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How To Trade Iron Condors

Iron Condors like Butterflies are a popular options strategy for beginning spread traders. They are conservative non-directional trades and many traders use them to bring in consistent returns, at least that’s what you’ll read. The reality is a bit different but in theory Iron Condors are a popular strategy for a market trading in a range.

As with Butterflies, which I’ve written about before, the strategy itself is simple to learn and to understand. The psychological effect as the market moves, the evolution of the trade, and entry/exit are a bit more complicated to manage and take practice, trial and unfortunately, a fair amount of error.

A fully constructed Iron Condor looks like this:

-1 OTM Put
+1 OTM Put with lower strike
-1 OTM Call
+1 OTM Call with higher strike

Here’s an example P&L Diagram.


It’s possible to find yourself with an Iron Condor with a max loss of $0 and these are the most rewarding of Iron Condors. Personally, that’s always my ‘target’ when I construct an Iron Condor. But, lets take a step back. We’ll look at two ways to get into an Iron condor, you can construct it at all at once or you can build it with two spreads.

I’m going to use Microsoft and Apple as examples. Microsoft, because it’s slightly range bound, we’ll fully build the Iron Condor from scratch, and let it run it’s course until just before expiration. With Apple I’ll consider a strategy in a trending market and we’ll construct the Iron Condor in two steps.

+10 42.5 $0.17
-10 43 $0.25
-10 45 $0.25
+10 45.5 $0.15

msftpandlironcondorHere you’ll see that the max profit is about ~$200 and max loss ~$300

With the Iron Condor I’m proposing, we’ll need Microsoft to expire between 43-45. Look at the MSFT chart. Looks to be a safe bet. Will it be? The market tends to fall faster than it rises on a short term basis. If I was really going to make this trade, I might consider lowering both of my ranges, yet the trend is still clearly upwards. Note: Look for reasons MSFT might break down (earnings), and if you find any consider targeting a lower band.

msft-1mo260215Using an Iron Condor with a trending product is a bit more complicated, but more rewarding as a trader. Look at the Iron Condor as two spreads, A bear call spread (45/45.5) and a bull call spread (42/43) – in the Microsoft case.

For Apple I’ll give you an example of how you might end up with an Iron Condor. What we’ll attempt to do is construct a bull call spread (the trend direction should be your second leg), let the market continue along it’s trend, start to accumulate profit and then lock that profit in, by adding a bear call spread. That sounds a little complicated, but in the end, if things go as planned (they never do…) we’ll have built our Iron Condor, locked in some profit and created some down-side protection if things go crazy. This works best when Volatility is higher than normal.

First the Apple Chart:


We see the trend channel rising, let’s look for our first spread. Lets see if 126/128 works.

+10 126 $6.10
-10 128 $4.80

aapl bull call

On first glance that looks like a bad trade, but keep in mind Delta, and what time will do to the value of these two strikes. Which will lose value quicker? And what is that called???

Lets look at one option for the second spread we’ll be targeting at some point in the future. This rests open, and will depend how the market evolves.

-10 134 $1.97
+10 136 $1.65

Today that P&L looks very similar to the Bull Call. But what happens to these P&L’s as the Vol changes or if the price continues in it’s upward channel?  If it falls?

AAPL Bear CallIf you’re considering constructing an Iron Condor in two stages in a trending market, watch Volatility, and trade with the trend, your first leg should fit a strategy that fits the trend. If things go your way, adding the second leg protects your ‘good’ trade and limits any losses should things turn south. This takes some practice, but using an Iron Condor to protect profits is as equally a satisfying strategy as is building one from scratch.


How To Trade Butterfly Spreads

A butterfly spread is one of my favorite spreads. Butterfly spreads limit your profit, and more importantly limit your risk, they can be easily constructed by combining 2 other spreads the bull and bear spread and are easily evolved into iron condors. It’s a neutral strategy – to be avoided with strongly trending markets.

If you’re new to trading options, the butterfly is one of the first spread strategies you’ll learn.

