Iron Condors Technicals | Ken Rose CMT | 9-12-19| Advanced Options Strategies
You. Oh investor. So my, my, goal here today is is that everyone will have a good understanding of. Using. Certain. Tools that can help enhance, our overall. Effectiveness. With regards, to using, iron condors, we will discuss iron condors, go into some detail but we really want to focus on tools, related, to iron condors, in an effort to help make those more effective, let's, first of all get started by running through our disclosures, here. And. In, wave disclosures, just, reminder, well first of all just a reminder here that you can follow me on Twitter, so when you think about some of the things we discussed here today I do post things related. To these areas of our discussion, here today so. If you'd like to follow me on Twitter I can be followed at at, kr. OSC underscore. T da so I love to see you over there on Twitter as well and, we have disclosures here today just reminder, investors that options are not suitable for all investors a, special, risk inherent, options. Trading, may expose investors potentially, rapid and substantial. Losses, spread. Straddles, other multi leg option strategies, can entail substantial, transaction. Cost including. Multiple Commission's, which may impact any potential, return. In. Order to demonstrate the function of the platform, we need to use action symbols however do be mindful that TD Ameritrade does not make recommendations, or determine. The suitability of any security or strategy, for individual traders any, investment decision you make in your self-directed account, is solely, your responsibility. We. Do use the paper money application, here do be mindful that paper money application, is for educational, purposes only in any level successful, trading we may have in that paper money account does not guarantee successful. Investing of AXA funds during a later time period, during a later time period as market, conditions do change continuously. Here's. A picture myself I've, been here for going on close to 15 years in addition to teaching. Advanced Options I also do some areas, and technical analysis, along with fundamental, analysis, and you may see me occasionally. On the TD Ameritrade Network, before. Before, we get into this let's go ahead and I just want to shift gears here just a little bit to review our agenda here today so. I will start off by defining what iron condors, are we'll. Talk a little bit about in relationship, to that a little bit about putting together, watch this related to those I want to go into some detail with, regards to Bollinger, Bands and the place Bollinger, Bands can play with, regards, to iron Condor, trading, and then, also probability. Counts and typically what you'd be looking at from a probability cone, standpoint, usually. You want to set those up a little bit different than what the standard, is when you first bring them up on the chart then look to paper trade an example, iron Condor, using the process, that we've described time, from time permitting we may look it possibly, may. Be an unbalanced fly or possibly, looking at legging into iron condors. Okay well. We'll also swing out and take a look at our at the trade that we did last week which is on HTS. Just. To remind our investors that this is considered to be an advanced session, it is assume that you do have a basic understanding of, options, like what does a call what does it put wasn't my new new buy an option what doesn't mean when you sell an option if you don't have that understanding, you're more than welcome to continue to join us through today just to keep in mind that at times you may feel a little bit overwhelmed if indeed, that occurs I'd also encourage you to attend our getting started with options, webcast, that's on Friday at 11:00 a.m. with, barb Armstrong, and or.
Selecting, An option strategy, that's with Cameron, May and that's on Thursdays, at 9:00 a.m. Eastern Time so keep those in mind as possibilities. As well well. Let's, come back over here and and. And discuss iron condors, a little bit always. Keep in mind the Greeks as we're going through our example here today we will look at the Greeks on each individual, one of these trades. So. What is an iron Condor. Well. And. Iron Condor, is a combination. Of two short, verticals, we. Can look at it as a combination of a short put vertical remember with the short put vertical we're, selling, the higher strike price and, we're buying the lower strike price, also. Remember that a put contract, gives the buyer. The. Right to sell the stock at a certain price. So. When you think about it the height when a buyer purchases, that put contract. The higher the the higher the price they can sell the stock for the more valuable that put contract, is so. When there's when you when we sell that contract. We, get a higher premium. For. The contract, we sell because we're selling that higher strike price that has more value relative, to the contract, were language is a lower strike price that, results, in a credit, that's. Why Nitin Condor is basically, we're looking at two credit spreads here the first one is sometimes. Referred to as a short, put, vertical, the. Second, side of an iron Condor, is a short call vertical. Let's, be mindful that call, option contracts, give the buyer and, give, the buyer the right to buy the stock at a certain price when. You think about it the lower that you can buy it the, lower the price you can buy a stock for the greater that value contract, has so. On the opposite, side of our iron Condor, here we, are selling. On. Our. On our on our on our on, our call site, we're, selling, the lower strike price because, that has more value remember the lower you can buy a stalk more value it is we're, selling the lower strike price and, we're buying the higher strike price so. Because on the call side what we're selling has more value than what we're buying that, also results, in a credit and those, two transactions. Together. Result. In, a couple of credits and you can see right here on our page here if I'm going to grab a little drawing tool here for just a second just to identify something so, this, little area right here. On. Both sides of this. This. Little area right here is, the, sum of both of those credits. It's. Some of the the, credit that we get for selling these short, put. Vertical. Plus. The. Credit. That. We receive, when we sell the short call vertical so. Those two credits. Equal. This area, profitability. That we're looking at right here. Notice. Is zero and right here that's breaking even. Yeah. And, also notice on the iron Condor. Typically. The. Amount of profitability, you have to make is. Less. Than, the amount of loss or, the amount of risk that you're undertaking when, you're doing an iron Condor, I say. Typically because there can be situations. Where it may not be so but typically. Under tender typical, market conditions, this is what it looks like so you, say to yourself, why. Would. Someone want to do an iron Condor, when, they are risking. When. They're risking, here their risk right here. Is. Greater. Than. The reward. If you think about it that on the on the surface that doesn't look like a great situation. Well. The reason that some investors will consider this even though the amount of reward is lower than the amount of your risk is your, probability, of success, obviously. If when you have a losing trade you're losing, more than what you're making when you have a winning, trade, that's. Basically. Not, not a situation, that you, can engage in for very long without with, with without, possibly. Losing. A significant, amount of your, account. So. The way to deal, with this is to have higher, probability. Trades in other words when, you are in there in an iron condor trade you, want your probability, of success. We'll. Just call this probability. Right here we'll call it PR okay. We, want our probability. Our. Probability, of success. To. Be higher. Then. Our probability.
