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The Costly Iron Condor Trading Mistake You Must Avoid

It sounds sexy, doesn't it?

Put on a weekly iron condor trade... one per week, then let it expire and send the cash straight to the bank.

Yet from many clients I've worked with, they've been burned on this exact trade...

What's going on? Why does it seem like such a "layup" trade until you actually try to do it in real life?

Let's take a look...

It's a Crowded Trade

Since weekly options were introduced, more and more trading volume continues to shift towards shorter duration options.

A lot of people out there chasing short options.

And when you get a lot of people leaning one way, it drives the premiums on those options lower and lower.

That means you, along with countless others, will be chasing smaller rewards and taking larger risks.

So the question you need to ask yourself...

Is the "juice" worth the "squeeze?"

A Real World Example

Let's take a look at a weekly iron condor trade:

With about a week to go, this iron condor trade gives you .70 of credit for 4.30 risk.

And as long as the market stays above 2385 and below 2460, then you make money.

Seems fair, right?

Well, let's think about this for a second.

You've got about 30 points of upside buffer, and then about 45 points to the downside.

Right now the market is trading about 14 points a day. So all you need is a 2 day rally, and you're nearing your upside risk limit. And all it would take was one more pop and you'd be in serious trouble.

If you want to earn faster returns with iron condor trading, there is a way...

...but you have to be smart about it.

A Better Approach

Weekly options give you the promise of "instant profits" with a hidden cost.

What if I told you there was a better way to earn quick profits?

Allow me to introduce you to the KISS Iron Condor.

This is a short term iron condor with an embedded stop inside of it.

Unlike many iron condor traders out there, we believe that iron condors aren't just "set and forget" trades. You need to have some kind of risk management setup.

Basically, we look at putting on an iron condor about 30 days out, and look to hold onto it for 2 weeks.

So while weekly option traders are trying to force profits out of a 1-week trade, we can get better risk/reward by stretching it out a little more.

Our goal here is to take about 80% of the credit of the trade, and we set a stop at twice the reward.

Here's a live trading example:

This is an iron condor for a credit of 0.90.

Our profit target is to pull out 0.70 of the credit, and a hard stop is placed if we hit a loss of 1.40. That will happen if the market rallies to 2490 or sells off to 2340.

We want to be out of the trade in about two weeks.

Here are the results from some of the trades beginning in 2017:

This was from just one iron condor, and this setup can easily scale up to 20 iron condors.

The math ends up being simple. If we risk 2 to make 1, and our odds are above 75%...

Then it's a system with the odds on our side.

Learn More About Iron Condor Trading

We've put together a free iron condor toolkit for you, so you can see our approach to income trading and you'll get some of the resources that we use on a daily basis.

Click Here to Get the Iron Condor Toolkit for Free

Nailing the Top in Mastercard (MA)

Trying to short a stock that's in an uptrend can seem like a dangerous idea.

Yet, if you choose the right option strategy and are very selective about where you put on risk, there are always a few setups that give you profitable opportunities.

Let's step through a recent example in Mastercard (MA) so you can see how to add this setup to your trading arsenal.

Key Fundamental Indicators

When it comes to analyzing the market structure of a stock, size does matter. The kinds of market participants and liquidity is completely different in a stock like GOOGL or GS compared to a highly shorted small cap stock.

If you want to short a stock in an uptrend, the fundamentals of the company actually do matter. You want a stock that can see growth... but not explosive growth.

And you definitely don't want the company to be a buyout target.

The best way to find stocks for this setup is to go with established, name-brand companies that have very large market caps and shares float.

Quantify Your Levels

It's not enough to eyeball a chart and place some trendlines on it.

You need to have some kind of statistical backdrop for your trade. If you don't, you may allow your ego to get involved in the trade, and odds are you'll be too early on the short side.

I have a cusom indicator called the IWO Turning Point. It allows you to get a statistical view of the rate of change on a stock.

Let's take a look at how MA was set up:

Over a 10 day window, the stock had rallied over 7.5%. This was coming into a 3rd standard deviation move relative to the past 3 months of price action.

Now this kind of move has happened in the past, but it tends to occur only after strong downside moves. To see this kind of extension into new all time highs was statistically significant and warranted a short biased trade.

