DaytradeTeam Brainzzzz
Trading Tips and Strategies from Traders at DaytradeTeam
Wednesday, August 24, 2005
Knowing when to cash out of an Iron Condor
Iron Condors are awesome—you simply make money every day that the stock stays within a (sometimes fairly wide) range! But how do you know when it is time to give up on an Iron Condor that isn’t exactly going your way or (more often) cash in profits on one that is? Well here are my thoughts on the subject---let me know what you think!
Three indications t might be time to exit your Iron Condor options trade:
#1: If intraday ranges start to increase
Keep an eye on the daily highs and lows of the underlying stock. Simply watching the closing price each day might be misleading. Picture this: the stock you have an Iron Condor on normally trades in a range of about 1% (say from 30.20 to 30.50). Now if you just watch the closing price each day, you might see 5 cents up one day, 10 cents down another, etc. Nothing to be worried about right? Not so fast….if the stock is now trading in a 2% range on an intraday basis (30.10-30.85), it could indicate higher volatility ahead, and greater likelihood that the stock could move out of your profit zone quickly.
#2: You can exit with 80% of potential profit more than a week before expiration
Nothing sickens an options trader more than a great trade that goes bad in the final days prior to expiration. Let’s face it—for whatever reason, volatility seems to pick up that last week and news events just seem that much more dramatic. Don’t let yourself go into this kind of situation, especially when the trade has already brought most of the bucks into your account. Simply close the position, lock in the profit and sleep easy during expiration week for a change!
#3: Premiums start to increase and you can’t figure out why
If the prices of your contracts are going suspiciously UP from one day to the next without significant movement in the stock price and you can’t figure out why---GET OUT. I’ve seen too many times where options traders would say “I didn’t realize until after the news came out that they were expecting…….” or some other sad story. Options premiums don’t increase for no reason. Don’t try to outsmart the market, just move out of the position quickly and move on.
Three indications t might be time to exit your Iron Condor options trade:
#1: If intraday ranges start to increase
Keep an eye on the daily highs and lows of the underlying stock. Simply watching the closing price each day might be misleading. Picture this: the stock you have an Iron Condor on normally trades in a range of about 1% (say from 30.20 to 30.50). Now if you just watch the closing price each day, you might see 5 cents up one day, 10 cents down another, etc. Nothing to be worried about right? Not so fast….if the stock is now trading in a 2% range on an intraday basis (30.10-30.85), it could indicate higher volatility ahead, and greater likelihood that the stock could move out of your profit zone quickly.
#2: You can exit with 80% of potential profit more than a week before expiration
Nothing sickens an options trader more than a great trade that goes bad in the final days prior to expiration. Let’s face it—for whatever reason, volatility seems to pick up that last week and news events just seem that much more dramatic. Don’t let yourself go into this kind of situation, especially when the trade has already brought most of the bucks into your account. Simply close the position, lock in the profit and sleep easy during expiration week for a change!
#3: Premiums start to increase and you can’t figure out why
If the prices of your contracts are going suspiciously UP from one day to the next without significant movement in the stock price and you can’t figure out why---GET OUT. I’ve seen too many times where options traders would say “I didn’t realize until after the news came out that they were expecting…….” or some other sad story. Options premiums don’t increase for no reason. Don’t try to outsmart the market, just move out of the position quickly and move on.
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