Let's. Get a little R right there then our probability. Of failure. If. We can maintain a, probability. Of success that's, higher than our probability, of failure, then, we tend to put ourselves in a situation where, even though, the risk is greater than the reward we're in where you could put ourselves in a position weight situation. We're overall we have the potential, to be profitable, on these trades. So. Why do some option traders, trade iron condors. Well. When you when you looked at that profit, loss graph where you can see that we we had that that area, that, area profitability. That area profitability, represented. Different prices, and if. The price, of the underlying security, tends to move in in a sideways, range, where. We forecast correctly. Where, it's going to be out in time then, we're going to be able to take advantage of those sideways, markets, now right now we, have a market, that is moving. Up very strong and very quickly, at. Some point though the expectation, would be for the market to slow down somewhat. When. The market slows down is it going to start to move down, if it starts to move down very quickly that isn't necessarily, a great situation either, because would like to have market that's a little bit more sideways. In nature, also. An opportunity, to trade with higher probabilities. You, can set up an iron Condor, so you're in a situation where, your theoretical, probability. Of success, is greater. Than. Your theoretical, probability. Of loss and, also. To take advantage of the passage, of time, remember. Those two option contracts, that we sold, those. Are both credit, spreads and on. A on a credit, spread the, maximum. Theoretical gain, on that spread is the credit that you receive, when you enter the trade and so. Basically we like to weigh the ideal situation would, be half of those credit spreads expire, worthless they. Expire worthless then you're able to keep that entire credit, we, do want to keep in mind with an iron Condor because we're looking at two credit, spreads we, actually have for, transaction.
Costs Are involved, so. We we, won't be addressing the transaction, cost here directly but as we run the numbers and we look at our analysis we do want to keep in mind the transaction, cost play a material, part with regards for overall profitability, on, trades of this nature. Also. Because. We are selling. Options. Because. We're selling options iron condors, tend to do we, we tend to get higher credits, remember we're talking about those two credits we tend to get higher credits, when implied volatility. In the in the overall market is high and when. The implied volatility, on an underlying security, is relatively, high and we'll, look at some charge today and look to see where implied volatility, is that it doesn't necessarily, need to be at one of these Peaks in order to have a trade, that, would be considered, possibly. Attractive, for some traders but, we'd probably want to avoid maybe a little bit if implied volatility, is relatively, low down here now. We've talked about the market as a whole as far as moving up and moving up in a very strong way we. Also know that that, in that in any given market there aren't there are individual, securities, and those, individual, securities, may actually be, moving to the downside, or possibly, moved be moving to the sideways that's, where we're going to talk about tools, that. We can use, to, identify those securities. Okay. That could have some of these characteristics. That. Investors. Are looking for when they're considering, trading iron condors. As. We said when the price action is sideways this is just a meant to be an example of sideways price action when. Implied volatility, is relatively, high that chart we're looking at with regards to implied volatility. If, we're looking at that in relationship, to the overall market I'm just going to shift gears here on our chart here for just a second, typically. What we're looking at is we're looking at a chart we're looking at data, for the overall market we're looking at the VIX this. Is the chart of implied volatility, on the VIX this is this is just a six-month, chart a lot of investors will go back probably, two to five years you can see when, the market moves up implied, volatility, moves down. So. This would this would suggest when we're doing iron condors it doesn't take iron condors off the map but it would suggest that in this, in these type of market conditions it. May be a little bit more difficult, to find candidates, iron, Condor candidates, that, provide, credits, that would that would be of interest to some investors, when. Implied volatility, is relatively, high it makes a little bit easier we, do want to keep in mind that each individual security, has its own level of implied volatility. If. We come over here for example let's, just pull up one of these stocks, which. One do we want to look at I'm just gonna pull up a pal here notice.
Right Here I've, got down, here now I've got the the implied, volatility, for, PayPal, and notice. Where it's at right here the implied volatility, is relatively, high on PayPal. Relative, to where it's been over the last six months so. Even though the market, has relatively low implied volatility, you with. A little bit of with using some tools and some different things are available to you aren't able to identify, individual, stocks that. Do indicate some, potential, here, let's. Go back over to our to, our area right here then. So. What are some of the examples, with regards, to watchlist. Criteria. For an iron Condor. Well. When we're looking at it when we're looking at an iron Condor, some key areas that investors, will look at one. Is they'll look for liquid, securities right, here but I got a little drawing, I can, draw with well. Maybe. So maybe not, looks, like I can circle that liquid security so what does it mean when we're talking about liquid securities. But. Generally means that if we're looking at the underlying, options. On an individual, stock and, we. Look at the slippage, between the bid and the ask price. Those. Numbers are not are. Satisfactory. To the individual, investors or what a satisfactory, mean. When. You think about it if you, if you purchase an option contract, and then turn right around and sold it. You. May be thinking oh I'm not going to lose a whole lot of money there because I'm because the market hasn't had a chance to change change. The value that an underlying option contracts I'll be selling, it for about what I purchased it for not necessarily the, case if the, slippage, meaning is the difference between the bid and the ask price is great then. We could be purchasing, it at the ask price turning right around and selling it at the bid price and then sustain a substantial. Loss, typically. We're talking about liquid securities as it relates to options trading we're looking for the slippage between the bid and the ask price, to, be relatively, tight for. Some investors are going to want that to be less than a nickel, for. Other investors, are going to want to be less less, than a dime for example, if the price of the underlying security, is you, say 80 to a hundred dollars, that want it to be less than a dime if, it's between 50, and 80 dollars, they'd like it to be less than a nickel and then.
