycling movement of the underlying index occurs over time. This provides a management technique to secure profits to cover other underperforming positions and “retire” them from the portfolio.
What is the logic behind this trade…?
The following is an example of a recent Seed Iron Condor created on NDX. Our investors opened two spreads with 5 weeks to expiration when the index was trading at 4357. One was a 4345/4350 Put Credit Spread (rising bias position) and the second was a 4375/4380 Call Credit Spread (declining bias position) with a total credit for both positions of $4.50. This brought money into our accounts immediately. There are several ways to harvest profits off of this seed condor. If the index simply remains flat over the course of the next several days or weeks, and the price remains in the middle or “sweet spot” of your range (in this case between 4350 and 4375) time decay will occur on both spreads. This will allow the investor to take profits on both sides and theoretically gain maximum profits if both spreads remain out-of-the-money at expiration. We usually don’t manage our positions all the way to expiration but rather harvest profits sooner along the way. In most cases there is enough cycling up and down to create profits on one side or the other prior to expiration…sometimes multiple times.
What Happened Next…?
Over the course of the next week, the NDX made a move upward to 4430. This move favored the Put Credit Spread side of the iron condor and allowed us to harvest $1.00 by closing that spread. The Call Credit Spread was unfavorable at the moment so we left it in place. With 4 weeks remaining to expiration, there are a number of situations that may occur to create additional profits.
It’s Great to Have Choices…
Next we go into a monitoring mode to determine what to do depending on the movement in the index. If the NDX moves down significantly, we may be able to exit the Call Credit Spread for a profit and be totally out of the position. If there is a moderate downward movement that takes the Call Credit Spread out-of-the-money we may leave that position alone and take advantage of adding a Put Credit Spread back in to create a complete Iron Condor again. If the NDX continues to move upward, we may choose to reposition the Call Spread to a higher strike price. This can be accomplished while maintaining a reasonable credit in the position and being at a strike price that provides for a better chance to make a profit. In addition to repositioning, we may also choose to add a Put Credit Spread back in at a higher strike price than the original position to have a complete Iron Condor once again. The multiple management options provide real peace of mind to the investor looking to harvest profits. Do you know what to do when the market is not cooperating with a trade and you are looking to harvest profits?
There was no one right answer in this case. There are many management techniques that can be employed. The decision each trader makes is based on their personal views and attitude towards risk. This case study points out the need to learn how to think like a trader versus just following a set of rules. Want to make a profit on a high percentage of trades and manage unfavorable trades from a loss to break-even or an eventual profit? We sure do! How about you?