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Let’s go back to our Trade tab here. Our spread between the bid and the ask price. The bid and the ask has a spread on it. It could be a penny, it could be 2 or 3 pennies. It could be 4 or 5 pennies, per contract. What you do, is you’re selling at the bid, and you’re buying at the ask.
As soon as you buy something for $1.32, if you had to go back into the market and sell it immediately, you would only get $1.26 for it. That is the reason why you have an immediate loss, as soon as you put this position on. Nobody gives you anything in the markets. You’re not going to make a penny. In fact, you’re losing a penny, every time you put on a position
The only way that you’re going to be making money is through the analysis of your positions and the way you manage them, in the future. The way you make your money is that this white line, over a period of time, will begin to rise, until it meets the green line at the expiration date. That is on May 17.
We can take a look at this a different way. If we go back up to our “Plot lines” here, for a second, let’s just make sure our probability date over here on the right side is accurate. It should be set to the day of expiration, which is May 16.
We’re going to go to “Plot lines”, and we’re just going to go to “Day Step” here. Look at this. What happens is, eventually, this white line will come up and meet. I’m going to go up, day by day. You can see that our current date is the 19th. The green line is 4/25. Within 1 week, we should have our white line moving from a loss of $5.81, up to a profit of $5.13. If we keep moving up our date line – remember, the expiration of these contracts is May 16.
Generally, we like to close these out about a week before expiration. Probably, close to May 9, we’re going to be taking a look at closing out this position. If the prices remain relatively stable, then we can continue to increase the date. We’re at April 30. At April 30, we’re in a position where we have a profit of $17.
If we continue, at May 4, you can see that the profit continues to rise, as we get closer to expiration dates. Let’s say we start closing out our position on May 9. If we hold our position from April 19 to May 9, which is only a couple of weeks away, you can see that this white line has increased dramatically, to the point where we are making a profit.
That is exactly the goal, of what we want to see happen. We want to see this white line continue to rise, and rise, and that means that we will have a profit of $50, for each contract that we put on. We put on 1 contract. We’re going to get a profit of $50.
How much did that 1 contract actually cost us, on this iron condor? Because we received a credit, it only reduced our buying effect of $109. If we were to close out this position, and the price remained relatively stable, and it didn’t move – let’s just assume that. Although it rarely happens, it does happen once in a while.
We close this position out on May 9, which is about a week before expiration, for a $50 profit. What kind of return on investment is that?
We only had to put up margin money of $109, and we got $50 in return. That’s almost 50% profit. How long did we have to hold this trade? We put it up on April 19. We closed it on May 9. That’s about 3 weeks. 50% profit, in 3 weeks.
Let’s just take a look and see what happens if we increase the number of contracts. Instead of 1 contract, we will do 2. Now, our margin is only $218, but our profit is $100. We’re still at 50% profit, in 3 weeks.
Let’s take a look at 3 contracts. For 3 contracts, we only put up $327, and we have $150 in profit. We’re very close to 50% profit, in 3 weeks. When you start to get into really significant amounts of profit, and you’re really good at what you’re doing, now we’re putting up $2000. In 3 weeks, we have a profit of $1000.
When you start to play in the big time, and you’re doing 50 contracts at a time, you’re putting up $5000 in margin money, and you’re making $2500 in just 3 weeks. This is on one position. The profits can certainly be significant. This is the way that you would use this Analyze tab, just to determine exactly what your profit position is going to be, over time.
If we took this all the way to expiration – as you can see, I day stepped it. This is actually May 17, which is the day after expiration. You’re going to see that this is almost exactly like our profit and loss figure that we looked at, when we initially opened up the position.
Our maximum profit on this position is $4,544, if we did this many contracts. Of course, when you’re starting out, I do not recommend that at all.