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It automatically brings up our call side, but the put side is generally not where we want it to be. It tends to be around the same strike as our call side. What we want to do is, we want to bring that down a little bit, maybe to the 133s.
All we had to do was just click on where it says “Put.” If you have those little yellow arrows down here, you can click on those, and that will bring up a box with all of the strike prices that are available, for that underlying.
We just clicked on the 133. We want to buy – because we’re selling an iron condor, we want to buy something below that strike. We’re going to buy the 131. For the call, we are selling the 142. I like to keep them a couple points apart, so I’m buying the 144. That’s how you select.
Now, we have the iron condor sold, here. We can see that we’re going to get a credit of 95 cents, at the midpoint, depending on… Right now, this is over the weekend, so the bid and ask prices are a little bit wider than they normally would be, during market hours. During market hours, this might be 93 cents and 95 cents, instead of 83 cents.
What we want to do is, we’ve got this set up so we can receive a 95 cent credit for one contract. Remember, when I showed you the Setup tag, that it automatically defaulted to create a single contract on this entire iron condor that we are selling. If we want to increase that – if we’re selling, we want to click this little blue down arrow, and that will increase the quantity of our iron condor by 1 contract. If we continue to click it, it will increase by 1 more contract, and so on.
If we want to reduce the number of contracts that we selected, all we have to do is click on this up arrow here, until we get the number of contracts that we want. Just to show you, I will delete this. Let’s go back to our Setup. Instead of going with 1 as our default order quantity, if we want to set it at 3, we can hit 3 here, and keep the option order quantity incremented at 1.
Click “OK,” and we’ll go back and sell our iron condor again. You can see that 3 contracts have now come up, as our default order quantity. If you want to decrease it or increase it, you can just click the blue links, and it will go up by 1 contract, because that is our order increment quantity.
Let’s set this back up again. How I normally begin the trade is by selecting the strike prices that I like to work with, either on a double calendar, or with an iron condor. I think I picked the 133 and the 131, for a 95 cent credit.
Now, you can go to this little blue dot here. When it’s highlighted yellow, right click on that, and go to “Analyze duplicate trade.” You can also click anywhere in this. I have trouble getting exactly on this little blue dot, so you can go anywhere inside of the blank area here, and do the same thing. Right click, and then left click on “Analyze duplicate trade.”
That will bring up your Analyze tab. The Trade tab and the Analyze tab are the two most important tabs. They are the tabs that I actually use more often than any other tab. I’ll show you some of the other tabs. Of course, your account is very important. Keep an eye on your current positions, and also your monitor tab, so you can monitor the Greeks of your trade, and your portfolio.
When you’re setting up trades, and you’re going through, you’re trying to get an idea of your positions – the Trade and the Analyze tab are probably the two most important. They are the ones I use most frequently.
Now, when you’re analyzing a trade for the very first time – what you’re going to do, is go over to the Trade tab, right click, and come over to the Analyze tab automatically. It brings up this risk profile graph. The risk profile graph gives you an idea, as it’s open, of the probability of the profit and loss, at the current time, based on its current price.
It doesn’t really give us that much information. What I like to do is find out what this is going to look like at expiration, and what it looks like right now, in comparison to expiration. I will immediately go to “Plot lines.” I’ll bring this down to “Expiration.” I’ll go “Expiration +1,” which means that it will take a look at what happens to this graph – what happens to my position – just immediately following expiration.
As soon as I click on that, this little graph will come up. What this does is show you the current price. It’s kind of hard to see, but when you first pull this up, this little gray bar right here in the center, is your current position. It gives you the price down here. $138.48.
You can move your cursor back and forth. Down here, it’ll show you what your current profit position is, based on date. Today is 4/19/08. The profit potential of the position, which is your green line, at the expiration date, which is May 14, 2008.
If we wanted to, all we have to do is run our cursor along these lines. Our strike prices are down here. The prices of the underlying are underneath, on the horizontal axis. Our profit and loss is here, on the vertical axis.
You can see that as long as the price stays within 132.10, all the way up to around 143, then we will have a somewhat profitable position. Our most profitable position will be if the underlying remains within around 142, to about 143.
You can also see that corresponds – the 133 on the low end, which is our maximum position before our profit starts to decrease – is the position of our short put position, at the 133 strike. Also, the 142 strike, which is our maximum profit position to the upside, corresponds to the short position that we have at the 142 strike price, on the call side.
There is some logic to this. What will happen is, our current profit and loss is this white line, here. Like I said, the 95 cents was the mid-price. Generally, you’re not going to get that. You’re probably going to get something close to that, but probably a few cents off. You might get 92 cents, or maybe even 91 cents. It does change the profit and loss a little bit.
You can see that this white line here is our current profit and loss. You can see that if we were to open up this position right now, at 91 cents, we would be in a position of losing $5.81, immediately. Why does that happen? It happens because of the spread.