We’re going to focus on ironCondor portfolio building.
We’re doing this inconjunction with the course that we havecoming out very soon, the Options mastery Iron Condors course.
I teach you all those things, and more in my new Iron Condor course -> Click here to learn more about it <-
Today, what Iwant to do is look at building aportfolio with iron condors. I want toshow you the power behind it. I want toshow you the capital the marginrequirements for it. Why you can dowell with iron condors when itcomes to building out a portfolio.
It’s not like a stock. Where youbuy a stock and a stock goes up and thenif it stands still, you don’t makeanything. You need that stock to headhigher. With iron condors, you don’tneed that. I’ll show you whata portfolio looks like becausemost people they don’t even understand what a portfolio means. Not to mentionhow to constructone.
We’ll do it in a simple versionhere. Compressed andcondensed for a YouTube audience. But ifyou want to go deeper into it, we will gointo those through our courses.You’ll get to learn more about thatas we get into the options masterycourse series.
I teach you all those things, and more in my new Iron Condor course -> Click here to learn more about it <-
Let’s take a look at building out aportfolio
A portfolio is abasket of stocks or a basket ofpositions. In case one position gets introuble, you have other positions thatkind of work together to help save youor not lose as badly.
You may want to watch thatprevious episode; I believe it’s episodenumber 188.
The basic construction of an Iron Condor
What you’re doing is sellingtwo vertical spreads. I’ll show youhow to do this here with Apple.
Whenwe look at Apple, let’s say I go outabout 60 days in time, and I’ll sell avertical spread at 155and 150. I’ll analyze that trade. You can see the white line hereis the current line – today – and thegreen line is at expiration.
Here onthis chart, what we have is ourprice down here below. So right now thestock price is at 185. Yourprofit and loss with the zero line beingright here.
So basically, as long as thatstock stands somewhere between 155 orhigher, you make at expiration $19. That’s not too bad but remember you’reonly using $481 of capital. On about $1000, you’re making about $38.
It’spretty good percentage-wise within sixtydays. Imagine just turning that everythirty to sixty days.
As we construct the next part of this,we want to do the same thing on the callside because right now we’reselling on the put side. Now we makemoney if the stock stands still becausewith time we make this theta. Premium expires with time.
Just like your car insurance premium expires. Every month you have to buy moreinsurance. This is what you’re doing.You’re selling insurance on stocks, soyou make about a dollar six hereevery single day. That stock stands stillor doesn’t move, with time, you cansee that theta actually will continue toaccelerate and then decelerate.Because with time, theta continues topick up. There’s less timepremium towards the end. Thesebecome worthless in the last couple ofweeks there.
What we’ll do is we’llconstruct the other side. If stock stands still, you makemoney. Stock goes up; you make money. Stockgoes down a little bit while 2025points, you always make money atexpiration. But if it goes down a lot, youlose about a thousand dollars on thatinvestment.
The way you protect this is you go aheadand sell about the 210. Maybe a littlebit higher. So we’ll sell a vertical overhere on this side to 10 to 15. We’ll make two contracts here, and you cansee I’ve closed this off.
Now,as long as that stock stays in thatrange, I make money.
How much do I make?
I make about $94 onabout $900 of investment.
Why did this $900 go down from $960?
It’sbecause the other side makes you somemoney. A stock can’t be in two places atonce. They only take one side of thatmargin. You’re making about 10% on your money in 60 days.
You’re looking at it where you need to pick a range. It’s not that youneed to choose a stock that goes up indirection, you need to select a range.Here you’re looking at 155 to 210.
The key question is can you choose arange for Apple?Let’s just pull up achart here.
If we look at Apple, can youpick a range for this stock? You cansee the range that we have. The current stock here’s theprice, and we look at this we got 155 toabout 210.
Do you think that stockwill go between 155 and 210?That’s a pretty big range to make10%.
So, as long as it hangs outhere in the next 60 days or even up hereor even sideways, you’re goodto go.
Can you make this alittle more bullish if you think thisstock is going to pull back? Absolutely!
Canyou make it more bearish? Absolutely!
