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Sheridan Options Mentoring, Inc.

www.SheridanMentoring.com
Oct 9, 2012
Monthly Income Strategies
Iron Condors
Dan Sheridan
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Options involve risk and are not suitable for all investors. Prior to buying or selling an
option, a person must receive a copy of Characteristics and Risks of Standardized
Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from The
Options Clearing Corporation at www.theocc.com. The information in this presentation
is provided solely for general education and information purposes. Any strategies
discussed, including examples using actual securities and price data, are strictly for
illustrative and educational purposes. In order to simplify the computations,
commissions and other transaction costs have not been included in the examples used in
this presentation. Such costs will impact the outcome of the stock and options
transactions and should be considered. Multiple leg strategies involve multiple
commission charges. Investors should consult their tax advisor about any potential tax
consequences. No statement within the presentation should be construed as a
recommendation to buy or sell a security or to provide investment advice. Supporting
documentation for any claims, statistics, or other technical data is available from
Sheridan Options Mentoring at www.sheridanoptionsmentoring.com. Chicago Board
Options Exchange, Incorporated (CBOE) is not affiliated with Sheridan Options
Mentoring or OptionNet. This presentation should not be construed as an endorsement or
an indication by CBOE of the value of any non-CBOE product or service described in
this presentation.
Disclaimer
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Big Picture of Iron Condor
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Portfolio Plan
Speculative
Strategies
Long Term
Strategies
Income
Strategies
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Portfolio Plan
Long Calls/Puts,
Diagonal Spreads
OTM Butterflies
Vertical Spreads
Directional Calendars
Long Straddles
Calendar Spreads
Double Calendar Spreads
Double Diagonals
ATM Butterflies
Condors
Collars
LEAPS
Covered Writes/Straddles
Long Stock
Long Term Calendars
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Philosophy
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Standard Deviations (Sigma)
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High Probability versus Low Probability
Options Price IV Delta Trade
840 Calls $1.13 20.3% 5.4 +10
830 Calls $1.93 21.0% 8.4 -10
650 Puts $4.60 37.2% -10.1 -10
640 Puts $3.85 38.1% -8.5 +10
FEB(39)
Delta -13.7
Gamma -1.1
Theta 50.9
Vega -159.2
Credit 1,550
Margin 8,450
High Prob
Options Price IV Delta Trade
820 Calls $3.08 21.5% 12.1 +10
810 Calls $4.65 22.1% 16.7 -10
680 Puts $8.15 34.8% -16.9 -10
670 Puts $6.80 35.7% -14.3 +10
FEB(39)
Delta -19.5
Gamma -1.2
Theta 59.2
Vega -181.8
Credit 2,920
Margin 7,080
Low Prob
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High Probability versus Low Probability
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HPC versus LPC
Risk/Reward Tradeoff
Less potential adjustments with HPC
Better for a beginner?
Easier to execute?
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How Far Out for Iron Condors?
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How Far Out for Iron Condors?
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Notice Steepness of T+0 Curve
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How Far Out for Iron Condors?
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Steepness of Curve Better
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How Far Out to Place IC?
Main reason to go farther out? Price concern
Theta less with farther out, Tradeoff
Gamma versus theta tradeoff ( Price VS
Theta)
Strikes farther out with Longer term
Tip: Most folk dont stay in farther out any
longer than closer in Iron Condor.
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Width of Strikes
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Width of Strikes
Options Price IV Delta Trade
865 Calls $1.73 20.4% 6.3 +10
855 Calls $2.55 20.9% 8.6 -10
620 Puts $7.00 39.3% -10.7 -10
610 Puts $6.05 40.0% -9.3 +10
MAR(67)
Delta -7.8
Gamma -0.6
Theta 29.7
Vega -153.6
Credit 1,575
Margin 8,425
Narrow Strikes
Options Price IV Delta Trade
875 Calls $1.15 20.0% 4.5 +5
855 Calls $2.55 20.9% 8.6 -5
620 Puts $7.00 39.3% -10.7 -5
600 Puts $5.25 40.7% -8.2 +5
MAR(67)
Delta -9.6
Gamma -0.9
Theta 31.8
Vega -163.5
Credit 1,775
Margin 8,225
Wide Strikes
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Width of Strikes
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Width of Strikes
Greeks and capital pretty similar with 10 wide
credit spread 10 times versus 20 wide credit
spread 5 times, which is better?
