## Options Education

### Iron Condors Re-examined: Part Two

...continued from Part Two

Iron Condors Ctd.
The next day, 02-25-2009, we were covering Iron Condors and again the same ticker was suggested and that is exactly what we worked on: an I.C. on POT. (A high flying Condor). Below are the specifics of it. For those who need a refresher of how this trade works, I suggest that you reread my article, I.C. Explained, before diving into this one.

POT: \$82.01

Bear Call side
BTO + 1 Mar 110c @ -0.63 (deeper OTM)
STO ñ 1 Mar 105c @ + 0.98 (deep OTM)
Bear Call Max Profit (difference) + 0.35

Bull Put side
STO ñ 1 Mar 70p @ + 2.72 (deep OTM)
BTO + 1 Mar 65c @ - 1.82 (deeper OTM)
Bull Put Max Profit = + 0.90

Combined Max P = 1.25
Max Risk = (spread width of 5 point minus the combined Max P of 1.25) = 3.75

Sending A Foot Soldier
Looking at Figure 3 above, it could be observed that I have first sent a "foot soldier" and then the rest of my contracts. The single contract, or a foot soldier, was sent to find out where the true market is and as soon as it got killed (filled), I sent my troops in.

Observe the difference in fill times. The point is that rather than jumping in with the big contract sizes all at once, it is wiser to gradually leg into your trade, for you are bound to get a better fill, just as I did. Once again, it is better to receive 1.32 on nine contracts than to receive 1.25 for all 10 because of impatience.

When combined, my credit on all ten contracts was just slightly less than 1.32, to be exact it was 1.313 or \$1,313, while at the same time I was risking \$3,687. If we divide our maximum reward with our max risk, we get 35.6% return on our money within the next 3 weeks. Now do not forget that is our maximum return and that in the current trading environment we are in, we might have to exit early.

Exit Strategies
Here are the five possible exit strategies we could utilize if POT goes out of our "box" that we have marked for it by selling the 70 put and 105 call. Once again, when we placed the I.C. trade, we made a couple of conditions:

POT must stay below our sold 105 call and also above 70 put, which means that it has 35 points of dancing room. In case it does not, then we need to fix either our call side or put side. The five options, besides simply closing the trade and being done with it, are:

Strategy Name

Month

Action

Roll out

Next month

Next call up or next put down

Roll up

Same

One call higher

Roll down

Same

One put lower

Roll out and up

Next month

Next call up

Roll out and down

Next month

Next put down

In one of my future articles, when the third week of March expiry takes place, I will come back to this chart and explain which exit I utilized for my current POT trade, but for now, we will leave it at this chart of possible exiting I.C. strategies.

In short, in this article I have gone over one of my open trades with the intent of pointing out the existence of multiple exit strategies for an Iron Condor in case it goes bad. Those exit strategies were meant to be taken in the case of an emergency. Rolling out, up, or down are done when things go bad.

In a normal scenario, we close our I.C. during the week of expiry collecting the majority of our maximum premium and move on to our next trade. If by any chance it happens that the stock is exactly in the middle of the range, then we might select as one of our options/choices not to even buy back our obligations but to let both Bear Call and Bull Put expire worthless.

Again, how we exit depends on what the underlying has done, yet the choices are there. Having those multiple choices is the very reason why an option trader trades options.

"

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