How do you do that? Let’s say, stockprices are heading higher, and I want totweak this a little. I could sellmore on the put side, and I’ll sell maybethree or four over here. I’ve stackedmore risk on this side, a littleless risk on the upside.
Now I have abigger Delta. For everydollar that stock moves up, you make adollar. Keep in mind you make theta as well, and Vega as volatility decreases.
Take a look as I start stacking moreand more contracts here on the put side, for everydollar that stock goes up I make 32dollars. That’s because we’re so weighted hereon the put side which means weneed that stock to go up.
This is whatyou can do. You can skew this positionkind of any way you want. Ifyou feel like well I believe this stockwill go up with time, you could goahead and do a 5 to 2 kind of position.Meaning, you have 3 deltas, 3 to4 Thetas, and a negative 18 Vega.Overall, you’re still kind of bullishon this position and with a time thatwhite line will get closer to your greenline or expiration line.
Then whatyou can do is take this position offearly. If you like, you can wait until itexpires as long as you’re in thesafe zone. There’s a tricky kind ofpart behind managing and adjusting itwhich we go over in the course.
I teach you all those things, and more in my new Iron Condor course -> Click here to learn more about it <-
Letme show you now how to build a portfolioand what the portfolio looks like.
Let’s say I go ahead and set up thisIron Condor.
You could do it all atonce or do it in verticals as I’vedone. I’ll go ahead and stack 6 contracts to 4, be alittle more bullish on it. Go ahead andconfirm and send these orders.
Thisis a paper trading account, toshow you for example purposes, what theportfolio is going to look like here.
Once we get filled here,I’m going to show you how this all workstogether because we need multiplepositions to kind of build out ourportfolio.
So, I have one that’s a little more neutral, little bullishposition. The next one, let’s sayyou have a couple of other stocks you wantto trade or you have some things in mind, I’ll go ahead and look atMcDonald’s.
Aswe pull up a chart, this one is startingto break this upward trending line. You can see we’ve had a major downwardbar possibly an ABCD pattern. We couldsay this one might get into lower pricesand it’s acting kind of weak. We cando the same thing with McDonald’s but doit a little more bearish.
What I’ll do is I’ll sell an unbalanced Iron Condor. Analyze the trade, and I manipulate my strikeprices. Let me get rid of theseslices, so you’re not confused. Thecurrent price is 159.84 mainly around160. I want to hug this or surround this, sowe have our calls. We’ll probably need tobring those in and where will we bringthose in. Perhaps about 170/175 will be the call sideand the put side will need to go underthat, probably about 130/135.We’ll drop these down quite abit about 135 and that’ll beabout 140.
Now you can see I’veset up this iron Condor right here. It’s still a little bullish becauseremember we have more weight on the leftside or the put side but what I could dois stack more weight on the call side becauseyou’re looking at this as abearish position.
So what I’ll do is takea look at this. I’m stackingabout $755 of risk on the left or the put side andabout 1200 on the call side to make 246 potentially. That’s a prettygood percentage, and again this is aboutsixty days out.
I could go ahead, ifI’m a little concerned about the upside, move these out a littlebit, but I think we’re okay.
Let’s stack a littlebit more contracts here because this one isnot as large asApple. So I’ll need to stack a bitmore contracts here. Let’s do againkind of 6 and 4 on a bearish note, or we could do sort of 6 and 5.
Wedon’t have to make it too strong becauseremember your short Vega here. It’s alittle more complicated beyond the scopeof this video. You’ll want to takea look at the course to learn more aboutthese Greeks.
I teach you all those things, and more in my new Iron Condor course -> Click here to learn more about it <-
But what’s going to end uphappening here is that if volatilityincreases, this white line will drop a little bitbecause we have a Vega risk problem here. We want always to be a bit short Delta, to be a bit more neutral. Sodefinitely you’ll want to keep an eye onthat so you’ll play with it.
We’ll go with 6 and 4. I’ll goahead and put this position in and to show you how this all plays out. We’ve done one kind of bullish andone a little more bearish position. Let’s say I do one that’s a little moreneutral. We’ll put on Caterpillar. I’ll goahead and sell an Iron Condor. We’ll makethis one a little bit quicker sinceyou’ve gone through the process.