Some Investors, are going to going to accept a wider, range. There a wider, range of slippage. They. Will just accept it based based on their strategy, that they're using when we're talking about liquidity, we're usually looking at that slippage I would like it to be relatively. Tight. Heavy. Trading, volumes, the. Reason we're talking about heavy heavy trading volumes because heavy trading volumes, on the underlying security, tends, to lend itself well to. The liquidity that we're talking about and. Notice right here we have narrow type in s price this is exactly. What we were talking about these. Two. Liquid. Securities. And. These, two. Are. Sometimes, are, sometimes. Talked, about in, the, same way, you know liquid, security with regards options trading is a security, that has narrow narrow, or, tight bid-ask, spreads in other words that slippage, now. A good place to start, for some investors is going to be to use the public watch list penny, increment. The penny enter come and watch this because the, options, are quoted in penny increments. So. If we're looking to build a watch list then for options, trading, one. Process, that we can engage in. Would. Be to use the scan tab that we have available to us over here I'm going to go ahead and collapse our left panel right here come, in here to scan and when, you come in here to scan just you can start off by by deleting, everything that's in here just start off with a clean slate here and then, where it says scan in right here again we're on the scan page come down here to scan in and on scan, in go, to the public watch list, of penny. Increment, options, right here. So. What does this mean it means that the options, of the of, all, of the option, all the securities, here their options are quoted in penny increments, well what exactly does that mean well let's. Look at an example here I believe McDonald's. Will be an example, I'm just going to pull this up and come over here the trade page. And. Maybe, McDonald's. Is is not a great example listen well actually, it is over here you can see right I don't know if you can see right here but on, this option chain we have a bid price of two dollars and thirty two cents and an ask price of two dollars and 37 cents, you. Know the next one above on this put contract, 144. 149. If they're, not quoted in penny increments, are quartered in nickel increments. Meaning. That it meaning. That example, for this one here where says 232, that's probably going to say 235. This, one that says 237. That's probably going to say 240. And. And. What you typically see when you have those nickel increments, is that. The slippage, tends to be greater in those situations, it's not always the case but it tends to be greater which, is why investors, would like to see the. Penny, increment, bid and ask price right there now. Another thing you can match with this and also investors, find to be beneficial, when they're looking at doing a scan is is. Not only have penny increments, available but also have weekly expirations. Because it's nice if you if you have those weekly expirations. That allows you to and. Gives you more, flexibility.
With Regards, to your options trading, so, we come over here where says intersect, we come down here and go to our public watch list and use, weekly. Is right here so we can combine these two as a beginning point then. From here course we could add we could add some filters for stocks we could have filters with regards to volume, on the, underlying stock, or. And/or price a lot, of option traders are gonna be a little bit leery about a stock, as, far as options trading that it's, currently trading at less than say 25, or 30 dollars particularly. If you're doing spreads. Of. Course we could have it we could add another if we can add another filter here and set it up so that it is related, to volume and or average volume, you, do that you could continue to go on here then you run your scan when you get your results right here I have 199, you can save those results, as a watchlist, then. Once you have those saved as a watch this you can go through your watchlist. And. What, I would suggest to start at the bottom of your watchlist and click on the stock that's at your bottom of your watch this come over here to the trade tab. And. Check. Maybe perhaps, have have a few options chains, open, set. Set your strikes to force you're primarily looking, at the money just kind of just when you pulled up just look at kind, of get an idea of the price here were 30 dollars what's, the slippage here well right here it's five cents 67. To 72, right. Here is two cents 43. To 45 if, that, slippage, is is is, okay, with you that, slippage is okay and I'm and I indicated, what some investments look at but every Bessemer can be a little bit different if that's okay with you then you just keep the stock of it's not you, can hit your delete key then, hit your up arrow key that'll. Automatically, didn't take you to the next stop to stock to the upside that tends to be a process, that investors, can use to, go through the. Results of their scan to go through 100, 1999. Of these and actually do that in a relatively short period of time you're, probably not talking, about even taking an hour to. Go through that process right there. Okay.
