“Monthly Cash Machine” Bonus Chapter:

A System for Trading Iron Condors

Matthew R. Kratter

www.Trader.University

In my book “Monthly Cash Machine,” I taught you a few ways to trade a range-
bound stock using iron condors.

Now I am going to give you a more advanced trading system. This system should
be used only if you have $5,000 or more in your account, and are thus able to enter
a few iron condors at the same time.

This system should make money over time, but it will also inevitably go through
losing periods. The important thing (once you’ve made up your mind to trade it) is
to keep trading it through both its winning and losing periods.

This iron condor trading system works for one simple reason:

You can’t stay scared for very long (it’s a psychological fact).

And neither can the market, since it is the aggregate of its human participants.

When the market gets scared, an option’s implied volatility (a measurement of the
underlying stock’s expected volatility over the life of the option) shoots up. As the
market calms down, that implied volatility comes back down to earth.

If you buy an iron condor when implied volatility is high, and then sell it when
implied volatility is lower, you will always make money. (Note: some brokers
define “buying” an iron condor as the reverse of how we’ve defined it in the book.
When you place an order, make sure that you are buying the highest call and
lowest put, as well as selling the middle call and middle put, as we discussed in
Chapter 3 of the book).

Now let’s get down to the actual rules of the trading system:

1. The IV Rank of the stock or index must be greater than 60. This ensures that
the implied volatility of the options are higher than normal. IV Rank is
simply a measure of where a stock’s current implied volatility is relative to
 where it’s been over the last 52 weeks. For more on this concept, please see
this link: https://www.dough.com/blog/implied-volatility-rank

2. Only use options that are 30-60 days from expiration. These will experience
the fastest rate of decay as they approach expiration, which is good for an
option seller like us.
3. Your short call should have a delta that is -0.07 to -0.10.
4. Your short put needs to have a delta that is 0.07 to 0.10.
5. Once you find the proper strike for your short call, pick a long call that is
one or two strikes higher.
6. Once you find the proper strike for your short put, pick a long put that is one
or two strikes lower.
7. Make sure that the distance between your call strikes is the same as the
distance between your put strikes. This will ensure that you are risking the
same amount on both the long and short sides, and that you will be charged
the minimum margin by your broker.
8. Your maximum risk is the distance between your call strikes (which should
be the same distance as that between your put strikes).
9. Your maximum profit is the credit collected (ignoring commissions for
now).
10. Maximum profit divided by maximum risk should be 10% or greater. If it
is not, try adjusting all of your strikes, or look for a different stock or index
to trade.
11. Take profits (exit the iron condor) one week before expiration, or sooner if
the price of the iron condor gets down to 0.10 or lower.
12. Exit the whole iron condor (even at a loss) if the delta on the short call
moves to -0.17 to -0.25 (depending on your comfort level)
13. Exit the whole iron condor (even at a loss) if the delta on the short put
moves to 0.17 to 0.25.

As you become a better trader, you will learn that you can relax some of these
rules, and add other rules of your own. The iron condor strategy is infinitely
flexible, so you will be able to develop your own personal style.

For example, if you are slightly bearish on a stock, you may want to sell more call
spreads than put spreads, or move the put spreads further away from where the
stock is currently trading.
Likewise, if you are slightly bullish on the stock, you may want to sell more put
spreads than call spreads, or move the call spreads further away than you normally
would.

Remember, if you are expecting a stock to be particularly volatile over the next
couple months, you should not put on an iron condor.

Likewise, if you are expecting the stock market to become more volatile over the
next couple months, you should not trade iron condors on it.

If a stock or index has been particularly volatile over the past few months, and you
are expecting volatility to drop in the near future, then it is an especially good time
to put on an iron condor.

Going through these 13 steps is not as difficult as it sounds.

In fact, there’s a website called www.Dough.com that has made this whole process
really easy.

I’m not affiliated with Dough in any way, and I am not being paid by them. I just
enjoy using their tools in my personal trading.

After you open up a free account at Dough, you can click on “Grid”:
This will take you to a list of stocks, many of which will have IV Ranks greater
than 60. In the following example, we are going to trade Amazon, which has an IV
Rank of 91:
.

Notice that I have chosen to sort the grid by “Impl Vol Rank.”

Stocks that are green are trading up for the day; stocks that are red are trading
down for the day. Double-click on the stock whose options you would like to
trade.

Next click on “Strategies” and select “Iron Condor” and hit “Go”:
Adjust the time so that you are looking only at options that are 30-60 days from
expiration:
Now slide the short call (“Sell Call”) bar until you get a delta that is between -0.07
and -0.10. If you double-click on the short call, a small window will pop up that
shows you the option’s delta:
Now do the same for the short put (“Sell Put”), until you have selected a put that
has a delta between 0.07 and 0.10:
Now move the long call (“Buy Call”) one or two strikes above the short call (“Sell
Call”), and move the long put (“Buy Put”) one or two strikes below the short put
(“Sell Put”). Make sure that the distance between your long and short call is the
same as the distance between your long and short put:
Now click on the white triangle to get an analysis of the potential trade:
Max Profit is $100. Max profit divided by Max Loss is greater than 10% (see Rule
#10 above), so this might be a good trade to put on.

If you open up an account with TD Ameritrade and link it to Dough.com, this will
allow the actual trade to be executed when you press “Review and Send.” Again,
I’m not affiliated with or paid by either Dough or TD Ameritrade.

You can also just paper trade your Dough account, while you get used to trading
iron condors. This is probably the wisest course.
 Disclaimer

Neither Little Cash Machines LLC, nor any of its directors, officers, shareholders,
personnel, representatives, agents, or independent contractors (collectively, the
“Operator Parties”) are licensed financial advisers, registered investment advisers,
or registered broker-dealers. None of the Operator Parties are providing
investment, financial, legal, or tax advice, and nothing in this book or at
www.Trader.University (henceforth, “the Site”) should be construed as such by
you. This book and the Site should be used as educational tools only and are not
replacements for professional investment advice. The full disclaimer can be found
at the end of this book. Options trading is risky. Options are not suitable for all
investors as the special risks inherent to options trading may expose investors to
potentially rapid and substantial losses. Please read “Characteristics and Risks of
Standardized Options” before trading or investing in options, available here:

http://www.optionsclearing.com/about/publications/character-risks.jsp