How to Make 5% to 10% Per Trade with Iron Condors

We, as options traders, have the ultimate advantage over other investors.

Unlike most investors, we have the ability to structure our positions in a way that generates profits regardless of the direction of the underlying stock or ETF.

Take for instance, the iron condor: an options strategy that thrives when the market goes nowhere. It generates above average profits when the underlying security remains range-bound for the duration of the trade, which in our case is typically 30-45 days.

The best part is, we have the ability to choose our return. Just keep in mind, the higher your expected return, the higher the risk.

Here’s my step-by-step approach to iron condors in basic terms. If you wish to learn more about how I trade iron condors, check out my latest webinar, “The Power of Iron Condors: Top Options Strategy for Earning 5% to 10% with Each Trade.” The educational webinar will be followed by an extended question and answer session to help get you started. I intend on answering every question that is posed in the webinar.

The Iron Condor

Okay, let’s get started.

First, a disclaimer of sorts. If you don’t understand the terminology, don’t be discouraged. Focus on the concept. Pay attention to the numbers, you’ll learn the terms with repetition. Best of all, if you need some help, just email me at [email protected] and I will gladly attempt to answer your question.

The first requirement when trading iron condors is making sure you are using a highly liquid security, in most cases an ETF. Highly liquid, in the options world, just means that the bid-ask spread is tight, say within $0.01 to $0.10, at least in most of the ETFs I trade.

For instance, take the heavily-traded SPDR S&P 500 ETF (NYSE: SPY).

The ETF is currently trading for $208.90.

SPY 4-17-15

SPY is just one of 50-60 ETFs that is considered “highly liquid” among most options traders. I focus my attention on roughly 30 of those ETFs.

I then move on to my mean-reversion indicator, otherwise known as RSI.

RSI can be seen below the SPY chart above. You’ll notice peaks (overbought) in green and valleys (oversold) in red. I want to place a trade when the indicator is in between those areas. It’s called being in a neutral state.

But, just being in a neutral state isn’t necessarily enough to warrant a trade.

An appropriate implied volatility rank and implied volatililty percentile is also needed.

Without going into great detail (I’ll save that for the webinar) the IV rank and IV percentile simply tells us if the implied volatility is high or low in the highly liquid stock or ETF that we want to trade.

If it’s normal to high … we want to trade it. Of course, there are a few exceptions, but I’m not going into the details here. I’ll save that for another time.

A normal to high IV rank and percentile just means we can sell options for fair to inflated prices, and as anyone who sells anything for a living, your preference is to always sell your product for inflated prices. Options are no different.

Typically this type of set-up occurs when a security moves from an oversold state back into a neutral state. When a security is oversold, it has trended lower, and as a result, fear has increased. The increase in fear inflates the price of the option, because more investors are buying options for protection. And that’s the reason why prices are skewed slightly higher for put options.

So, assuming SPY’s implied volatility is at least slightly above historic volatility, we can proceed to the next step … choosing your return.

Again, SPY is trading for roughly $209.

I typically like to start with a trade that has a probability of success around 80%, if not higher. But I use 80% as my starting point.

First I look at the call side of the iron condor, also known as a bear call spread. I want to find the short strike with an 80% probability of success.

SPY OC 1

The May 215 calls fit the bill, as it has an 81.55% probability of success.

Next I take a look at the put side with the same goal in mind, a probability of success of 80% or higher.

SPY OC 2

At 80.92%, the May 198.5 puts work.

So, right now I have my starting range established. Obviously, I can alter it as needed, but first I want a good base for my iron condor trade.

If you’re interested in mastering the art of Iron Condors, go here to view my latest webinar.

Published by Wyatt Investment Research at