Wow!

I am really overwhelmed at the number of people who have shown interest in how I trade Iron Condors….and I must admit, a bit intimidated too.

There was one part of me that wanted to run screaming the other direction (!) but then the greater part of me said that maybe I’m meant to do this to give you a greater understanding of ICs and that there are many different ways to trade them. There is no one absolute “right” way, only the right way for you. I want to give you this understanding so that you know there is actually something to choose and you will select carefully other trader’s information that they disseminated out there so that it will match YOUR style. This is VERY important. I have not seen anyone telling people this in chat except for me. Someone’s hints on THEIR strategy may be the wrong thing to do for YOUR style.

That said, I have been taught 4 specifically different ways to trade IC-s (and have explored the one that a chat trader was very vocal about just before the market dropped after he encouraged traders to put on his trade. Needless to say those people got hurt, some having their short strikes blown thru, because his plays were aggressive and he didn’t share what he did when the market turned. This upset me immensely.)

OK, enough of that, but the message here is that I take this very seriously! Most of the time IC-s bring in nice monthly income with no worries, but you must be prepared on the couple of times of year when your position(s) may be challenged by a quick crash down or even a bullish black swan event (which I have experienced while I had a position on!).

I have been thinking how to best present this to you, I know so much I don’t want to make your brains explode in the first email. There is a range of experience from people with some or no experience trading Iron Condors so I will try to address things with detail that can serve as a review for those who have traded IC-s before and possible can help further define/refine your rules while providing a strong foundation for newbies.

I will start with a glossary of terms, abbreviations I will use and I will try to make a distinction in the verbiage used at Investools with those you should know when you call the Trade Desk. it’s a language you should be conversant in cuz they don’t know what a Bear Call is!! Then I will tell you the styles I have been taught and by whom so that you can see what feels right for you. My style may not fit you and that is totally ok….its important for you to know so that you can seek out the style that suits you and learn it to a greater depth. I will only be teaching MY style here because, obviously, that is the one I have embraced and works nicely for me!

On the most basic level, I ask that if you are new to spread trading (cuz that’s all an Iron Condor is) please brush up on your credit spreads. All we do is structure 2 credit spreads together, forming the Iron Condor. It is the individual spreads that we watch and manage if necessary.

For those more experienced brushing up on your Greeks will help and eventually as you take this to a higher level you will be able to use the Volatility in the market to bring in some sweet premium, so understanding how Volatility works in your Option Premium will help.

Don’t let this scare you, you first need to build a nice safe position.


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GLOSSARY
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IC: Abbrv. Iron Condor

Made up of 2 credit spreads both Out of the Money (I trade them Way out of the money)
One is above and one is below the price action.

Technically we trade Short Iron Condors, “short” because they are made of credit spreads, “iron” because they are made of calls and puts. Practically speaking we often just call them “Condors” but you should know there is a difference because upon ordering, on your pull down menu you want to set up an Iron Condor and you will be selling it. This makes a BIG difference.

Wings: There are 2 in and IC:

Upper Wing: Bear Call Spread
AKA Short Call Vertical (Trade Desk lingo)

Lower Wing: Bull Put Spread
AKA Short Put Vertical (Trade Desk lingo)

Leg: In a spread a leg is one of the strikes - so you have 2 legs in a credit spread

Short Strike: The strike within your wing (credit spread) that was sold on entry. This is the strike or leg that we watch and protect.

Long Strike: The strike within your wing (credit spread) that was bought on entry. This is the strike that is considered your “cover” within the credit spread.

Legging In: Generally means entering each option strike separately. I don’t do it, it is too risky.

Winging In: Entering each wing separately - I do it because it typically brings in greater premium and allows my wings to be at a safer (greater) distance from the price movement.

Often an IC trader will use the term “legging in” when he/she really means “winging in”. I try to be consistent with my terms and whenever I talk to another trader I always ask them to clarify that it is winging in that they mean. Usually this is the case, but I like talking the same language.

Way OTM or WOTM= Way out of the money

Selling 10 Delta: This refers to the Delta on the Short Strike (strike you sold) within your wing.

RUT: Russell 2000, the index that I exclusively trade my Iron Condors on. The ticker on Investools is $RUT on TOS it is RUT.


Ok, here we go…..this is me (read disclaimer - lol) AKA Dreamer8 in chat and Pam in LA by the ShadowTrader: Please know that I am not a teacher, nor am I an expert. I know so many people who have been trading these longer than I have and who are so much more experienced that I am, but I do have access to those people. I will tell you though, that once I went over to the RUT and defined/refined my rules, my trades have been consistently profitable except last August’s crash where I exited at what I considered an acceptable loss. I chose not to repair (closing a position and re-entering at different levels) because I had never experienced a crash before and felt it was more conservative to sit on the sidelines and watch carefully, learning for next time.

As I briefly (?? I promise I will try….ok….impossible) tell you the different styles and teachers I encountered, there will be a point to this because I want YOU to see WHY I trade the way I trade. Each of my teachers has defined/refined my rule. Some styles, as you will see, do not fit me. It is YOUR job to find the style that suits you. I won’t cry if you reject my style…..you should if it doesn’t resonate within you.

I will tell you how I trade and you may find it is too rich you’re your blood, meaning too much risk on the line. I do not trade the ETFs, I only trade the RUT (Russell 2000). That is fine, Hopefully within my words you will discover what fits your personality + risk tolerance. After all that is what trading is all about.


