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How I'm making $ in the Stock Market NOW
One of my favorite income strategies is the Iron Condor. The stock market is literally an ATM if you know the pin number to access it. The Iron Condor is basically like sitting in the Champagne room collecting your hourly fee while you wait for time to pass. You get paid up front, but you have to wait 6-8 weeks until it’s “really” yours. It doesn't matter if the market goes up, down or sideways...as long as it stays between your strikes you make money.
Right now is the PERFECT time to be implementing this strategy because the of the volatility of the market. When the $VIX spikes high, it is in your favor to be an option seller.
This strategy can be used on any optionable stock, but I prefer using options on the indexes themselves. Specifically I use options on the Russell 2000 Index. If that is greek to you, just bear with me and follow this thread over the next few months. It’s REALLY simple once you get it. I will post my annotated charts, but all you newbies need to do is check the market at the end of the day and see where the Russell 2000 Index closed at. You can use Yahoo Finance http://finance.yahoo.com/q?s=^RUT or CNBC. The ticker symbol is $RUT
I set up my Iron Condors are to have a 92% chance of profitability. It is basically a bet that the index will stay between two strike prices (shown in green on the chart) between now and the day options expire. Since this is an November trade, option expiration day is the third Friday in November, the 21st.
It is actually two trades in one: a Bear Call Spread on the top and a Bull Put Spread on the bottom. The strike prices that I sell is what the index needs to stay between in order for me to win. Remember, I drew green lines on the chart to represent the strike price I sold. All it has to do is stay between the green lines.
Suppose you had $3000 in your brokerage account. I believe that is the minimum needed to open an account at my broker www.thinkorswim.com. Since this is a high probability trade (92% chance you are right) you could risk roughly half of your capital and trade two contracts.
So the broker would pay you $225 for the bear call spreads and $140 for the bull put spreads. $365 would be credited to your account for which you would have to risk $2000 of margin. That is an 18% return in 8 weeks for something that is 92% probable.
Compare that to a 6 month CD that is paying 3.5%. In six months you will make $105 in interest on $3000 for something that is 100% probable.
The difference is the risk to reward ratio. The six month CD is guaranteed, so there is no risk, hence very little reward. The Iron Condor is just a bit riskier, hence it carries a greater reward.
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Re: How I'm making $ in the Stock Market NOW
You're selling volatility during the beginning of a recession? That's very brave.
At least condors have limited downside in practice, I guess. Personal investors should be aware of the other factors involved in options trading but this sort of spread trade is one of the less risky ones, I guess. Be wary of the "92%" figure you quote there - if you're getting that from the implied vols, then that merely reflects how much people are currently paying for the protection, not some insight into the way events will turn out :)
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Re: How I'm making $ in the Stock Market NOW
agreed that straddles in any form have historically meant 'easy money' ... but the 'tin foil hat' crowd would tell you that the extraordinarily high success rate has been due to actions of the so-called 'Plunge Protection Team' intervening in the markets to limit downside momentum. Personally speaking, there are unprecedented levels of volatility out there and the Plunge Protection Team members seem to be focused on financial institutions rather than the stock market lately.
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Re: How I'm making $ in the Stock Market NOW
A tin foil hat is just one of many reasons why someone might think that things won't move too much. You'd want to think about why the VIX might be rising before selling it, but if you're of the firm opinion that people are paying for downside protection they don't need, by all means sell it to them while the price is high!
Great post Britney, btw.
Sorry if I'm overemphasizing risks. Just got home.
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Re: How I'm making $ in the Stock Market NOW
Thats the beauty of selling time premium, you can adjust to your own risk. My risk is defined because I'm not selling options naked, I'm selling spreads. I know exactly what my risk is and even if I'm completely wrong, the most I can possibly lose per trade is $500.
If someone is afraid of a plunge, then just sell bear call spreads. We all agree that the markets can crash down, but rarely do they crash up. So I sell the strike that is above technical support/resistance.
