Today I begin a multi-part series of articles on how I trade Iron Condors. This first segment will be dedicated to the entry setup that I look for and the specific timing of the entry. I don't really plan on spending any time on what an Iron Condor is, or the basics of the trade, but if you are not familiar with them Investopedia has a nice article explaining how a basic iron condor is set up.
Every Condor trade I enter begins with a look at the price chart and implied volatility. I'll get to more about the strikes I choose in a future segment, but because they tend to be far out of the money my chart reading doesn't have to be perfect. There is a lot of forgiveness with these trades. In broad terms, I am looking for one of two patterns. Either the market is ranging, or trending, and depending on what I see I will make the trade differently.
Flat Entry:
On 12/22/08 I was ready to put on a condor for the February expiration so I went to the RUT price chart. Here's a picture of what I saw:
You'll notice that it's a nice, calm, very flat price trend. The market is not in a strong uptrend or downtrend. I prefer to "leg" into condors, but in cases like this it's begging for a nice evenly spread condor with both sides put on at the same time. I don't have a picture handy, but if you go look at implied volatility (I like to use the RVX for this), you will also notice it was coming down nicely at the same time... a great trend for vertical spreads like Iron Condors, which profit from decreasing IV.
Again, I'll talk about the details of positions sizing, how I choose strikes, my adjustment plan, and more in future segments, but this is where I start.
Legging In:
In contrast to the flat entry, I started to add to my RUT condors on 1/2 and 1/16 by legging into some more positions. Part of my position sizing segment will address how I "scale into" positions and why, but basically I gradually enter positions in order to spread my risk over time. By putting on each side, either the bear side or the bull side, when price movement favors us I feel like I pick up a much wider spread between short strikes and a nice advantage.
On 1/2 (yellow circle) I noticed that we had just finished two nice "green" (up) days. In a bear market, especially with the strength of the current one, we rarely see more than a couple of up days in a row. With that little rally I sold a bear call spread on the 560/550 strikes. Did I call the exact top of the market? Nope. But I don't need to. As I said, these are far out of the money and very forgiving.
on 1/15 (second yellow circle) you'll see that the opposite happened. There had been a strong down trend over the past few days, RSI (one of the few indicators I use) had plummeted, and a nice green hammer had formed. So, on 1/16 I entered the bull put spread side of the Condor, completing it. And so it goes... I added another bear position after the big up day on 1/22. I don't know yet how all of these will play out, and I will have to manage them, but that's the basic entry picture that I look for.
Next Time - Part Two: Position Sizing
No comments:
Post a Comment