1. I was taught John Jagerson’s strategy which was too high risk for me. At the time, he traded IC-s on the NDX which has 25 point spreads which gave me the hee-bee-gee-bees!!! He is highly disciplined with very exact exit rules should the trade go against him. I actually have one of his exit rules incorporated in my plan once I have another heads up triggered. Great, juicy premiums in his strategy, but way too much on the line for me. In the most simplistic way of looking at this….you are tying up tons of margin and that is your risk on the line

2. I was taught thru the Investools Trading Room on the SPX. 5 point spread seemed like a nice conservative approach for me (less margin tied up, less on the line). This is the vehicle I started live with (read dizzzzaster!) I very quickly switched my vehicle to the RUT (which has 10 pt spreads) and discovered the 5 pt spread on SPX did not create a safer environment for me (will explain in more specific at a later time). Also, be aware that SPX is still pit traded where as RUT is not. This makes a big deal on your fills and if the market crashes (!!!!) good luck getting out quickly on the SPX. My view, thru my experience.

I also discovered that the instructor really didn’t understand his Greeks nor did he understand how the market makers ate him up and spit him out on his premiums because of when he entered his trades. (Note he hasn’t taught there for quite awhile) I don’t mean to dump on him because I did use his system to research historical monthly price movements on the Indices that I was considering trading. I use a simple way of technically projecting where my Index may be by expiry that is based on some of what I learned from him.

3. I was taught by Michael Drew whose strategy resonated with me instantly and how I wanted to trade these bad boys! Might also have had to do with being surrounded by a bunch of people at an Advanced Options class who traded his way that were bringing in sweet monthly premium. YUM!

Michael is my mentor. I did not trade live until I took his live class. I was also instructed live by him in Chicago last August at the High Probability Trading Class thru Investools and TOS. I learned his more advanced rules and how he has adapted his rules/strategy because the market environment had changed by then and he also had been influenced by the Money Maker Mentality thru the merger of TOS + IT (a very good thing).

Someone emailed me that (in the Income Trader) Michael’s comments often are a bit cryptic. I understand this. It used to piss me off because I just wanted to know where and when to put on my wings and, thank you very much, but, uhhhh, could you tell me exactly when and how to exit too!!??? Oh, and if there is a crash, could you call me?

But then I saw that he challenges you or rather insists (as I will) that you create your own rules from the guideline he gives you. I understood that if my trade went bad he wasn’t gonna get me out of the trade, and he wasn’t gonna call me at home with a “Pam, uh, you should do something now!!” I got myself in the trade and I needed to own it…good or bad. This created my respect for the market and for my trading discipline. If I become a cowboy/cowgirl, then shame on me.

Sometimes he is a little cryptic and will refer to his more advanced students….know that I am blessed to be included in this small mentoring group.


4. And lastly, I was taught by TOS - through Don Kaufman on a basic level and by Tom Sosnoff + Steve Rashis in the High Probability class in Chicago. This was at a higher level than you would get at the basic local classes
This type of IC I want to address specifically because many people have been taught this way and trade this way. I am in no way saying not to trade this method, I just want you to understand that this is very different Iron Condor than I trade. Remember there is no one right way to trade these but you must know what you are trading, how to trade it and how to manage the position once you are in it.
TOS teaches these and recommends you trade them on ETFs.. They do not suggest “managing” the position but rather that it should be small enough that you can stomach the max loss. They do not adjust. If you can’t sleep at night your position is too large. They scale in with multiple levels on the same underlying with the theory that most will be ok….Heads up - this is what I want you to pay attention to……they don’t manage their individual positions, they manage their entire portfolio w/ Deltas, watching theta and beta weighting the entire portfolio. If you don’t understand how to do this (in my opinion) you could be hurt, so you need to learn that aspect of that style to keep yourself safe. Again…it’s just a different style, and one that I don’t trade on my monthly positions.
TOS doesn’t teach my style, in fact they advise against it because they believe that traders do not pay attention to their Iron Condors (because they are low maintenance) until its too late . The traders I know who trade my style are very disciplined and we manage our Condors if necessary, bottom line is you need to trade smart if you want to be trading the rest of your life!


Ok…I know right now some of you, maybe all of you except Don/OS/dm, have deleted this saying “OMG - forget this!!!!”

But I just want you to be fully informed because you are going to be making decisions as to what and how (and I suppose, IF) you are going to trade Iron Condors. Again, you may decide not to trade my style, but it has disturbed me that PARTIAL information has been floating around in chat and people were hurt in the end of the year. I hope you feel more informed.

I’m going to stop here so you can digest this. It’s a lot but it’s important. And besides my head, neck and fingers need a rest!!

I don’t know how else to put my rules out there other than to write them out and give them to you. I know I run the risk of overwhelming you all but if I put it all out there you can print it out and have it for reference For newer people, take it slowly what initially doesn’t make sense, eventually it will. I need to address new IC traders as well as more experienced one.

OMG I can’t believe I’m doing this…how do you spell s-t-r-e-s-s-e-d-????? While I’m composing my next dissertation on IC-s I ask that you shoot me an email with your level of experience, if you haven’t done so already. A reminder to those new to credit spreads please re-read you’re the Chapters on them.

Thank you all for your overwhelming interest. I LOVE Iron Condors and I hope you not only learn to love them too, but that you find that they are this wonderful strategy that you can count on to bring in monthly income.

Until next time,


Pamela Small - The Condor Queen
Trade Well To Manifest Your Dreams