Buy and hold did pretty well last year. Heck, the S&P 500 returned almost 30% and the Nasdaq 100 over 40%.

But what if I told you I could show you a strategy with a high win rate that is so easy to execute, you could put in your exit order alongside your entry?

Of course, I’m talking about the short Iron Condor!

And with volatility spiking after Friday’s market sell-off, which saw the Dow drop by 600 points, its worst single-day loss since August—you better believe this strategy is going to come in handy.

Today I’m going to walk you through the mechanics of the short iron condor strategy.

I’ll cover how it works, when it’s ideal to trade it, and how to manage it.

Iron Condor Basics

 

As a review, an iron condor combines a put credit spread and a call credit spread. This is what the payoff diagram for one looks like at expiration.

 

 

Down the left side, you can see the hypothetical stock price and the payout at each price. This trade would work as follows:

  • Short $50.50 put contract
  • Long $49 put contract
  • Short $51.50 call contract
  • Long $53 call contract

This is what’s known as market-neutral trade. The setup let time decay and implied volatility decay work in my favor. As time ticks away, the premium price (what I would buy it back to close the trade) declines, eventually going to zero by expiration. Declines in implied volatility work the same way.

Ideally, I want to take the trade-off at 30%-50% of maximum profit.

These trades work best when:

  • You go out 30-60 days for expiration
  • The implied volatility is elevated
  • You collect a premium that is equal to 1/3rd the distance between the spread contracts
  • IE 1/3rd the distance between $53 and $51.50.

Once you put the trade on, it’s perfectly acceptable to place the exit order in immediately. Generally, you want to let the trade either go to expiration or hit your exit order (from what the statistics show).

 

The ROKU Show

 

So, here’s how it played out in December. I was looking at this daily chart:

 

ROKU Daily Chart

 

The stock appeared to be forming a range. Now, I wanted a look at the hourly chart.

 

ROKU Hourly Chart

 

The stock was trading in a channel that was trending lower. However, it had reliable support and resistance at the green lines. When I looked at the option chain, I found I could go out to the beginning of February (about 45 days) with a $5.00 wide spread on each side and collect the required 1/3rd premium.

My option contracts landed at the $105/$110 put spread side and the $175/$180 (I believe). That gave me a strong resistance and support level to hold this stock in a range.

From there, I placed the trade, receiving a premium, with my goal to either keep the entire premium or buy back at a lower price then I received.

Then, I just let it ride its course. I ended up closing the trade at 30% of the maximum profit. To close the trade early, the stock has to land near the midpoint of the short strikes (in this case, between $110-$175, which is $142.50).

At the time I took the trade, the stock was around the 50th percentile for the implied volatility range over the past year. Generally, you want the IV to be above 30 when you take these trades. That lets declines in IV work in your favor.

 

My New ROKU Trade

 

I liked this trade so much that I did the same thing again at the beginning of January. Low and behold…3 weeks later I’m out of the trade again at 30% of maximum profit.

Both of these trades ended before ROKU reported earnings. Additionally, ROKU maintained a high implied volatility throughout the trades. That let the IV and time decay work in my favor (or Vega and Theta for your option nerds).

Plus, I am loving some of my SPY iron condor trades I have set up.

I just took one live!

Don’t believe me?

Check out a replay of the live trading event here.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

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