Some of my other trades I'm currently in:
GS: A downtrending stock with resistance at 155. As long as the stock stays below $150 I make 19% ROI ($95 gain on $500 margin) in 4 weeks.
RIG: Downtrending stock. As long as it stays below $130 I make a 22% ROI
VLO: Channeling stock that cant break above $35. Also 20% ROI
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Re: How I'm making $ in the Stock Market NOW
I'm not going to comment on the strategy, I tend to invest not trade so I'm not the right person to judge. However, that was very well explained. I look forward to this thread continuing. Good stuff.
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Re: How I'm making $ in the Stock Market NOW
Precisely Stuart, I never called it "investing." I'm not buying anything. I also don't have to "hope" my investment goes up in value. This is a strategy to create a passive stream of income using the stock market as the underlying vehicle.
I use this strategy to pay my car payment each month. On a 10K account I trade 5-7 contracts and get paid a premium of $875-1100.
I read an article that most bankruptcies can be avoided with an extra $500 a month in income. The first inclination of most people is to run out a get a part time "job" to make ends meet. If a person opens an account with 3K, they could make an extra $300-400/month using this strategy.
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Re: How I'm making $ in the Stock Market NOW
You're not buying - you're selling implied volatility, skew and realised volatility. Glad that this is working out for you :) The trick is what level you want to sell at and what range you reckon realised movements will be in.
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Re: How I'm making $ in the Stock Market NOW
Thank you for starting this thread--I'll try to follow.
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Re: How I'm making $ in the Stock Market NOW
Hmmm.. only $3000 startup. Not much to lose....
*yoink*
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Re: How I'm making $ in the Stock Market NOW
Awesome Charlie61! All you need to do is everyday check the Russell 2000 Index.
As long as it stays between the green lines drawn at 540 (we sold the 540 bull put spread) and 780 (we sold the 780 bear call spread) we make money!
http://c4.ac-images.myspacecdn.com/i...9837b2380b.jpg
If anyone is interested in learning how to trade these, I have a papermoney account set up at thinkorswim so you can follow along.
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Re: How I'm making $ in the Stock Market NOW
i am definently doing this.
now i need to get off my forums and start researching all of this.
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Re: How I'm making $ in the Stock Market NOW
But how can you predict it'll stay between those numbers? It looked like it was on a consistent upward trend until it randomly began staying between your bear and bull...
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Re: How I'm making $ in the Stock Market NOW
This is a lot like show [short odds] betting the trotters.
You never bet win, only show. You lay $200 to win $50. A 25% return for the investment. For a good tout it is pretty easy to pick a horse that will at least show in a ten horse field.
Ten races bet you've risked $2000 in total but you win eight [80%] and made $400. You've lost two races though, losing $400, and break even.
You have to win nine times out of ten to make money.
For a good tout it can work out but most people aren't good touts, and the money risked is large for the money made.
Quote:
Suppose you had $3000 in your brokerage account. I believe that is the minimum needed to open an account at my broker
www.thinkorswim.com. Since this is a high probability trade (92% chance you are right) you could risk roughly half of your capital and trade two contracts.
So the broker would pay you $225 for the bear call spreads and $140 for the bull put spreads. $365 would be credited to your account for which you would have to risk $2000 of margin. That is an 18% return in 8 weeks for something that is 92% probable.
Compare that to a 6 month CD that is paying 3.5%. In six months you will make $105 in interest on $3000 for something that is 100% probable.
In the example above if you lose ONCE you are out $2000, for which you would have to be right more than five times to make it back.
If you are very good at this... very good... you can make money but the risk is large because you only have to lose ONCE to fold in almost six times your winnings.
A good gambler never bets out unless the return is as good or better than the risk. So if the changes of winnng are truly 90% and you lay $1000 you want to win at least $1100. So it makes sense in that regard IF the win ratio is truly 9:1, but can just ANYONE do that.
