Welcome back to the Morning Mailbag!  Where TackleTrading coaches answer your questions.  In this edition, Tim explains how a new trader can start building Iron Condors and also looks at a Bear Put Diagonal spread on FSLR.  Direct your questions to team@tackletrading.com to be featured in the future!

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Hey, Tim, I was wondering if you could go over the guidelines for the iron condor?  I have been practicing the basics In Paper Money, I am wondering if there are any guidelines on structuring the trades based on delta is any different than the bull put or bear call alone.

Also, can you show us when and how to close out the trade if the stock has a strong move to one side of our trade? I would like to know how I can repair an iron condor if it does go south.

Thanks again

 Ben

Hi Ben,

I can discuss this in the coaches show later today to further elaborate on the answer below, but let me give you some quick tips when trading Iron Condors to help you understand the strategy a little better.

First, Iron Condors are 4 legged trades that include selling a call, buying a call, selling a put and buying a put.  Many traders use the delta per contract to help them establish which strikes to use.  Depending on the trader, management style, trading history, and risk tolerance, the delta per contract can be as low as .01 and as high as .30.  There are many different ways to build Iron Condors.

Expiration is also one component that can vary greatly from trader to trader.  Some traders use options that expire this week, other traders go 45-75 days out til expiration.   Part of your job as a new trader is to learn how to use the strategy in different situations and with different deltas.

I’d suggest that you start by using options 45-75 days out with deltas around .10 on the short legs per contract.

To manage these trades, you have several different choices to make.  1^st – will you set up an exit order or just an alert?  How much risk will you give it?  My advice as a Coach is for a new trader to have a short leash.  Set up an alert at support and resistance to email and notify you if the trade gets out of hand.  Then exit that side of the position if the alert is met.

Because Earnings are coming up in late October, and these are November strikes, you’ll want to watch for a profit taking opportunity sometime in the 1^st or 2^nd week of October.

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Hi Tim,

I just finished listening to your 9/2/14 recording and as usual

You never fail to stimulate my thinking and challenge me.

I did FSLR  based on the 9/12 closing price of $72.78.

Buy 5 Diagonal FSLR 100 Oct 14/Oct1 14 75/73 Put at 1.91 debit GTC.

I expect a consolidation and plan to keep the trade on for 2 weeks, till 9/25-26.

The BPE is $955 and $17.49 comm.

The atr is 1.6 and the IV is 35.9% with a possible rise of 3% in 3 weeks.

My goal is to make approximately $200 in 2 weeks.

If the stock goes up or down by $2, I’ll still make $50 and break even with the comm. cost.

What do you think?

I wasn’t able to figure out how to add a 20 day MA, however; perhaps you could show me.

Francine Daniels

 Thanks for the questions, Francine.  This question hit my inbox last week and now we’re reviewing the trade after you’ve been in for a while.  Looking at the chart, you made a strong entry point for a bear put diagonal.  9/12/14 for FSLR was a strong triple top formation and you built a spread that was Vega positive with a profit window just below the current price.  Great job!  This is a good strategy for stocks on the Vega team of our scouting report – in fact, most calendar or diagonal type spreads carry positive Vega and can be used with those stocks.

This trade has now moved down into a profit point on the risk graph where you need to make some management decisions.  There are some more complex techniques you can consider here, like rolling the short contract into a different strike or weekly expiration.  But, based on your original plan I would suggest you lock in the profit and record the winning trade in your trade log.

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Thanks to Ben and Francine for the questions.  If you want to be featured in an upcoming version of the Morning Mailbag please send your questions to team@tackletrading.com and hit us up on twitter @tackletrading or @timjusticeutah

Have a successful day!

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