Let's, Come back over here then and, so. That's that's that's some of the considerations, with regards to your watch this criteria. Expiration. And, duration. Considerations. You. Want to use it at a timeframe, that produces, a satisfactory, premium. You. Know when we are when, we're setting up these these, these verticals, these short verticals. So. We got here is we're selling options that are currently out of the money that's why they that's why they have a that's, why you you can set these up where they have higher, probabilities. Of success, so. Basically what you're selling you're not you're selling all-time value, and. The. Further you go out in time the, more you'll get for those options that you're selling, and the larger your credit will be we'll look at an example here but. Also keep in mind that further you go out the, more that you're looking at being able to forecast, where the price is going to be so. You so. There's. A little bit of a of a of a go between there, go. Out further get a bigger premium. Go. Out further and you. Need to forecast, further out if you go in if you go in tighter not, you don't go out so far you, don't have to forecast, out so far so you don't have to be right over over. Such a long period of time but your credit tends to be a little bit smaller on those winds so, basically what you want to do is you'll find you want to find a balance, okay. Between. Expiration. And duration consideration. Use the time frame that produces a satisfactory, premium, it select a time frame that fits technically, technically, we're usually talking about our ability, to forecast out, into the future. When. Selecting, strike prices we want to choose a strike price with Delta's. That result. In a good balance, between probability. And return now we've talked, about having. A high probability. Trade here, so. What, exactly what, exactly, is is is a delta, telling us well Dell is telling, us the, probability. That that short, vertical actually, get into trouble, because. It's saying what the probability. Is of the, option we're selling what's the probability of that being in the money on the expiration, and, we. Don't want it to be in the money on the x-rays we wanted to be out of the money on the expiration, so. We have two short options, here we have our short call option we have our short put option. So. When. We're looking at our probability, of success we, want to look at the deltas, on both of those short options we want to add them up and have them add. Up to less than 50, why. Is that because. The, probability, of that trade getting into trouble the theoretical, probability is the sum of the. Two deltas, of the options we're selling, and. We'll and and we'll look at an example so when we're looking at selecting, our strike prices. We're. Usually looking, at at our call option, and our. Put option, we're usually looking at a delta, I'll just make, the delta sign here, we. Want our delta to be less than. 25. Because we're going to need to add those both up right and we want it to be less than 25 if, they're, both at 25. Then. Our probability, of success. Is. 50%. How. Can we say it's a high probability, trade if our probability, of success is only 50%. We. Typically want our probability, of success to, be greater. Than 50%. What. Is art what is our Max gain, on, a. Iron, Condor. Remember. We talked about getting our credit, right well. Our max gain is simply going to be that credit that we receive, and hope you know what we're looking for is we're. Getting that credit, and we're selling, that option, in an, effort that both of those we're selling those those two short verticals, and hoping, or looking, for planning. Around we're, looking for those two options to expire worthless okay. And. If. They do expire worthless our max gain is the credit received minus. The Commission's, that are paid we do want to keep in mind our Commission's what. Is our max loss where max loss is. Simply. The. Width of the verticals, minus, the credit that's that is received, so for, example, if we're if. We're. Selling. At. A strike price of 25. And. We're. Buying. At. A strike, price of 24. And. The. Credit that we receive, on, that transaction. Is. 20. Cents. Then. What's our max loss where max loss is the width of the spread, which. From 25, to 24, is $1. Our. Max so it's $1 -. Credit. That we received, which is 20 cents. Gives. Us a max loss then of 80 cents, I, share.
Each Contract, generally. Generally each contract. Is. Related, to 100, shares so, our max loss on each contract, again this is before Commission's. Would. Be $80. How. Do we calculate our, return, to risk our return. To risk is this credit that's received. As. $20. Divided. By our. Max loss. Which. Is the $80, that's how we that's how we calculate, the numbers here on an iron Condor. Let's. Go live in and we'll go through processor, and going through this process I'm going to introduce some, additional. Tools that. Traders. Traders. That, that that, that many traders find to be beneficial, I'm, not really recommending. Him so much as I'm bringing him out here and showing them to you so that you can so, that what I can't what I can recommend is to go ahead and use them go. Ahead and use them for some paper trays and you can make that determination as, far as whether or not they fit in to, your trading. So. We'll come over here and let's pull up our. Platform. Right here. And. Let's. First of all come over here to our charge you know one of the reasons I kind of want to come over here a charge and what and and the like is because right. Now the markets, been moving pretty high pushing, implied volatility, down low but what have we said there, are stocks. When. The overall markets, high there are stocks out there that have where, the market overall markets push implied volatility, low there are those stocks that are exceptions. Where implied volatility, is relatively high so it doesn't mean that we're totally out totally. Out of opportunities, one, thing you want to be careful about doing is, is. Is. Is kind of forcing, yourself to go into trades that you're not comfortable with now. You may look at the market say hey implied, volatilities, way low this is a great time to do counters we talked about calendars, last week in fact one of the things I want to do now that we're back over here swing back and take a look at that calendar trade but, but, but, just because the. Market, is is that, implied volatilities, low doesn't necessarily, mean we cannot we only go into calendars, we can still consider, other trades we just made take, a little bit more time searching, for something that's appropriate the main thing is to be comfortable with whatever, you're trading if you're, more comfortable trading iron condors, then that's fine if you're more comfortable trading calendars, diagonals, or, whatever then that's then, that's, fine as well, just, insert market conditions or maybe you may be looking a little bit longer to find a trade that you're going to be that, you're gonna have confidence, with with regards to mechanics, and understanding. So. Let's, take a quick look at the trade that we did last week here, that. Was a that was a calendar, that we did on Hess, HTS. Here. It is right here so this is our this is our bar right here this was telling us where we needed to be in order to break even so we need to be between these two lines right here now. This this, is a trade that goes out over significant, period of time because this bar right here is actually, when the when the options, expire, so. We still have a way to go but you can see that up here break even up here break even we're sitting in between those two lines so the trade should show a. Theoretical. Level of profitability, this particular point in time I actually, came in here to take a peek at it to see what we've got here and unfortunately, I, was a little bit disappointed, because the trade did not feel now. We put the trend and sometimes, in a in a paper trading account you have trades that that may feel but but they actually don't feel and so, this so the trade that we put on on Hess did not feel in our, in the paper trading account okay. Let. Me just see if I can find it here we'll come cows tragically put in Hess right here there may be another way to look at this though, yes. Order. History right here so. Here's the order and we had that notice over here says expire, I believe, what we can do is this, let. Me delete what we got down here I'm just going to take this order in she, create. Duplicate, order, and. When the order when we put it in last last, week we were going to try to get filled with a debit of sixty we weren't we weren't filled with a debit of sixty but we can play a little bit of what-if here to. Do that we can do it right click here and choose, analyse this trade and take this over to the analyze page and we're, keeping it here, it. Looks like let's take this one off here, delete.