The hard thing to learn aren’t the strategies themselves, but the evolution of the strategies. For example, if last week I was expecting the market to break resistance and move higher, I might put on a bull spread, yet the market stayed flat and Vol is going nowhere. What possibilities do I have? Should I evolve that bull spread, bail, or leave it as it is? If I see the market staying flat and I want to stay in the trade, I add a bear spread. Voila, I’ve constructed a butterfly. This is exactly what makes options trading so interesting and difficult. The evolution of your positions.

I’ll keep things simple and we’ll look at the butterfly as a strategy in itself but keep in mind, it’s an easy strategy to ‘ease into’.

A long butterfly is built by selling 2 inside calls usually ‘At The Money’, and by buying 1 outside call (on each wing).

+1 ITM
-2 ATM
+1 OTM

Profit and loss looks like this, you’ve seen the chart…



Lets take a real example from today’s close. I’ll use the SPY as an example and point out some of the advantages and disadvantages of a butterfly with the SPY at the moment.

The chart, looking at a monthly perspective.


Using the February Strike, At The Money, we need to sell 2 (I trade in 10 blocks to keep the ratios clear) at 202.

First, you’ll be selling 2 At The Money 202 strikes, they’re $4.60. Next, start considering which wings interest you. How do you do that? What are you range expectations? What type of Volatility will I see? Remember a butterfly is a neutral strategy! You want this trade to close at 202 – or as close as possible (your short leg). The option chain, OI and some IV is below.

Note: You do have a little help with the volatility and pricing,  it’s a good idea to keep an eye on value, as well. I do this rapidly using the VIX levels, they help me create triggers for entering and/or exiting spread trades on the SPY. The VIX also has levels of support and resistance, and you can use these levels to time your entry or exit. Selling is better done when the VIX is high, and buying when the VIX is low. Obviously… But if you plan on constructing your butterfly with a bull-spread leg and a bear-spread leg, this becomes more important.

spyoptionchain130115Back to the SPY. What’s the chance the SPY will close at 202? We can identify atleast 2 ranges over the 2 month period on the chart above. An inner 200 – 206 channel, and outer 198 – 209  band. We’ll use these ranges to identify the wings of our butterfly, but to make a clean butterfly we need to buy 1 ITM and 1 OTM – at equal distance from our short. Lets look first at the inner channel with a 199/205. (I like 199 because 200 has some psychological value as resistance.)

Look at the P&L for a 199/202/205 butterfly.


You have a max profit of ~ $2500 and a max loss of ~ $460. That’s ~ 5:1. Not bad, but 199/202/205 is a very tight range. We’ve moved in and out of that range, just this week… Attention, If you’re new to this, there’s a panic ‘risk’ with this particular trade. If you’re expecting such a tight range you’d be expecting a big drop in Vol. It’s nearly sure we’ll break these ranges. You have to be prepared for that. How? It’s called the Iron Condor, but that’s for another time!

Lets reduce our panic risk and move the wings out, what happens? I’d propose a 196/202/208 spread. Why? Because these levels reflect our longer term outer range. Look at the first chart and the ranges I’ve drawn, you’ll see what I mean. The SPY has been volatile, but bound between 198 and 209 for over 2 months. Might it continue? Do I feel more comfortable with this range?


In this case, you have a max profit of ~$4500 and a max loss of ~$1500. That’s 3:1. Not as good as the 5:1, but is this not a better trade? It gives me a little more breathing room. The SPY has been very volatile lately and that makes for a hard neutral trade, but volatility is price discovery.

There are some extreme opinions about whether the market should be going to the QE moon or tanking with a deflationary Europe, and low oil prices. If the truth lies somewhere between these extremes a neutral trade is perfect, and the butterfly is a good choice.

Spotting Big Trends With Technical Analysis

Trading Rule #1: Trade with the trend.

Trading Rule #2: Buy Low – Sell High: or Sell High Buy Low.

Trading Rule #3: Understand and stick to a disciplined trend and trading time-frames.

If it was only that easy…

Big Trends in the market are easy to spot, the most recent obvious trends are in everything Oil. Down, down, down. Look closely at rule #3… Because trends and time-frame are where traders make mistakes. When thinking about a trade consider both the TREND time-frame AND your TRADING time-frame.  In this case we’ll call the TREND time-frame, The Major Trend and we’ll consider entering trades on Minor Trends (Rule #2).