Pick the Right Strategy

I would never want to go short stock straight up on a trade like this. I'd rather limit my risk, increase my odds, and get paid for taking risk off of someone else.

This is where a bear call spread comes into play, also known as a call credit spread.

A bear call spread profits as long as the stock sells off or drifts sideways. This is a great strategy for shorting large cap stocks because often times the stock doesn't actually sell off hard, but simply drifts sideways.

Get Good Executions

On a trade like this, it's foolish to go "all-in" when you first spot a short setup. Instead, focus on scaling into the trade.

That way if the stock continues to move against you, risk can be added to the trade without a ton of stress.

Sure, this means that you may miss out on going full size on a trade, but it also helps you sleep at night.

Here was the original trade setup I shared:

The stock is up 7.5% in a 10 day period, which doesn't happen often into range extensions. Expect this to correct and consolidate.

Trade Setup

Expected Price: 127

Sell to Open MA Jul 130/135 Call Spread

Tier 1: Open at 0.70, Close at 0.20

Tier 2: Open at 1.00, Close at 0.70

Tier 3: Open at 1.30, Close at 1.00

The next day, the stock stretched just enough to get a Tier 1 fill. And then over the next week, the stock corrected hard into 120 per share, allowing an exit at 0.20.

That's a .50 gain on a risk of 430, for an 11% return on risk within just one week.

Keep It Simple

If you want to sell credit spreads successfully, it comes down to a few simple ideas:

  1. Pick your levels.
  2. Use limit orders.
  3. Scale in.
  4. Scale out.

With that framework, you can earn consistent returns in the market without losing sleep at night.

How would you like a "done for you" service that gives you these consistent trade alerts?

Read more about how we can help you get consistent option profits.

You'll Never Make Big Money Trading Unless You Understand This

I'm currently staring at my charts and it's green across the board.

The Nasdaq, Dow Jones, and S&P 500 are all hitting all time highs. Smallcaps look like they're about to play catch-up.

Momentum is clearly to the upside, and it doesn't look like it's slowing down any time soon. Any kind of correction is short lived and rotational in nature.

Investors are complaining that this market lacks breadth, that somehow only a handful of stocks like AMZN and GOOGL are "propping up" this market.

Yet we have over 100 stocks in the S&P 500 that are up 20% for the year.

And truly objective breadth measurements are still very strong.

Are You Holding Back?

With that backdrop, let's talk about trader discipline. For those market participants that have a timeframe in weeks, not years.

The most tired line of thought I hear is about how nobody knows how to respect risk.

That it's OK to not fully participate in a rally because once the turn comes, all those undisciplined traders will get runover.

You know... Johnny trader with 6 months under his belt is ripping out thousands by buying calls in NVDA, NFLX and FB.

But don't worry, you tell yourself, because you just have to wait for the Fed to sneeze and they'll get runover.

Here's the thing...

Have you ever thought about the other side?

Discipline in the market runs both ways. Sure, you focus on the downside risk, but what about the upside risk?

Do you really have the discipline to know when to press your bets?

You've been counting the cards, and you know the shoe is stacked with face cards.

Are you going to take advantage of it?

... or just keep complaining about how the market is "rigged?"

 

Ignore The Political Idiots to Avoid Costly Losses

Today we've seen an obscene amount of hypersensitivity to a small selloff.

At the time of this post, the S&P 500 is off about 1.5%. A pretty good move, but not unprecedented.

Personally, I've felt that it's been a long time coming.

But the reasons being floated out for this selloff have been absurd.

You're really going to try and push the blame on Washington? When it's been months since we've seen a proper pullback?

It's absurd. And frankly, it's dangerous to try and put risk into the markets trying to bet on what's coming out of the White House next.

Because that's not what is driving the markets.

I know what you're thinking...

"Well, if you're so smart? Why are we selling off?"

I got some news for you, it's not going to be one major reason. I'll give you some ammo, but the more important part is you understand the approach.

1. VIX Options Expiration Squeeze

VIX options expire the Wednesday of options expiration.

And if there's one indicator that's been beat to death over the past few weeks, it's been this one.

We've seen historically low VIX levels, which at the time were justified... until today, the market hadn't been moving around a whole lot.

Think about a trader who has short exposure coming into expiration. They're pretty confident they can let their options hang out into expiration.

