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That is the double calendar. I’m going to show you how to enter into a position – the sale of an iron condor. It’s basically a very similar position. However, it’s a little trickier to manage, because of the fact that both of the options – the option that you’re selling, and the option that you’re buying – is in the exact same month. They’re both in the front month.
The reason that we do not do this trade with less than 30 to 40 days to expiration, is because normally, you can’t find trades that are priced right. In other words, if you want to go far out of the money on these trades, you’re not going to be able to sell much of a premium on them. And that’s the way – we want a very large profit range on these trades. Let me show you exactly what I mean, here.
On this EEM, you can see that we only have 23 days left until expiration. This is not the optimal time to enter into an iron condor, and let me show you why.
If we wanted to have as wide as possible profit potential, we would want to go at least $15 above the current strike price, which would be the $165 strike price, on the EEM. If we were to sell that option, we would only receive about 10 cents on it. Remember, you’re selling it at the bed. The bid is only 9 cents, in this case.
Maybe we can squeeze another penny out of this particular option, and get 10 cents for it. Our protection is going to be much cheaper. It’s only 5 cents. That only leaves us with about 4 cents of profit potential. That’s not very much.
Let’s take a look at it. Just for example purposes, we’ll take the 160s. We’ll right click on those. Now, you can buy an iron condor, and you can also sell an iron condor. If you buy an iron condor, that means you’re buying a position in which time decay is working against you. You always want to sell an iron condor.
All we have to do is come down to “Iron condor.” We go to “Sell,” and “Iron condor.” That brings up our dialog box, at our call strike price of $160. If we are to sell the 160, we are going to buy the 165 for protection.
Remember, we’re running a business here. What we want to do, is we want to sell for more than we buy. That’s exactly what we’re doing. We’re selling the 160 calls for 38 cents. We’re buying the 165 calls for 15 cents. The difference is our profit.
Now, on the put side, we want to go at least – in this case, we’re going 10 points above the current price, so we want to go 10 points below the current price. The current price is $146.79, so we want to hit $135, if possible.
On the down side, we actually have a little bit better premium. The 135 is selling for $1.16. Let’s put in our prices here. We go to the 135 put. Now, we want to sell for more than we buy. That’s what all good businesses do. They sell for more than they buy their product for.
We want to go down to the 130s, which is a lower price than our 135s. The difference between what we buy and what we sell is our profit, just like any other business.
It looks like we can get an 81 cent credit on 1 contract. Now, how much is that actually going to get us, in profit? If we bring up our dialog box, it does calculate. We are in the same month for both the sale and the purchase of our options. It can give us the maximum profit and the maximum loss on this position.
Our maximum profit is only $81 on 1 contract. You can say, “Well, that’s not very much money.” But we only have to put up $400, to earn that $81.
That’s a pretty good return on your investment. That’s about a 20% return on your investment, in just a couple of weeks, before the expiration of these options. That’s not too bad.
Let’s take a look and see what happens if we do more than one option. Let’s say we do five options. Now we’re earning $400, on $2,000 of money that we have to put up in margin. That’s still a 20% return on your investment, in just a couple of weeks. That’s not bad.
Let’s take a look at exactly what this position would look like, on our profit picture. We’re going to right click on this red area, and we’re going to go to “Analyze duplicate trade.”
We already have the other simulated trade in here. We’re just going to close that out. Then we’re going to take a look, and see exactly what this looks like, on our profit picture.
Even with only 23 days to expiration, we have a fairly wide breakeven on this position. Our breakeven – we can set these by going to set slices, and we’re going to go to “Breakeven” on the date of our option expiration, which is May 17. We can see that we have a fairly wide profit potential in breakeven points, at 134.24 on the downside, and 160 on the upside.
That’s not too bad. The price can move close to 12 points on the downside, and about 13 points on the upside. We’re right in the center of that. That’s exactly how we make our money.
As long as the price remains in this profit area, our price is right now in the center of our iron condor. That’s where we like it to be, because the closer we get to expiration, then the closer we will get to this green line, which is the maximum profit potential that we will realize, at the expiration of these options.
The nice thing about iron condors, is if you do take it all the way to expiration, you have no cost to close out these trades. You’re not paying another commission to sell them out. The problem is that once this price gets to one side, then we probably will have to do an adjustment.
Most people will simply put on an iron condor like this, and they think that if it moves against them, they’re just going to close it out, at either a small loss, or a very small profit – probably at a small loss. They say, “Well, iron condors don’t work.” Because they don’t know the art of adjustment. Adjustments are everything.
You don’t just put on these positions and let them run against you, without making some sort of adjustment. That’s where the real science of trading as a business comes in.