BTW, I am NOT knocking Britney in saying this. If it is working for her GREAT. She is probably one damn fine tout too.
I'm just reminding folks there is no such thing as easy money and there is real RISK inherent in playing this particular game.
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Re: How I'm making $ in the Stock Market NOW
I don't know much about betting, touts, or trotters...sorry I'm not cool like that.
Nevertheless, GoldenRule is correct, the inherent risk in this trade is that 8% chance it completely blows up. Statistically, it's going to happen at some point. I've been doing this successfully for over a year...so this month just may be the month that it completely blows up on me.
That's OK, I will just take the trade again next month.
The probability of success with this style of trading is very high. It's different from risk to reward of table games. Market crashes are systematic, a huge down day (like monday) is always followed by "the dead cat bounce" (tuesday) and indecision. As an option seller you have theta (time decay) working for you. Playing cards you either win or lose....there's no sitting there collecting premium for your time.
Charlie: I choose my strikes by the delta of the option (I know that is greek to you right now but bear with me) I sell the call option that has a delta of 0.10 and I sell the put option with the delta of 0.08 The delta of the option tells me roughly what the probability is of the Russell closing at that strike price. So in our example there was a 10% chance the Russell would close above 780 and an 8 percent chance is would close below 540. The chart you are looking at is a 5 YEAR chart. The last time the Russell closed at 540 was in mid-2004.
Also great observation that the Russell is just going back and forth. That is called channeling. The top of the channel is called "resistance" the bottom of the channel is called "support" The Russell has A LOT of support at 650. If you compare the chart of the Russell to the Dow, Nasdaq, and S&500 it is much stronger than the other indices
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Re: How I'm making $ in the Stock Market NOW
I don't know but this sound a lot like "day trading" to me, buy a million shares of stock hope it goes up a quater and sell within the same hour and make a few hundred or few thousand.
Guys made a fortune but a lot in the end lost there shirts and funny thing is now you don't hear much about it anymore.
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Re: How I'm making $ in the Stock Market NOW
Day trading is when you buy an equity or option and sell it before the close of the day. In order to be approved for day trading an individual must have an account balance of $25K. If an individual holds their position overnight, it is not "day" trading.
Hence, there is not even a remote resemblance.
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Re: How I'm making $ in the Stock Market NOW
But this IS a super-risky strategy.
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Re: How I'm making $ in the Stock Market NOW
It depends on how you define risk.
If you define risk as Maximum Gain vs Maximum Loss, then yes you stand to lose more than you can gain.
If you define risk in terms of probability, spreads are MUCH less riskier than a directional trade.
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Re: How I'm making $ in the Stock Market NOW
What I was getting at was the risk aspect and that it always seemed tha tin the end day traders lost out. Also that back in the day it was the flavor of the month the "easy way" to make money but now you never hear about it anymore.
If you are making money that is good. Until know I had never heard of this "concept" If this was so easy and such a sure thing then why don't the Charles schwab's and Scottrades of the world have entire departments of brokers set up to market this to joe average investor for a cut of the profit?
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Re: How I'm making $ in the Stock Market NOW
Put it this way Britney--if you do this trade every (month, quarter, whatever) for the full amount you have in your account, eventually you will have nothing in your account.
That is why it's risky.
And to properly support this trading strategy with capital appropriate to the risk (i.e. so the drawdowns don't have a significant chance of taking you out of the game) I'd suspect you reduce your expected return to something in the low double digits.
More fundamentally, there are huge trading houses that spend tens of millions of dollars on options pricing models. Their favorite counterparty is someone who comes into a trade saying, "Wow, my chance of making money is really high!"
While I have no love for Nicholas Talebi, I'd recommend one of his books as good background reading for non-professional options traders.