That So we just have one over here so. Here is right here so this is where the price is at right now notice, we're at the lower end of the spectrum right here this, is our profitability, on, the on the on the expiration, dates where we're, currently profitable, on the expiration day but if we were if we want to get out of the trade today would actually incur a little bit of a loss but. If we're at this price point on the expiration day would actually be in a in, a in a in a mildly profitable, situation but. What do we want this trade to do we definitely want it to go to the upside right. And. If we look at this trade all by itself that's why we have some strong positive deltas, here because we're down, at the lower end here that does correlate with the chart right here where you can see right here here's the upside here's. The downside and we're closer to the down area here than the upside would like to be in the middle right here. Well. That's, it let's, discuss what we have on our charge and I'm gonna come back over here to eBay. Our. PayPal was at eBay or PayPal, where look I think maybe was PayPal now let's come back over here to PayPal because we're looking to PayPal the implied volatilities, light. Notice. Here we've got Bollinger, Bands, now. Bollinger. Bands are our, representatives. Been, in the past and. It's. Telling us is is, is it in the middle, I've. Wore it as. It, sort of found a mid place with regards, been in the past because, it at the higher end or is it at the lower end and these. Bollinger Bands are currently set at two standard deviations, what does that mean it means that the stock with regards to getting outside of the Bands that that only occurs a little, bit less than five percent of the time, but. Because. We're talking about stock market expected. Things like right here we're just riding that upper band we popped out here then we came back in we populate here they came then, we came all the way down here which really widen the bands out because of all the volatility, but now notice how we're starting to settle down we did have some volatile days here volatile, day here volatile day here we're actually moving up but right now we're sitting at about the midway point of, our Bollinger, Bands, so. Perhaps this would be something as a consideration. With. Regards to an iron Condor because implied. Volatility. Is relatively, high right, here, you. Can see that right there that point, you, can compare that to down here. And. Compare it to over here, you. Can also just just bring a horizontal, line across here that'll help us see it a little bit better if I bring. A horizontal, line that's where implied volatility, is at so again, it's it, is, not at one of these Peaks but. It's but it's but it's relatively high so that may lend itself to a potential, iron Condor. Also. Because we're in between our Bollinger, Bands right here, would, be looking at and, doing an iron Condor and when we go out and we look at our Delta's, our.
Iron Condor will be somewhat, balanced. In relationship. To the previous, volatility. Of the stock in other words on our, call side we should get a break-even point, that's somewhere close, to the Bollinger Band up here maybe not all the way up there because. Again we're talking about about. About 95%, of the results, in here and then also maybe maybe down below the lower Bollinger Band, here with regards to to. To, the put side of our iron Condor. Now. We're talking about probabilities. Talking about the Bollinger Bands this is where the probability, cone can come into play now. Some, of you may be happy, just trading with the Bollinger Bands there's nothing wrong with that if you're looking at the Bollinger Bands you kind of get an idea of where you'd like your breakeven, points to be within those Bollinger, Bands and you have a history of trading you're keeping a, diary. Of a diary, of your trades and you're referring to those things, then. There. Is nothing wrong with that but if you wanted to add something, else, to your chart, you. Could add the probability, cone of the nice and one of the nice things that some investors like about the probability cone here is you can adjust the probability. Of being, inside the cone right here. Remember. We wanted to have a probability, that's greater than 50 percent. So. When you load up the probability, cone you. Want to go in and check to see where it's currently set out with regards to its probabilities. Now to load up the probability, own to load of the Bollinger Bands either one of these when, you have your chart up just come up here to studies click on studies. Click, on edit studies and, in, your head of study box right here this is where you can add the things by typing Bollinger right here, there's. Bollinger, Bands but, what do I want to type in I want to type in, probability. Cone. Probability. Cone right here then you click on it and then bring it over here. Now. Once, you have it over here we want to set our probabilities, so the probability. Of being within this, cone is going, to be greater. Than 50%, so to do that you come up here click on your gear right here and. You have two items that you can set here one, is the period, now. This period, is not a period that's used to calculate these probabilities this, period is how far this probability, cone goes, out to the right of your chart I've. Got, a set at 50 days here so we go out here maybe one two and possibly three expirations. Or more. Right. Here is your probability range, and also I have a set at 55. If. I move this up. If. I move this up to say 60, and I, say okay watch. Our cone right here and I say apply I don't. Know if you saw but the cone but the cone widened, out there okay, but. I don't, but I but. What I'd like it to be is is, more along the lines of about 55, I'm not I'm not going to request it to be it to be at 60 I want the probability of. Being within this cone to be more along the lines of 55, so let's move. It down here probability. Of being within the cone. Is. Now. 55. Percent, I'll. Say okay and we'll apply, okay. So now our probability, of being in here is is. A 55%. We'll, go ahead and say okay so. 55, percent so. When we set up our iron Condor. If. We're if if, we're if we set if we look at our breakeven, points, and we're, outside of our probability, cone here on the raishin day then, would have a theoretical, probability. Of. Success, on the trade of. 55%. We're. Possibly, greater if we if we get even if we get even further outside of here, so. With that then let's go ahead and we'll take we'll put together a trade here for PayPal we'll go ahead and use PayPal because we have this, compared.