The Major Trend to trade in Oil is clearly short. To keep this simple, we should enter short trades on our trading time-frame as close as possible to the red line.

The S&P provides a different type of example because the Major trend is ‘longer’. The S&P is not trending as clearly as oil on a monthly chart.

ES-1MoTo see the S&P trend we have to move the trending time-frame to a yearly chart, (the monthly chart looks like it’s found a range).  I’ve left the MACD and a stochastic on the yearly chart to drive a point.

es-tvEach time over the last few years the S&P has approached the 50 day moving average we’ve bounced and continued the Major Trend. If you are looking at the S&P and trying to call the top of this trend, count on losing money. You might be right, it can’t go on forever, but the Major Trend on the S&P is up. Trading short, at this point is too risky. Traders are making money buying the dips on the S&P and shorting the spikes on Oil. You’ll get faked out here if you try to call the top on the S&P or the bottom on Oil.

Lets have a look at Starbucks, first the Major trend, up… The moving averages have been supporting SBUX for a few years. 75 (moving average) and 66 (support/resistance) are trend reversal levels.

sbuxAnd the minor trend, our trading time-frame, also up:

sbux-1MoBut this chart is flashing a few technical warnings. First, the 3rd flag we’re seeing is not as “clean” as the first two and volatility (high-low ranges) is higher than during the two earlier flag setups. I’d say that we’re seeing the TOP of this trading (minor) trend. Why? Traders are less bullish and the resistance line at 84 is firmer (there are lots of stop-losses around 84). You can confirm this with the option chains.

I would suggest if you’re going to trade the trend on SBUX you use one of two strategies: A breakout strategy or a trend resistance level strategy. What I mean by the breakout strategy is that if SBUX breaks into a short-squeeze (over 84) get in for a short trade, and ride up the short squeeze, but that’s a major possible fake-out. It’s a hard trade, but easy money. Don’t stay in long! The short squeeze will happen within the next 5 days, if it happens. Notice the duration of the other 2 flags…

If SBUX doesn’t get squeezed, be patient, watch how this chart plays out, Look for entries at the trend levels 80/75, and eventually 66 before going long. Under 66 the major trend will have reversed.

I won’t say a word about trading against the trend… Or I’d have to break rule #1!


Option Chains, Indicators, and Insiders

Trading options is appealing for several reasons: leverage, spreads, and pricing is based on a ‘model’. Each of these reasons appeal more or less to traders who use options as part of their trading strategy.

Lets take leverage, the most obvious, for only $150 I can ‘trade’ an 80 Dec call option on SBUX (Starbucks). The nominal value of that option contract is ~$8000.  (I’m assuming you understand the basics of option pricing.) Multiply that by 10 and for $1500, you can trade 80k of SBUX stock. Who wouldn’t like options? (That’s the trap, on too spreads…)

Good spread trading allows you to stay in business a bit longer – bad spread trading puts you out of business quicker.  I can create spreads or ‘construct’ combinations of put, calls (and futures) which fit a particular strategy. For example, if I think SBUX is going stay flat for a while, I’d like to create a spread, selling options outside my projected range.

There are a few models, the most common is Black Scholes. These models appeal because they give traders a structure and theoretical pricing. They help you determine if a particular option is over-priced or under-priced. From this perspective they act as an indicator. Experienced traders will pay significant attention to models and pricing. For good reason. Statistically the ‘premium’ you pay for an option is based on the likelihood that it will expire worthless. Many traders will tell you that the only way to make money with options is on the sell-side. In other words, the pricing model, is better at predicting future prices than they are. That’s hard to argue with.

Lets take our Starbucks example and look at it’s option chain – I’m going to avoid the weekly options, they were designed to tempt the retail trader into losing their shirt. We’re also going to see if we should use options as part of a strategy with SBUX.

sbux-option-chainSo what should we be looking for here?