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Re: How I'm making $ in the Stock Market NOW
Phonehome: Great Question: why don't brokerage firms market this to the average joe? My reasoning is because the average joe doesn't take the responsibility for his retirement and expects someone else (his job, the government) to do it for him. I went through the 2 year PhD program at Investools to learn how to do this. Many people don't have the time, effort, inclination or patience to do that.
There are TONS of resources out there about delta neutral option strategies. A similar one is called the Butterfly. Google it! I guess the reason you never heard about it is because you either never asked, or were talking to the wrong people (i.e. mutual fund salesmen)
Lurker, you are correct proper position sizing is key! Why would ANYONE risk their entire account? I have risked half of my Iron Condor Account (which is separate from my Emergency Fund, separate from my IRA, etc) every 6-8 weeks for a year. Maybe this month will be my drawdown. I don't know, but as a trader I have to be willing to take that risk.
A person's return is always going to be a function of their risk. It is the individual to decide what his/her risk tolerance is. I'm not trying to convince anyone that I'm right and this is the best thing in the world out there. Given current market conditions, I favor it to "grin and hold"
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Re: How I'm making $ in the Stock Market NOW
I believe that's PHD, not PhD. ;) funny how they make it sound like a doctorate degree, though. LOL. it really stood out to me especially because I am considering post-graduate studies in business or finance.
I'll look into the strategy. Do you recommend any of the Investools courses? The site looks like their business model is based around simple education retail e-commerce rather than institutional progressive learning like most credible schooling. My finance professor balks at most online trading courses. It doesn't hurt to have 'outside the box' opinions, though.
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Re: How I'm making $ in the Stock Market NOW
Essentially the Iron Condor is one of the lowest risk strategies in terms of a losing trade, but that is counterbalanced by limited gains on the upside. Under relatively stable market conditions it's almost a guaranteed moneymaker.
Iron Condor Spread Defined: Combine a Bearish Vertical Credit Spread and a Bullish Vertical Credit Spread on the same underlying security. By doing this, an investor will potentially be able to double the credit obtained over a single spread position. Since there are two spreads involved in the strategy (four options), there is an upper break even and a lower break even. A profit is made if the stock remains above the lower break even point or below the upper break even point.
What it means: When you enter an Iron Condor, you are actually entering 4 options orders at once. If the stock stays within a specific range, you profit, and if the stock moves out of the desired range, you lose.
EXAMPLE: Take a look at what the order looks like on a Iron Condor on the stock QQQQ where we buy 1 call option with a strike of 43 and sell 1 call option with a strike of 42 as the "upper" Vertical Spread AND sell 1 put option with a strike of 38 and buy 1 put option with a strike of 37 as the "lower" Vertical Spread. The result is a complete trade that gives us a .55/contract ($55) CREDIT to our account (for each contract we choose to do).
The price of QQQQ at the time of this trade was 40.09.
http://www.daytradeteam.com/dtt/medi...or_example.gif
EXAMPLE: Now look at the profit and loss scenarios that could occur on the trade we entered above. You will notice that if QQQQ closes ANYWHERE between 38.00 and 42.00 on expiration day, we PROFIT $55 on the trade. Above 42.55 and below 37.45 we start to lose on the trade, with a MAXIMUM loss of $45 total
The 'Butterfly' strategy is a little simpler and IMHO offers a better ROI potential versus risk of loss ... but under stable market conditions has a higher statistical risk of a losing trade.
Butterfly Spread Defined: An options trading strategy combining a bull and bear spread. It uses three strike prices. The lower two strike prices are used in the bull spread, and the higher strike price in the bear spread. Both puts and calls can be used. A very large profit is made if the stock is at or very near the middle strike price on expiration day.
What it means: When you enter a Butterfly Spread, you are actually entering 3 options orders at once. If the stock remains or moves into a defined range, you profit, and if the stock moves out of the desired range, you lose. The closer the stock is to the middle strike price on expiration day, the larger your profit.