To The trade page and, because. You know they because, we're not up up at one of those pigs on PayPal, but. Some investors, will do is is, they'll start off with tighter, timeframes, let's take this one off of here, and. You, know what, is a tight timeframe with regards to an iron Condor, well. For our example, here we're going to play the part of the investor, that would like to do iron condors, at about 20 days somewhere, in the neighborhood of 20 to 22. To, 20 to 22, days but. When the implied volatility. Is is off, of the peak in other words it's down off those peaks has, found that sometimes they need to go out a little bit further maybe a week further and go out 29, days notice. Right here that we do have we, because we have weekly options we. Have a lot of versatility, with regards to our expiration choices. Now. Before. Before, right before I get into this there's one other item that I wanted to touch upon here and, that. Is on our chart here notice. We pulled a PayPal and PayPal sitting, halfway. In, between these, Bollinger Bands right here. Well. How did I how, did I kind of just come down here and click on PayPal, and and. And have an understanding that that was going to occur well. Over here under my watch this this is our dollar wide watch this we went together search I came, up here to left hand side and I clicked on symbol, and I chose customize, and on. Customizer says there's a study called Bollinger, % B and. With. This poll engine % B does it tells you where, the stock is currently added in relationship, to the Bollinger Bands so. If the stock is currently, at 50, it's pretty well centered in the bands right here in fact fact it's going to be right it's, going to be perfectly centered well not perfectly, but closely, center to them to the center of the Bands right there if, it's at 90 it's going to be up towards the top if it's at 5 it's going to be down towards the bottom so. We've, said we're playing a part of the investor that would like to the iron Condor being sort of in the center of where the recent volatility, has been. So. When you bring the Bollinger percent be over here as a study I'm going to bring this over here, also. You want to set your Bollinger percent B to match the timeframe you have over here on your Bollinger, Bands so. I'm going to click over here and just see so I have this set length is 20 so when it's calculating. That normal distribution it. Goes back 20 days and. It's. Going out to standard deviations, we're not as interested in the standard deviations, here is what the Bollinger percent B value, is, but. We want to make sure this length right here matches, the length of our Bollinger, Bands here, so, that's set at 20 we'll come over here and check our Bollinger Bands here our Bollinger Bands here is set at 20 here we come in here and double check it length. Is 20 so because those match up. We. Should be getting stocks, over this is at 50 point 7 4 and you can see we're sitting pretty fairly, close right here we're, also checking the implied volatility right here see on the chart that it's relatively high I also have an implied volatility, column here that also tells me it's it's it's. Relatively high as well so. With that in place then let's come up over here to the trade page. And. Again. We're going to play the part of the investor, that's looking going out about 29, days I'm going to open up our option chain here a little bit a little. Bit more viscerally, and on the option chain I want to have my Greeks I want to be able to see the Delta right here, so. What, Delta are we going to look for then what would like to have a trade that has a probability of success that. Is greater than 50 percent and. Remember. We said I'm going to change. This up a little bit let's see I look. Like I need a few more strikes in order to get out to those deltas, so I'm gonna go I don't. Think it quite I want to go to all but probably want to go to 20, does that get our deltas yeah that gets our deltas over here and it gets our deltas over here so, that's nice and we still have some room to. Draw under the like. So. Here's, our Delta column right here investors. That's, our Delta call them on the calls, excuse. Me that was our delta call them on the puts this is our Delta call them on the calls and. We. Want our combined Delta to be less than 50 so we'll come down here and say okay right, here on the PUD. Right. Here we're at 23. So. We could go over there with the puts do we have more of a more of a downside, thing or more of an upside thing well the stocks are currently moving up so, maybe we go 23, on the puts and over here on the calls we. Choose a delta here of about a 20s, we're sort of so we're given to this thing this thing is going to be a slightly, oriented. To the upside because the stocks are currently moving to the upside so we'll go in that direction so we, have a, 23.
