One of my favorite components of my role as Chief Analyst of Cabot Options Trader is working with beginner options traders. Very quickly they come to realize that you don’t need to be a rocket scientist to learn to trade options, and with my assistance these subscribers realize that options should be a part of every investor’s trading playbook.
And once I have worked with a beginner options trader at Cabot Options Trader, they can choose to graduate to Cabot Options Trader Pro, where I teach about and execute more advanced strategies such as Bull Call Spreads, Bear Put Spreads, and my personal favorite, Iron Condors.
How Iron Condors Work
While the name Iron Condor may be foreign to you, it’s a risk-defined options strategy that is a great way to create yield. It is a strategy that has a high probability of success, allowing for a modest profit with enough room for error. Also, it’s meant to be a directionally neutral trade.
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Essentially, Iron Condors are a strategy that will profit if a stock stays within a defined trading range. And the profits can be substantial.
For example, in late August salesforce.com (CRM) had just released a strong earnings report, and saw its stock rise from 148 to 152. And because the earnings/major news had passed, I felt that the odds favored CRM trading mostly sideways for the next couple of months.
With that in mind I sold an Iron Condor betting that CRM would not fall from 152 to 130 or below (a 15% decline), or rise to 170 or above (a rise of 11%). If my trade was right, I could make a yield of 21% in two months.
Here is a trade alert I sent to Cabot Options Trader Pro subscribers in late August targeting salesforce.com (CRM):
My Salesforce.com Iron Condor Trade
Iron Condor: Sell the salesforce.com (CRM) October 130/125 Bull Put Spreads and the October 170/175 Bear Call Spreads for $0.87 or more.
Option volatility remains high in the market due to the recent wild swings for the indexes. Today I am going to execute an Iron Condor in salesforce.com (CRM), which just recently reported strong earnings, that will sell this elevated volatility.
To execute this trade, you need to:
Sell to Open the October 130 Put,
Buy to Open the October 125 Put,
Sell to Open the October 170 Call, and
Buy to Open the October 175 Call
The most you can make on this trade is the premium collected, or $87 per iron condor (a yield of 21% in two months’ time) if CRM were to close between 130 and 170 on October expiration.
The most you can lose on this trade is $413 per Iron Condor if CRM were to close below 125 or above 175 on October expiration.
Essentially we are selling insurance that CRM will not move lower by 15% or higher by 11%.
So how did that trade work out?
A couple weeks later we closed the Iron Condor for a profit of 12.75%.
But why did we not collect the full 21% that I had hoped to gain?
The answer is that my Options Scanner had started to pick up on unusual call buying targeting a big move higher in CRM. And because of that, I felt that the 12.75% profit was enough, and then flipped into a CRM call buy!
Here was that trade alert, sent to subscribers of both Cabot Options Trader and Cabot Options Trader Pro:
Buy the salesforce.com (CRM) February 155 Calls (exp. 2/21/2020) for $8.80 or less.
As I’ve noted the last several weeks I’ve been monitoring the stock and option action in salesforce.com (CRM). The stock has lost some ground, though has outperformed its software/cloud peers which have come under intense pressure (though today CRM is under some pressure with its peers).
And while CRM stock has fallen a couple dollars this week, options activity remains very bullish including these trades made this week and last.
Today – Buyer of 750 February 160 Calls for $7.35 – Stock at 151
Monday – Buyer of 8,000 October 170 Calls for $0.36 – Stock at 153.5
Monday – Buyer of 1,700 October 157.5 Calls (exp. 10/4) for $1.71 – Stock at 154.5
9/19 – Buyer of 7,500 October 165 Calls for $0.91 – Stock at 153.75
To execute this trade, you need to:
Buy to Open the CRM February 155 Calls
The most you can lose on this trade is $880 per call purchased.
Add More Yield to Your Portfolio
So far getting out of our Iron Condor, and into a straight call buy, has been the right move as we sold half of our calls for a profit of 20%, and the balance of the position is at a profit of nearly 50%.
If you are new to options I recommend starting slow, and working with me to first learn how to Buy a Call, Buy a Put, and trade Covered Calls. However, once you have mastered those strategies, Iron Condors are a great next step to adding even more yield to your portfolio.
To learn more, click here.
Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.Learn More