EXAMPLE: Take a look at what the order looks like on a Butterfly on the stock EBAY where we buy 1 put option with a strike of 47.50, sell 2 put options with a strike of 45, and buy 1 put option with a strike of 42.50. The result is a complete trade that gives us a 0.55/contract ($55) DEBIT to our account (for each contract we choose to do).
The price of EBAY at the time of this trade was 43.81.
http://www.daytradeteam.com/dtt/medi...ly_example.gif
EXAMPLE: Now look at the profit and loss scenarios that could occur on the trade we entered above. As you can see, if the stock stays near its current price, we'll make money. We want it to close as close to 45.00 as possible, as that is where our max profit point is. We are profitable anywhere from 43.05 - 46.95 and have a max loss of only $55. This, when compared to the max gain of nearly $200 per contract, makes this a very attractive trade.
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The concept behind both of these strategies isn't very difficult to understand at all. The difficult (and tedious) part is identifying particular stocks or indexes or ETF's whose option prices (a.k.a. time premiums) are at a level where it's still possible to make decent money on the overall trade.
And there is even an Iron Butterfly options strategy, which theoretically combines the positive points of both the Iron Condor and the Butterfly spreads. See The Iron Butterfly also has the positive aspect of being able to partially close out the 'wrong' side of an apparently losing trade with minimal losses, while still retaining the potential to earn enough profits from the 'right' side of the trade to cover those losses and book additional gains besides - i.e. this strategy has a Plan B available when Plan A appears to be going wrong ! This is one of my favorite strategies under stable market conditions.
I would also add that these sort of options trading straegies require not only an options trading account, but an options account with a credit line - since you are technically selling 'uncovered' options contracts against stock shares that you do not own. In terms of overall risk, however, the uncovered options you sold are in fact 'covered' (or at least partially 'covered' if there is a small difference in strike prices) by counterbalancing options on the very same stock shares that you do not own ! Discount options trading accounts will not allow the sale of 'uncovered' options contracts.
Also, since these options strategies require the buying and selling of multiple options, the consequences of several broker commissions needs to be considered. In other words, executing an Iron Condor trade doesn't make a lot of financial sense when the 'upside' profit is $ 55 but the total commissions involved are 4 times $10 ! Obviously the way around this problem is to increase the size of the trade ... but this also increases the up front cost and increases the potential maximum dollar loss if the trade turns out to be a loser.
As posted earlier, in a highly volatile market, the normal 90%+ chance of making a winning Iron Condor trade ( and the statistical odds of 'winning' using any other options spread straddle based options trades) can be significantly reduced due to 'unpredictable' events happening without warning. IMHO, in today's volatile market the limited upside of the Iron Condor strategy isn't worth the elevated risk.
And while these options trading strategies may seem complex, some hedge funds have been using extremely complex 'Quant Models' and all sorts of related strategies that are similarly based on hedged spread straddle options positions. Ultimately, in a volatile market, all of the past statistical backup that made the strategy successful can fly right out the window (right along with the hedge fund's money !!!). And unlike the hedge funds, small time investors don't have $10 million in ready cash available to plow into the futures market to help 'pursuade' the underlying stock's share price back into the center of their $20 million options position on options expiry day !!! My point of course is that even though there are reams of statistical evidence that a options strategy has worked X percent of the time in the past, and even though some of the brightest minds in the IT and financial worlds have applied all of their knowledge to develop 'expert systems' that go far beyond the options strategies discussed here, 'Mister Market' has a way of outsmarting all of these strategies every once in a while. But right now happens to be one of those 'once in a while's !!!
IMHO in today's highly volatile market, and given yesterday's 'bailout' package approval, one of the lowest risk highest potential reward options trades ( as britney mentioned already and I have posted about in another thread) is probably to simply identify one of the already beaten down 'Friends of Hank' and simply buy 3 month call options on their stock !!!
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Re: How I'm making $ in the Stock Market NOW
Britney, I'm curious, how much of a time commitment do you put into this per week?