But then something shifts. On Tuesday, the market comes back into support. Being a smart trader, you pick up some hedges in the VIX futures market, or some other instrument.

Well, when you do that, the market maker has to take the other side, and eventually you get this cascade of short volatility exposure that starts to unwind. This easily ends up being a case of the tail wagging the dog, where a squeeze in vol leads to a selloff in the markets.

That squeeze moves to other durations, and it's what can take the $VIX 10 to 14 in a day.

2. The 2400 Shake and Bake

When there is an obvious level of support or resistance, often times the market breaks that level, only to reverse hard and head back to the lower end of the range.

And this one was obvious. The market was "flirting" with that level for weeks, and made headlines once it broke. Dumb money came into the market a bit, and then ran out of steam.

Stops get hit, which leads to more stops getting hit.

3. We Ran Out Of Good News

Setting aside the US political narratives aside, what has been driving this market?

Remember, we operate in a market of stocks. With low volatility has been low correlations, so individual stocks can help to buoy an index, especially if they're large cap stocks.

We just finished up earnings season. If you look at some of the mega-cap tech stocks like AAPL, GOOGL, NFLX and other have been running hard.

Well, there's no more "good news" to come out of these stocks. No more catalysts for the hot money to chase. When we run out of that, then traders pull their money out waiting for the next setup.

Get Prepared for A Normal Market

If you're freaking out about a 1% selloff... boy do you have a short memory.

The average market pullback since this rally started off in 2009 is around 5%.

That level is around 2,250 on the S&P 500.

And that's AVERAGE.

Can you imagine the doomsday scenarios that will get floated out if we have a normal, run of the mill pullback?

It's always going to look ugly, especially for those that get paid by the pageview.

What Do You Really Want?

If you're trying to trade based off political headlines, you need to make a decision.

Are you going to focus on market structure and the actual setups the market provides?

Or are you going to obsessively follow the poltiical flotsam that gets pushed out of Washtington?

Guess which one will allow you to be a consistent trader.

When Should You Buy the Dip in NVDA?

NVDA is off over 7% today, headed back to the lower end of its range.

The stock has been one of the largest movers over the past two years, so should we look to buy the dip or just let it collapse back down to 50? Let's take a look.

The "Why" Behind The Move

Relative to the past month's volatility, NVDA saw a 4 standard deviation move.

That's pretty big.

Normally when you see a move like this, it's related to a fundamental shift in the company. Earnings or guidance.

But the news today?

A downgrade.

Here's the thing... big moves related to analyst coverage stink. They have a much higher odds of reversion.

So until we see the actual company coming out with some fundamental catalyst, this has the chance for a bounce.

What Are The Odds?

Going back over the past year, the stock has a tendency to drop 10-15% during a 10 day timeframe.

In a one-month window, we're looking at about an 18% drop.

Now let's take the most recent swing highs at 110.

A 10% cut from that is about 99 per share.

And an 18% cut is about 90 per share.

Assuming normal volatility, dropping into the low 90's should be a floor. Earnings is coming up but that is a risk you'll need to consider.

The Obvious Support

When using technical analysis, I ask myself two questions:

  1. Who are the market participants?
  2. Where will they get screwed?

NVDA is a momentum darling and has plenty of high-risk individuals looking for upside. The fact that it was so sensitive on this analyst downgrade tells me that those momentum players are probably using too much size and are getting impatient.

Now there's a very clear level right at 95, the support level from February.

Think about how many traders are using it as their stop loss level.

We know that the statistical odds put a "stretch" target in the low 90's, and if we clear 95 we'll probably see a bit of a stop run.

Into that is where I want to look for a trade.

Take The Trade

A good strategy here is a put credit spread. This is a limited risk, limited reward trade that profits if the stock goes higher or sideways for a while.

With credit spreads, you can be Proactive and anticipate price levels, plan your trade, and use GTC LMT orders so you can walk away from the screens.

The May 85/80 Put Credit Spread currently has a price of 0.45, but if NVDA heads to 93, then it will be at 1.00.

So you can put a limit order to sell that spread at 1.00, and you become a tiny market maker, providing liquidity to the markets.

There is earnings risk with this trade, so if you need a little more safety you can look to the May 80/75 put credit spread.

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