Smoothness of adjustments better with wider
Iron Condor
Less commissions with wider Iron Condor
Never do same size, wider condors more
capital
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Helpful Indicators
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Helpful Indicators- VIX
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Helpful Indicator- VIX
Monitor support and resistance
Increase of 25% while your in IC spells trouble
Under 20: Prepare ( Winterize) IC for downside
Over 30: Prepare IC for upside ( Long calls or
scaling)
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Helpful Indicator: Standard Deviation
Price 100.00 $
Volatility 19.1%
1 1.00 $ 99.00 $ to 101.00 $
2 2.00 $ 98.00 $ to 102.00 $
3 3.00 $ 97.00 $ to 103.00 $
Range
One Day
Standard Deviations
FREE STANDARD DEVIATION CALCULATOR AT:
http://www.sheridanmentoring.com/sigma
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Helpful Indicator: Standard Deviation
Too much speed hurts Iron Condors
Monitor size and frequency of daily SD moves.
3 out of 5 days where daily SD moves
approach 1 SD , start pulling back or smooth
out T +o curve a bit.
Monitor average True Range
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Weekly Iron Condors
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Weekly Iron Condors
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Steepness of Curve?
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Weekly Iron Condors
Dont usually recommend adjustments
Tradeoff between high gamma ( price risk)
and high theta
Delta theta ratio large and start, but comes with
a price!
Dont be afraid to sit out a week, over 50 of
them!
Size? Small in relation to 30 or 60 day ICs
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Which Vehicle for Iron Condors?
RUT, SPX, NDX
IWM,SPY,MNX
Stocks over $85, IV under 40, and you would
buy the stock long term for your retirement
account
Same vehicle every month ? Why?
When to abandon an vehicle?
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Iron Condor Adjustments: The Setup
Insurance
The Bobby
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Set up #1: Insurance
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Set up #1: Insurance
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Set up #1: Insurance
Advantage: Big move down or up ( depending on
where you have insurance), OK!
Advantage: With insurance, braver to trade size,
keep insurance to 5-7% of margin
Disadvantage: Affects theta and can keep you in
trade longer. Also, if you buy puts to already short
delta position Iron Condor, upside adjustment will
come much quicker than downside adjustment.
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Set up #2: The Bobby
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Set up #2: The Bobby
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Set up #2: The Bobby
Advantage: Smoothed T + ) curve and cut risk
of position at the beginning! Gap risk reduced.
Disadvantage: Hurt theta and will usually have
to stay in trade much longer
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Strategy Methodologies
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Low Prob Condor- Low Maintenance
Enter 30-42 days out in RUT (10 contracts)
Sell short options with a delta of 12-17
Plan: 10% profit, max Loss 12%
Upside adjustment- Buy in a few call spreads if
needed when P and L down around 5%
Downside adjustment- Buy in 1 short put when
short put delta increases by 13
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RUT Case Study: Low Probability
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Short Delta Leaning of Position
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Adjustment Point - Why?
8 Days in Trade
$742.81 Original Price
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Steepness of Curve
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When to Adjust
Steepness of curve
P and L
Down 1/3 to 1/2 of max loss
Delta/theta ratio
Negative theta
Deltas of either individual option or position deltas
Market moving too fast.
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Adjust #1 Long Put
8 Days in Trade
$742.81 Original Price
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Tradeoff
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Adjust Long Put
When to use? When your at adjustment point
and the stock moved to adjustment point with
speed ( 1-1 SD). Early in trade ( 1
st
week),
like a long put. Also if VIX 16-19 and we start
heading down, the first adjustment Ill use on
downside will be long put.
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Adjust #2 Debit Spread
8 Days in Trade
$742.81 Original Price
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Kicker on Downside?
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Adjustment Debit Spread
When to use? Effective in most situations
versus long option adjustments because you
cut risk and dont affect the Greeks as much as
the long option.
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Adjust #3 Roll
8 Days in Trade
$742.81 Original Price
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Downside Risk?
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@ Copyright 2010. All rights reserved.
Dan Sheridan
+1-800-288-9341
info@SheridanMentoring.com
Sheridan Options Mentoring, Inc.
http://www.SheridanMentoring.com/