Track That Trade 110718. Iron Condor + Ratio Condor

Introductory statement

At Options for Rookies Premium, we have Members with a wide range of experience. My strong recommendation for newcomers is to check out the Introduction to Options Course – at your own speed. It’s fine to read about this trade. However, if you find parts to be too complicated or too advanced, they probably are too advanced today. If you have the patience to go at your own speed and ask whatever questions are necessary, you will get where you are going.

More experienced traders may find the ideas in this trade to be attractive or absurd. Or anywhere between the extremes. The idea behind my discussing topics such as this is to help traders broaden their horizons. Not necessarily to offer a winning strategy, but to get you thinking about specific problems that you had previously considered.

I don’t offer a trade ‘system.’ I want to take rookies and move them along the education process smoothly, and at their own pace. I hope that is what you want to achieve here.

Trade Rationale

By opening both trades simultaneously, we are buying inexpensive protection with a bonus. There are price ranges for which additional profits can be achieved. Even if that does not come to pass (and it is not likely that we will earn this extra profit), maximum loss for the whole trade is reduced.

Beyond that, this trade appears to be one that can be held through expiration – if the trader is alert to the fact that holding increase the chances of turning a profit into a loss.

Let’s take a closer look.

Iron Condor

The iron condor portion in this example is less far OTM than usual. The reason for this will be seen when we add the ratio condors to the trade. Please be aware that if you want to sue this idea, you can choose any strikes you deem appropriate.

Important note: If you are a an options newbie, I do not want you to feel left out. I suggest taking a look at the iron condor video course, which will give you a good introduction to iron condors.

Next, there is a webinar on ratio condors.

If you view these videos, this trade will be easier to follow. However, it is not a beginner strategy and I see no urgency to consider making a trade similar to this. If you can follow the discussion, then you can consider yourself well beyond the newbie options person stage.

As always, please feel free to ask questions to clarify anything that is not clear to you.

The Trade

Sell these two spreads, 10 x each:

    a) RUT Oct 730/740 put spread
    b) RUT Oct 900/910 call spread

The bid/ask midpoint is $4.00. I assumed a credit of $3.80 when making the trade. Using real money, I would be asking $3.90 and then $3.85 before settling for $3.80.

RUT Iron Condor. Opened 110718

RUT Iron Condor. Opened 110718



Note the maximum profit is $3,850 and the maximum loss is $6,150.

Add five Ratio Condors

110718. 10 Iron Condors, Plus 5 Ratio Condors

The Trade

Call 2 x 1 Ratio Condor: We add this trade 5x this size

    Puts:
    Sell 1 RUT Oct 770/780 put spread
    Buy 2 RUT Oct 750/760 put spreads
    Debit for each 2 x 1 = $210; Total debit = $1,050

Calls

    Sell 1 RUT Oct 860/870 call spread
    Buy 2 RUT Oct 880/890 call spreads
    Debit: $210; total debit $1,050

Position Cost: Collected $3,850; paid $2,100. Net credit: $1,750.
NOTE: Maximum profit is NOT that $1,750 cash. We can earn as much as an additional $5,000 when the position is held to expiration and the settlement price for RUT is between 740 and 750 OR between 890 and 900. [Because either the call or put spread that we own can be worth $1,000 each, while the other spreads expire worthless.] However, there is danger from the original iron condor. Below 740 or above 900, profits quickly disappear and turn into losses.

Notes
a) We swell one spread that is CTM
b) We buy two spreads that are farther OTM
c) EACH OF THESE TWO SPREADS is closer to the money than the put spread portion of the iron condor
d) We must pay a debit to buy this ratio spread.
e) The trader may choose other strike prices, but this is illustrative of the principle of combining the iron condor with the ratio condor. The reason that I chose the original iron condor strike prices is to allow room (at least four different strike prices for the ratio condor.

The ratio condor does not have to have adjacent strikes. I could have elected to sell the 740/750 spread instead of the 750/760 spread.

The ratio does not have to be 2 x 1; 9 x 5, 11 x 5, or any other ratio can be used.

There are three major changes to the risk graph

1) We paid an extra $2,100 to own the ratio condors. That the profit potential from the original iron condor. This is represented by the flat plateau in the center of the graph

2) The maximum loss is also reduced. We no longer lose $6,150 because the ratio condor adds $2,900 in gains [The spread would be worth $5,000 after the large move, but we paid $2,100 to buy the ratio condors] to offset almost half of that potential loss

3) There are two ‘bonus areas’ where profits are substantial. But please recognize that these two areas are not wide and the chances of earning that extra cash is slim

Adding FEWER Ratio Condors

I took a look at this trade by adding only three ratio condors in place of five. This cuts the cost and cuts all of the changes in the risk graph by 40%. It’s a compromise trade.

Three, instead of five, ratio spreads added to same iron condor


One important point to mention is that these are complicated trades – not complicated to understand, but it takes time and effort to select your initial trade. At this point in time, the only thing that recommends this play is that it reduces maximum loss, and that makes it easier for those working full time to manage trades. That does not mean that is a good idea to hold through expiration, but when maximum loss is already withing your comfort zone, adjustments become less important. LESS important does not mean UNIMPORTANT.

Less risk is great. However, if the trade now has too little reward potential, it may not work for you.

One more point. If you, as a trader, want to move the whole position farther OTM, that is also possible. Please be certain that you have a chance to earn enough money when the trades works well.

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