When I first began trading the Iron Condor, my game plan was to leave the trade on all the way to the bitter end.
After I placed the trade, I would just leave it be until expiration day where the options would expire worthless and disappear into option heaven.
I figured this was the smartest way to go, since I would bank the ENTIRE credit received – and I would not have to pay any broker contracts to close out the trade.
But I do not think this way anymore.
After a lot of sleepless nights, too many close calls, a couple painful ulcers and one near hernia, I've changed the way I run my Iron Condor business.
Now – as soon as I place the trade, I set a contingent order with my broker to buy back the call spread – as well as the put spread – once I've made the major of the profit in each spread.
For example, if I sold an Iron Condor on XYZ for a total credit of $ 1.00 – or.50 each side – I would set up a contingent order to buy back the call spread for.05 or.10 (or at the very most. 20). Then I would set up a contingent order to buy back the put spread for.05 or.10 (or at the very most.20).
Personally I do not think so.
Sure I might make less than if I tried to milk them all the way through to the very end.
But not necessarily.
And even so, it's not that much less.
What's more important to me, is that by buying back those credit spreads, I've LOCKED IN the BULK of the profit.
AND – I've reduced my risk.
AND – I've created the potential to make even MORE money on the trade than was originally possible when I first initiated the trade – WITHOUT increasing my original risk.
Here's an example:
I've found that many times during a trade, the premiums in options can drain quite quicklyly. In fact, its possible for a spread to drain the priority of its premium in a matter of days.
Say I put an Iron Condor on XYZ – 40 days from expiration – for a credit of $ 1.00 – or.50 each side.
Immediately after placing the trade, XYZ heads downward over a number of days.
4 days after I put the trade on, I see that I can buy back my CALL side of the Iron Condor for.10.
If I do nothing, I am choosing to risk that CALL spread margin for the next 36 DAYS for a measly $ 10.00 of remaining profit (per spread).
On the other hand, if I buy it back for.10, I lock in the bulk of the profit for the CALL side – making that ROI in just 4 days.
Then, if XYZ bounces back up – which it will often do after a drop – I no longer have any risk on the upside.
In fact, if XYZ bounces back up high enough, I could RESELL the same CALL spread that I originally sold – for the same original credit – or maybe even more – increasing my total ROI for the same amount of RISK that I began with.
And even if I do not resell any spreads – but just buy them back at.10 to close out the entire trade – it reduces my risk, frees up my capital sooner, increases my ROI over number of days, and gets me out of the trade MUCH more quickly than if I were to try and hold on all the way until expiration.
This allows me to totally get away from trading for a few days – or weeks (or even how long until the expiration expiration cycles starts) – and enjoy the other things in my life without having to always be wondering what's happening to my trade – or the market – or worried about the next big crash.
And for me, being able to have that monthly 'window of time' away from the markets – that 'break' where I can completely clear my head and forget about 'options', and 'strike prices' and 'standard deviations' and 'deltas' – being able to just get away from the computer and go out and do other things without having that little constant nagging' I have a current live trade on 'stress and worry – being able to go to bed at night without an' option trading care in the world 'and quickly fall into a thick, deep, snoring sleep – sound as a baby …
Or – or at the very least, it's DEFINITELY worth the.20 or so it costs me to exit early out of the trade … for what is STILL a remarkable monthly profit.