The first thing to look at is OI (open interest). SBUX OI is saying the 80 strike is the most active, but 6 or 7 times more active than the put side – that’s bullish. Does that correspond to our strategy? No, we’re assuming SBUX is going to stay flat. Though if we look at the IV (Implied Vol), calls are relatively cheap. If you want to continue to dig into ‘relatively cheap’, work on the model, and have a look at HV (Historic Vol).

The second thing is volume/price spread. There are NO institutional bets ‘out of the money’ on SBUX. Volume is low. Often you’ll see big trades being made around earnings, and those are good indicators. SBUX is NOT showing any big out of the money bets. Price spread is bid-ask difference – low volume leads to large spreads which implies bad pricing (remember our model?). I’m oversimplifying, but if you don’t know what you’re doing, STAY AWAY from low volume, high price-spread, low open interest options!

Back to the problem, should we use options to fit our strategy of ‘flat’? I’ve highlighted a proposed range ~80-82.


Technically this is a very bullish chart with two bull flags, hence the high call open interest. If we’re flat we’re predicting that we’ve jumped to the next range. Is ‘flat’ still a good strategy? December expiration is the only contract period we might sell calls or puts outside our range and even in December our Condor strategy is very limited with almost no open interest at 79 and 84. If you’re flat SBUX, the option chains are screaming, stay away from me.

Should we adjust our strategy? Is the bullish open interest enough for us to change strategies or start looking for another? That’s a personal call, but lets say it’s time to go full bull. 6-7 times Open Interest on the Call side is a strong indicator. Not as strong as an institutional trade, but strong none-the-less. What’s the trade? Buy the 80 expiration sell the 82.50 expiration. That trade will make money if the SBUX December contract closes over 81.  We’re still theoretically in our range so I’d take that spread one step farther and look at a calendar (diagonal) spread, selling the Jan 82.50 and buying the Dec 80.

What’s the P&L look like on this trade? Break even is ~ 81.25, you’ll have to get out or adjust around Dec. expiration… The probability curve based is in blue and the P&L is based on 10 contracts.


How can I learn more about option chain indicators? My favorite tool is livevol pro. If you can’t afford that, watch option chains with high activity. Most trading platforms will give you scanners that find: high open interest, high call/put activity and high/low vol filters. Option chains can be great indicators for stocks you trade, Starbucks in this example. They can also be used as a tool for finding new stocks to trade.


Good morning. I was looking at the popularly traded coffee companies this morning: Starbucks (SBUX), Green Mountain (GMCR), and Dunkin Donuts (DNKN). Starbucks is the most actively traded, has a large institutional ownership, and would be a good candidate for time spreads and “income” trades. Volatility is low and just by looking at the open interest you get the feeling the most popular trades are selling covered calls.  Starbucks is not a high volatility speculative product, and if you’re looking to trade Theta, this is a good product.

On the other hand, I was a bit surprised with the September open interest for DNKN, so lets try to decipher it.

45/50 calls and 45/40 puts – with roughly twice as many calls…


What’s going on here? Time to look at the charts. I added the trade levels on the chart so you can you see these block trade ‘expectations’.

The 6 month:


The 3 month:

and the 1 month, I’ve added another resistance line at 46.50. With the stock at 44, it’s no coincidence that the 45 calls are $1.50 and puts $0.50.

dnkn-1mo-260814As you can see expecting DNKN between 40 and 50 looks like a safe range.  Recent volatility has been low, and it’s been 5 months since we’ve touched 50. The trend is falling, slightly. That’s a counter-trend with the market and with their competitors. I find that odd. SBUX and GMCR are both reaching or at their highs.

Let go back to the open interest in DNKN and break it down.

  • 1300 40 Puts
  • 1600 45 Puts
  • 2400 45 Calls
  • 3700 50 calls

There’s a few possibilities here (for the sake of argument lets take 2) either these traders are sticking with the trend and selling calls to buy puts, which I partially suspect, or given the large blocks of puts and calls at 45 they might be creating straddles, which I doubt.

Lets take the basic bull spread: buy the 45 calls and sell the 50 calls.


