Posts Tagged ‘option trading’
Of all the various option spread strategies out there, the iron condor strategy is perhaps one of the most popular, the most talked about, the most used (or misused) – and possibly the most dangerous and misunderstood option strategy of them all.
The thing is, when rookie option traders first hear of this strategy (perhaps from a late night infomercial or free hotel seminar conducted by slick salesmen touting it as the greatest thing since sliced bread) – very few seem to able to resist the temptation to jump right into trading them head first – with actual real hard earned money on the line – and usually way too much of it.
And unfortunately what always seems to happen to a high percentage of them is that they promptly wind up getting their trading accounts demolished and their heads handed to them on a platter.
Now wait -
I don’t want you to get the wrong idea here. So let me explain something.
I LOVE iron condors.
I think the iron condor really IS a great trade.
And yes, I absolutely believe all those stories and claims you hear swirling around about iron condors generating ten percent plus monthly returns and providing trades that have the probability of winning somewhere in the range of eighty to ninety percent. In fact, I KNOW those stories are true because I see it happen all the time in my very own trading account.
The big problem is that there is some very important information being left out of those iron condor claims and stories. Information that I’m sure would keep alot of rookie option traders – who frankly just don’t know any better – from blindly making that ‘over-confident’ leap into the iron condor abyss.
See, while it may be true that the iron condor and credit spread strategies can kick off yields of over ten percent monthly and that they favor the trader by offering high probabilities of winning (in some instances as high as 80 and 90 percent) – what isn’t being talked about is the risk to reward ratio of these trades – which can be as high as 10 to 1.
This means that in order to achieve those 80 to 90 percent probability trades – you need to risk ten dollars to make just one – or to be more realistic – you need to put at risk $10,000.00 for the chance to make just $1,000.00.
And as my mammy used to say (God bless her soul) – that risk to reward ratio is ‘an awful bad egg’. In fact, it’s an honest to goodness stinking rotten deal.
Even with the ten percent monthly returns and the high probabilities – all that needs to happen is for a problem month to come along (and it WILL, believe me) – and the next thing you know you’ll be staring at a gigantic loss and a zero balance account!
But…
There is still hope…
As I mentioned earlier – I really do LOVE trading iron condors.
Over the last ten years it’s been extremely profitable for me.
So apparently, even with that atrocious risk to reward quandary, there must be a method to generate consistent income with this trade.
And there absolutely is.
It all has to do with the management of the trade.
As long as you learn the correct way to initially place these trades, then combine that with a super simple management technique and a few easy adjustment tricks – this risk to reward issue can be completely eliminated and no longer presents a problem.
You just need to arm yourself with a small amount of trading know-how. A few iron condor tricks that will allow you to quickly and easily adjust yourself out of sticky situations and smother any problem month threat that comes along, permitting you to experience the iron condor strategy for all that it’s ‘really’ cracked up to be.
To learn a much ‘better’ way to trade the Iron Condor spread for monthly income, visit this Iron Condor Adjustments site for simple step-by-step instructions on how to correctly place, manage, and ADJUST iron condor trades.
There are several advantages of trading options over trading in normal stocks (shares). There are unfortunately also a number of things you need to watch out for. Let us look at a few examples.
The popular advantage of options is that you can make a lot bigger profits than if you should invest a similar amount of money in normal shares. The reason for this is what is called leverage in trading circles. Let us say you’ve got only $100 to invest and the price of your favorite stock is $100. So you can only buy a single share. Not a big deal.
Let’s see how it works. If you have $10,000 to invest and the price of a particular share is $100, you can buy 100 of those shares. If the call option on that share sells for $2, you can buy 1 option and spend only $200. For this $200 you can control 100 shares of the stock also, similar to buying 100 shares of stock. Unfortunately, as we said, leverage is a double-sided sword. If the underlying goes up, you make be a very prosperous option trader, but if not, you could lose your shirt.
However, if you trade options for a while, then you quickly learn that this leverage can be risky. It takes a while, but eventually you’ll see that it’s much better to use spreads if you plan to make any consistent returns with options.
Options traditionally used to be utilized to hedge another investment you already have. Let’s say you have shares in a company whose share price jumped up by 25% the past month. By investing in put options (which will cost you a fraction of the cost of 100 shares) you can protect your investment. The way it works is that, should the share price drop, the value of the put options will rise with the same amount. Your net investment will therefore remain the same. This is a rather old strategy. In today’s world, there are many better ways to hedge a portfolio. We prefer using spreads to just buying calls and puts.
Find out more about option trading and how it works. With the right option trading system in place you will make lots of money. Set up your future today with a great way to earn cash!