Caterpillar currently is 141.03 so on the call side.When I look at this, I’ll probablywant to be around 160/165and the put side maybe 115/110.
Now again startstacking some of these contracts. Let’ssay we go with 4 or 5 contractsright here. You could have the spreads a littledifferent, 10 points on oneand 5 points on the other. I’ll bring in the callside just a little bit, and we’ll dosomething like that to have abit extra negative Delta there. Andagain five contracts. Put that in and goahead see if we can get that orderfilled. I’ll try to make sure we get itloaded pretty quickly so that you can see.
Now, what you can see iswe have these positions. We have acaterpillar, an apple and McDonald’s. You can see they’re allskewed a little bit different. McDonald’sis already up at $2.71; Apple is down about $10 andCaterpillar here we just placed it ondown about $10.
Let’s say we move this 3 or 4 daysforward. Time value decays. Now what you can do is take a look atthis position. Beta-weighted on Caterpillar.Again we’re going to keep all thecaterpillar prices here on our chart, butnow we’ll go instead of single symbol view, we’ll take a look at thingsin a portfolio view.
What this doesnow is it averages all thesepositions together and kind ofcomposites it based on the Caterpillarprice.
You can see I have Apple, Caterpillar, and McDonald’s. There are all my positions.
As I lookat this spread, it now gives me anoverall picture. You can seethe perspectiveof this expiration curve and how we’repositioned.
You can see within a fewdays. We’re still going to be about negative48 Delta. We’re going to be about positive21 Theta. And negative 102 Vega. Andwe’ll be up about $47 if priceskind of hold stable.
If prices godown a bit, what’s going to happen?
Take a look at Apple. Apple will be downabout $80, Caterpillar will be upabout $80, and McDonald’s will be upabout $156. Overall, we’ll still beup about 150, but you can see oneposition doesn’t hurt you as much whenit goes into trouble. Like Apple herewould be in a little trouble becausewe’re bullish on that position.
Thisis what a portfolio does. Itallows you to spread and mix the riskaround depending on where stock pricesgo because you don’t know wherethe prices go. That’s why tradingiron condors can be very beneficial.
Asyou can see, I can overlay two/threepositions, four positions. I can makethem a little bullish, alittle bearish, or a little neutral.Now, you have this portfolio basisthat if things are moving against me, I canhedge this position based on the cues.
If prices started to move upon me,what you can do you? You can go ahead andhedge this by just getting theQ’s 20 shares of that now you could do50 shares if you are looking for afaster movement.
You’re adjustingyour portfolio, and this is really what aportfolio is. Keep in mind now you have 50shares of QQQ which is a littletech-heavy, but you’re also still gettingand collecting that theta premium everyday. This is the beauty and the power oftrading iron condors because now you cancontinue to stack more andmore of that theta the time value.
What you’ll see happens here, as timemoves forward, o we’d make about $20 everysingle day. As time moves forward, you cansee that starts to pick up to $25 to $30little by little because you’re gettingcloser and closer to expiration.
Asyou start trading with larger accountsizes and capital, you can be beginningwith 25 Theta as you pick up contracts28 beta 35 Theta 40 theta$50 every single day if thatstock stands still. This is how the bigboys make a lot of money with lesscapital because for you to be ableto earn $2,400 in 60 days, it requiresabout $18000 onthis capital side.
Think about it, $2500 on $18000, look at the percentages.If we take a look at the percentages, $2432 on about$18500,you’re making about 13% percent in60 days. Pretty good return oninvestment. You’re not going to makemoney every single month. But as youmanage and budget some of thesepositions because some of these willlose out as you know, others will makemoney because they’re not going to land andsit still, you might end up over here. You might close one of thelosing ones, but you got the other three, that’ll be okay.
That’s the way money is made in thisbusiness, in iron Condor,in stocks. This is how the big boys makemoney. This is what I wanted to sharewith you on a portfolio beta-weightedbasis. Of course, you can overlaycalendars on this and many otherstrategies – diagonals, verticals – combiningit to make a portfolio.