From a percentage perspective that looks great. Max Loss $500, max gain $9100. The prices are saying that’s ‘unlikely’. But if it hits…

And the basic bear spread: sell the 40 puts and buy the 45 puts.


This also doesn’t look too bad from a percentage perspective. Max loss $1500, max gain $3500

Now what would it look like if we put the two together?

dnkn ratio


  • Buy 20 45 Calls
  • Sell 20 50 Calls
  • Buy 10 45 Puts
  • Sell 10 40 Puts

Interesting, remember this is a ratio spread, there’s twice as many calls moving as puts. And look at the December open interest… Is someone selling the option farther out as well? Very interesting! To keep it simple, we’ll just combine the two spreads which would give you a risk profile with a max loss of $2200 and a max gain on the put side of $2500, a max gain on the call side of $7600.  The risk is time and that resistance level I spoke about earlier. DNKN has to close below $42.50 or above $46.50 to make this a good trade.  This combination, is a better trade than a straddle, you are lowering your price and reducing the break even range. It’s a great set of options to play around with and an easy trade to ‘ease’ into. There’s still a good amount of risk, but if you expect DNKN to move 2 points in the next 30 days, this is the trade, and someone is backing you up!

Herbalife Ackman & Hempton – Watching the 1% Squirm

Bill AckmanWatching Bill Ackman trying to take-down Herbalife (HLF) yesterday was a bit like watching an early episode of Breaking Bad – seeping desperation. Over the course of his presentation, he reacted to John Hempton, repeatedly (almost childishly). Hempton, who takes the opposite position of Mr. Ackman, is probably profiting handsomely from the relentless short-squeeze in HLF. I enjoyed John’s response, it deserves to be republished in it’s entirety. I hope you don’t mind John, this is good stuff!

Herbalife clubs – another experience

Bill Ackman has made something of my visit to a Herbalife club in his presentation. I have visited several. And I have a radically different interpretation.

But for the moment I just want to tell Bill Ackman a story.


In my lifetime in Australia it was commonplace to take children of mostly of mixed aboriginal racial heritage from their mothers and adopt them into white society or even to leave them in welfare homes.

This was done for the children’s welfare, usually but not always close to birth. But there are stories of children aged four being hidden from the welfare because the kids would be stolen.

Stealing children had widespread social acceptance in Australia. The condition in which the aboriginal people lived was very poor – often rural, often quite lowly educated. And you hear stories of children aged 12 in middle class rural towns saying they have never met an aborigine and being told to look in the mirror (because they were aboriginal).

This wasn’t a genocidal society. Indeed at the same time Australia had a massive multiethnic immigration program running. It just became the view of the liberal intelligentsia in the city (people who were utterly disconnected I might add) that this was welfare improving.

Like you Mr Ackman I am instinctively more than a touch paternalistic liberal. This was done by and supported by people like me. And dare I say it people like you.

The liberal intelligentsia came to this view however without ever talking to an aboriginal mother, without listening to their stories, without actually seeing what their policy looked like on the ground.

The literature of the time clearly made this out to be an interventionist welfare program. It was done for the victims own good. And the victims own good was widely believed by people who did no research. Strangely the welfare agencies – who should have had an idea that what they were doing was evil – were strong supporters. But their salaries were paid for by an evil program and their view of morality lined up with their pocket book. [Even then it would have been hard to describe them as evil people when they were doing it. They were concerned left-of-center but interventionist liberals. Like me. Like you.]

With our modern eye on this the church groups, rotary clubs, welfare agencies and the government were all deeply racist. They separated children from their mothers against their mothers wishes and did not listen to value their stories because they were different from them, had different colour skin and sometimes spoke in a different language or broken English.

I have – when all the historic inquiries into this practice – took place read the literature and wondered whether – reading it then – whether I would have seen the program for what it was. Pure evil. I have come to the conclusion I wouldn’t have. There is an underlying misunderstanding of what is different in all of us.

I too would have been an evil person by my implicit support for evil.

But I resolved then to always listen to the stories that people told me even when it offended my sense of decency.