Delta Here in a 20 Delta here what, is the theoretical probability that our trade is going to get into trouble, well. It's going to be that, 23. Plus. Our. 20. Equals. 43. Percent, right so our probability of, the trade getting into trouble is 43 percent what, does that mean as far as our probability, of successful, our probability of success is going to be the inverse of that, in. Other words take 100. And minus that are, probably, success, on the trade from a theoretical standpoint. Is. It about 57, percent. So. Let's let's set it up and then and and, and, then we'll continue to look at this so. Coming over here then on the put side again. We're going to do our short put vertical so we sail on, the short put side we sell the higher strike price we buy the lower strike price I'm. Going to go ahead for purposes of this one I'm going to go ahead and stay at a dollar wide, now. The reason for that. That's. That's, going to actually increase our transaction. Cost. However. It's, also going to give us a little bit more versatility, in the event the trade gets into trouble if the event in the event the trade gets into trouble we can work with us and that'll be if that'll be part of another discussion, if indeed that occurs. Let's. Get this guy out of here there. We go and. All. Right so where's that Delta yeah this, looks like it shipped around now it's a 24. Well. Sell that and we're just gonna say because these are dollar wide because he's come in to alter increments, we want to go dollar wide will just say sell, iron. Condor, here now, we know that our puts are where we want them, but we don't but we know also know that our calls are not where we want them because when you set these things up you can set one side or the other course, there's another way to do this where you can hit you can hold your keys down and bring them up that way but for, purposes of our discussion here we'll use this process we just use let's, do this and then come in and we'll add at the other side of this or the call sign so. Coming down here then we want to find that Delta, that was pretty close to 20. That's. The one 14, it's currently at a 19, so, we want to on this side we want to do the 114. And the 115, on the call sites we want to sell. The. 114. Here. And. We want to buy. The. 115. Go a little bit higher than that to the 115. Okay. And there, it is and they're here so here's our credit of 37, cents now the, credit they are 37 cents that's the mid price I'm gonna bring it down a couple of cents just. In an effort to just in an effort to get the trade filled I don't, know that will get filled with 36, I don't I don't know that we need we may very well get filled with 36, we're gonna bring it down here to 35 though just to just, to maybe try, to try to get the trade in there so that we have it in there and it's done I don't I don't know if we I don't know exactly whether, or not it will but, we'll find out here momentarily let's. See what our risk is though so we can set, the. Number of contracts, we want to do so, keep in mind at an iron Condor you can only lose on one side or the other you're. Either gonna lose on the call side or you're going to lose it on the put side the, credit, is the credit that you have that's, going to pertain, to, both, sides whichever, one you lose so, in calculating our max loss we'll take our hundred here again. 100. And we'll subtract, from that our credit of 35. And, that's showing us, $65, of risk on each one of these now again we're outside of commissions and do keep in mind we have outside. Of commissions, and other two related transaction, costs we do have four. Sets of transaction, cost here, to. Spread out over a 30 over a 35, dollar credit here so they, could be significant, they could play material, part here we want to keep that in mind you, say we're playing the part of the investor that's okay on this trade putting.
At Risk 15. Hundred dollars we can go 1,500, right here and. We're gonna divide that by our 65, bucks right here we're, looking at 23. Contracts. So let's. Go over here yeah, I'm gonna do 23, of these we'll hold that down and move that up to 23. Right. There. It. Looks like we are ready to go now, one thing we want to look at though is we want to look at this on the analyze page so let's bring it over the analyze page before we send it off this. Is where iron Condor, I want to get a little drawing tool here because I know it's a little bit difficult to see this. Right. Here's our iron Condor, here we're here, and then up. Here over. Here. Down. Here and. Over, here that's what the iron Condor looks like now the line that I just drew is on the expiration day this, line right here is as of today. As. We as we as we stay in the trade and these, options. Lose, some of their time value are also known as their theta value, and, typically what you'll see is this red line will move up okay. It'll. Move up and by the expiration, day it will become one with. Our green line right here. Also. It's, worthy to take into consideration what the Delta is on this trade keep, in mind that that we did 23, contracts. On. This. And with. Those 23, contracts, we have a delta we have a negative delta of, seven point of, seven point nine four now. Many, many. Traders would say when he traders would look at that Delta to be relatively, small. Relatively. Small in, relationship. To the size of the trade the number of contracts, so it's primarily. Would it would be seen by many to, be just about a delta-neutral, trade, also, look, at theta right here we have positive theta. What. Does that mean with regards to positive theta it means that it means that if price cooperates, to say in this area we'll, be collecting that will be collecting approximately. This much in, theta on a day, by day basis, theta, theta will actually change over time has, a tendency, to get greater as you get closer to the expiration. Also. Notice that this trade is negative, Vega. What. Does that mean that means, it would like implied. Atilla t this, this trade gets. Hurt by rising, implied, volatility. That's, why we're looking at a stock that already has relatively, high implied volatility, so it's more likely to go down however, we want to keep in mind with regards to iron condors, investors, that. If implied, volatility, moves against you on an iron Condor and price. Cooperates. You'll. Still be in a you'll still be in a great position to, achieve, your maximum gain you can still theoretically, get your maximum gain and you'll, still be in a great, position to get your maximum gain if price cooperates, so, if you're right on your price forecast, implied. Volatility, can do pretty much what it wants to do and theoretically. You still should be in good shape now some, investors, when they're looking at iron condors. They'd like to they'd like to exit, those iron condors, early, when, they can get a certain percentage of their gain, you. Know on ours with regards to our percentage, gain we were looking at that at that credit, of about. Of about 35 bucks on of about $35, well, as we're going along in time and this lines coming up here like this. There. May be an opportunity to possibly, get out of the trade we'll just for, our example, here let's just play we'll just use an example here of 80% let's. Say that we wanted to get out when we could get out and capture 80%. Of that $35, credit, this, is where the implied volatility can hurt you if. Implied. Volatility, has been ramping, up and, price. Has been cooperating, you may not be able to get out at 80% of your max gain until, very, late in the trade. However. At some point, from, a theoretical standpoint you will be able to get out at 80 80, %, it just won't be as quickly as you could if implied, volatility. Was staying level the, applied volatility, is going down you could possibly even get out earlier. Okay. You get out possibly you have an opportunity get out earlier with, regards to 80%, of your maximum gain. Alright, well, with that then we've discussed our Greeks here and talked a little bit about what's going on there well, let's come back over to our trade page then. Yeah. And let's see if we can send this in a boom now that now the midst 35 let's go ahead and see what we can do here investors. Will. Confirm. And send right here and we'll send this into our AO account. That's. On our page here we have on, this one our example, here has a overall, credit of eight hundred and five dollars. Cost. Of trade including commissions, 147. Ninety five those were those transaction, cost gain this is just a sample account there, you have your net credit, and we'll, go ahead and say send and.
