Instructions

Options trading is not as difficult as most people think. However, it does require a sound understanding of what options are and how to use them to your advantage. The first step you’ll need to take is to learn the basics about options. There are hundreds of sites that provide great information, or just check out a book at your local library.

To set an iron condor in motion, you’ll first need to wait for the right date. The date you will want to place your trade in the 3rd Friday of the month. This is the date that options expire. The reason you need to wait for this date is so that you’ll have exactly one month to invest your money. This ensures consistency, as you will be repeating your trade on the same date each month.

Now you’ll place your trades. The iron condor strategy makes money by selling a call and a put on the same index fund. Let’s say the current price of the fund is $100. You’ll want to sell a call at the strike price of $120, and sell a put at a strike price of $80. For simplicity, we’ll say you sell 1 of each, and that they each sold for $1 each. Upon the sale, you’ll make $200 ($1 x 100 options x 2). Your hope is that the price of the index fund will never go above 120 or below 80. If it stays within that range for one month, the options you sold will expire worthless, and you will keep the $200. You’ve just made $200 without spending anything (except trading fees).

So what if the index fund goes outside of your $80 — $120 range? This is where the second part of the iron condor strategy comes into play. Because your loss potential is limitless if you sell the aforementioned call and put, you need to put some insurance policies on your sold options.

To do this, you will now buy a call at a strike price of $125 for $.80, and a put at $75 for $.80. Now, if for some reason the fund goes outside of the range of 75-125, you will only be down $.20 per option, or $200. The downside is now your $200 profit is down to $40 ($200 — ($80×2)).

The key is to sell your calls and puts at the right strike prices. Be conservative and you’ll increase your chances of taking a gain instead of a loss. The wider your range, the safer you’ll be, but you will make less money per month. But, make your range too small and you’ll end up with a loss.

Experience has shown me that if I try to earn just 10% per month, I have a 98% chance of doing so. But, if I try to earn 20% per month, my chance of earning that amount is only about 80%.

I find that %10 profit potential is more than enough to risk, and making a 120% return each year suits me just fine!

In the scenario presented, I would have made $40 if things when my way. I would only have needed $360 in my account to place these trades, as that would have covered my two buys and my losses should the index fund moved out of my range. So, $360 was turned into $400 in one month. That’s an 11% return, or 133% over one year. Not too shabby. (P.S. — Don’t forget to factor in trading fees. )