Let me tell you about a Herbalife club in the Bronx. This had real customers – about fifty per day which is fairly standard – who came along and purchased their shakes and sat around and chatted. It was like many other Herbalife clubs that I have visited. There was a grid on the wall with the names of the regular attendees, and gold stars against their names for when they lost the requisite amount of weight.

You could do the calculation and work out that husband and wife who ran this club were earning marginally less than minimum wage for the time that they were there. They didn’t have much of a downline. A few of their customers purchased shakes at home for personal use – and they got some income from them. But for people who were modestly entrepreneurial it was almost sad – it certainly offended my sense of what is the right distribution of income to see them working so hard for so little. At first for me it was a little like poverty-tourism – the sort of poverty tourism you see when you visit small towns east of Battambang (Cambodia) or for that matter Arakun (a somewhat dysfunctional aboriginal town in Northern Australia.

But just as I would have been deceived by a welfare program in that aboriginal town I made a point of listening to the woman who ran the shop. And what I heard surprised me.

A husband and wife had been running this club for about fourteen months – and yes – they worked out that per-hour they made slightly less than minimum wage. They opened the club as a couple in the morning and he took the children to school and went to his minimum wage job. She ran the club, her friends came by. Most importantly after school her friends dropped her children off along with their own and went to their minimum wage jobs.

There were a pile of toys in the back and the place looked a little like a creche. The kids played well – and yes – one of her customers – in full knowledge of the financial circumstances was going to start a similar business a few miles away.

When I asked her about whether this was a pyramid and should be closed by the government she was hostile. She knew about you Mr Ackman but her attitude was that you wanted to take her children away from her.

I could not help but be struck by the parallels.

This is not a pyramid. There are plenty of real sales to real people. That is visible. Its a lousy business but it is a business in which people have integrated their lives and their families.

If it were Australia I would not hesitate to call the unwillingness to listen to the stories of the poor people of different race what I called it then: racism. In the US it is probably not that. US attitudes to Hispanics are far less racist than Australian attitudes to our aboriginal population.

In the US it is just money/class and the separation of the 1 percent from the masses. It is entirely possible to be from Manhattan and the Hamptons and completely lacking in empathy for people whose income is near minimum wage.

When I listened to people at Herbalife clubs I heard a story completely different from the story you tell in your presentations. It is a story about people who have integrated this business into their life. About people who have found community. And about people who have controlled their diabetes.

Its a story you don’t present.

And not hearing it or presenting it reflects badly on you.


Uber vs the Taxi Monopoly in Europe

croissantI’ve rambled about this before, but today was especially fun. Thanks to the medallion buying taxi drivers stopping for their croissants on French highways, Paris and it’s suburbs saw 300 kilometers of traffic jams. This is what’s known in French as a vrai bordel. In classic French fashion, strikers brought Paris to a standstill, and the evening news brought images of caffeinated taxi drivers trying to block even the scooters and motorcycles from passing their automotive barricades. (Cue la marseillaise…)

According to The Independent, Uber in the UK saw an 850% increase in demand today. Can you chuckle on a blog? I would love to know what the increase was in Paris, but that little fact is unlikely to be reported here. So I wanted to write a little note to all the taxi drivers that read my blog.

Dear Taxi Driver,

I feel your pain. Driving in Paris sucks.

Competition is unfair, you’re job is left unprotected, and it’s obvious that uncontrolled mayhem will break out if exagerated fares aren’t kept solidly above market levels. But dear sir, I humbly wonder whether Uber riders simply can’t afford your services? They’d be taking the train if Uber wasn’t there for them, not your taxi, so maybe it’s the SNCF that should be striking. (Oh sorry, yes, they were, but for other reasons.)

I love paying 60 Euros to get to Charles de Gaulle by car, and then only 35  to get to Gatwick by plane. I’m happy to do my part… And it’s a pleasure to pass 2 hours in the back of your polished Prius, admittedly I have more leg-room than on EZJet, but I’m also paying more.

Good luck with your show of force, but I for one, believe that if Uber (and it’s technology) can offer better service, at a lower fare, while at the same time reducing the smog in Paris, your days are numbered.

Veuillez agréer, Madame, Monsieur, l’assurance de mes sentiments respectueux.