Keep, Our fingers crossed, yeah a little, bit of difficulty getting filled here on our paper trading account. Let's. See if we can do some about that this. Was. Have. That here and, I'm. Gonna go in and take, a little bit more off of it just so we've got it in there this now this this will tighten up our this will make our max gain a little bit less and, our, max lost a little bit more so. Let's take off a couple contracts, here to. Accommodate, for a little bit shaving, off a little bit of the Creta the markets moving around here but we'll take a couple cents off that and, give. It a shot here and send it in and, we got filled so we I take a couple cents off but we did get fill so now we have a trade in there we can look look at next time alright, buddy so what we talk about here today. Well. We. Talked about not, only not, not only iron condors, let's come back over here for a second we talked about not only iron condors so we talked about tools you can use that, can possibly enhance. The whole process of, trading, iron condors. Now. Using Bollinger, Bands so identify, stocks are sitting at the halfway point. Over. Here on the analyze page we got our little signal, here because one of the things we wanted to do I think. We got time to do this. Let's. See we've got here. You. Know I just, wanted to pull up those breakeven. Points we can look at it on the chart. You. Know what this is a trade rinse oh this will work this is actually the one we're in so, let's. Just let's choose, high simulations. There's our trade I just want to set these up so we can look at it on our chart, we're. Gonna set our slices to break-even. Right. Here then we're gonna run those over to the chart. So. We came into the analyze tab we're analyzing things, and we, can put slices in here that will show you your breakeven, points and. You want to set those up for the expiration, day and. After setting those up for the expiration, day and you, have them on the analyze tab right here you can move them over to the charge to see where they're at in relationship. To the. Bollinger Bands and also the probability count. So. We'll move, those over to the chart now here's our breakeven, points notice. And this is due in part to our level of implied volatility, we're, well outside, of our Bollinger Bands right here we. Also want to keep in mind where we add in early to our probability, come we did they didn't indicate we're giving ourselves little bit more room to the upside of the downside because we're currently moving out doesn't, mean we're going to continue to move out we. Want to look at the expiration, date of these options. And. These options are expiring, on October. October. 11. That looks like so. We'll come over here to the chart then and let's find October 11th. Come. Right here and let's. See October. So. There we are so you can see on the call side we're, just hitting the top of our probability, cone on the, downside, we're a little bit, we're. A little bit. With. Regard for our break-even point our break-even point is a little bit inside, of the probability, console okay up here a little, bit tight here to the downside we'll. See what happens, as the trade continues, to unfold, also, note that right here we have a corporate, announcement, and this. Trade expires, before that corporate announcement, so we wanted to be we want it to be within that corporate announcement you generally, don't. Want to be on an iron condor, over, a over, an earnings, announcement, unless it's built specifically, for an earnings announcement, and that's not what we did here we, built this to be - we build this as a typical iron Condor, okay. So what. We've talked about well we've, talked about, Bollinger. Bands, probability. Cones also. Bollinger, percent be how to use those the, mechanics. Of it just the mechanics, and some considerations, with regards to iron condors, in choosing your strike price choosing, your deltas, in an effort to get appropriate expiration. Stage then. We went ahead to the paper trade I'd like to encourage all of you to practice. What we just did here you. Know put together a watch list look. For some higher levels of implied volatility, you can create an implied volatility, column you look a bunch of percent B you, know pick out a stock out of your will out of a watch list and do a paper trade so you become familiar with this there's no better way to learn how to ride a bike than getting on the bike and actually starting to pedal and holding that bike in going along I'd like to encourage all of you to do that so. With that said then. Just. Remind everybody, by the way think thanks for joining me here today thanks to a Larissa and, Edward, and Stephen I just, wanted to catch any questions, here I'm not seeing any questions so we may be okay.
Trend. Change exactly, and, and, and, you, do want to keep in mind the Bollinger Bands they give you an idea but when you're at the top of the bottom of the band and there is a potential for a potential, change in direction there that's that's a good comment but just to reminder folks that in, order demonstrate the functionality platform, we need use actual symbols however, TD. Ameritrade does not make recommendations, or determine the suitability of any security or strategy for individual traders any, investment, decision you make in yourself letter to the account is, solely, your responsibility. Everybody. Thanks for joining me here today again, I love to see you on Twitter if you'd like to follow me on Twitter or probably I'll, I'll, I'll, make, an effort here. Over. The next three or four days to put put something up there on Twitter some kind of a comment with, regards to an iron condor may be another example stock, and say hey this is interesting and, and and, elaborate, on some, of them on some of the things we've talked about here today possibly. Have a little chart there you can pull up and you'll have details, on the chart in there with regards to an iron Condor again, thanks for joining me here tell, your friends love to have your friends here as well everybody yeah, next week we'll be back in we'll be looking at the. Market kind of see what's going on with the market and we'll we'll review our iron Condor see see how that's going on as well I also just reminder, growth, and value strategies, coming up with James, Boyd, and James always does a fantastic job, so you want to hang around here and enjoy James so everybody, again I hope to see you next week we'll, catch later bye.