Credit Spreads, Iron Condors, Butterflys and Diagonal Spreads
May 17, 2007 by Daniel Beatty
Credit Spreads, Iron Condors, Butterflys and Diagonal Spreads are the option strategies that I like to play and teach here at Conservative Options. Each one has a different purpose and once you learn when and how to use each strategy you will be ready to make money no matter what the situation. Here is a brief synopsis of when to use each trade…
Credit Spreads - a directional trade used when you have a fairly good idea that the stock or index is going to continue in a certain direction and not fall back to your sold option.
Iron Condors - a neutral trade using two credit spreads. It is used when a stock or the index is channelling and it is not likely to break either sold option but if it does you know you have at least one profitable credit spread.
Butterflys - You can use this when you have an idea that a stock is going to move into a certain range or do a short butterfly when you think a stock is going to move out of a certain range.
Diagonal Spread - probably the easiest of the conservative trades to understand, a directional bullish strategy used when you feel a stock is going to increase in value for the long term but at a slow pace, very simialr to a covered call only with more leverage.
We will go into more depth on each one - however if you want to learn about how I trade credit spreads right now check out my ebook - How to Trade Conservative Credit Spreads
butterflys, credit spreads, diagonal spreads, iron condors, option strategies
I really enjoyed your website and also bought your e book credit spread. It was really clear to understand and how to use it.
Two days ago I was in ASEI iron condor spread for june expire buy 40 put, 55call, sell 45put, 50call. Do you think this position is going to make untill expire?? I am kind of nervious now . It was pretty big position and hopely I hadn’t got any mistake .
Please give me any comment.
Thank you very much.
from your student kenny
Yes I would be really nervous as well. Earnings are being reported on Monday! You only have a 5 point spread between your sold positions. One of your positions is going to take a big hit, I think. The other will be profitable. When did you place the trade? I hope you sold at high volatility like it has right now.
Thank you for your responed.
I was placed this trade at 17th and at that time calculater showed me $180 credit, Max risk 320, Down break even 43.2, Upside break even 51.8. Volatility was 5.2%. Hoply volatilty would down after earing.
volatility was 52% not 5.2%
Today earings beat the eastmate and went up 10%. I am loosing pretty big money so far
my hand keep shaking what shall i do now?
What if stock price keep going up how can i adjust my position or just keep waiting untill expir?
Please some comment .
First this has got to be the best learning experience ever. It will teach you more than I could ever teach you. You need to follow rules and the first rule is never let emotions rule your trade. The second rule is money management never ever risk more than you can afford. The third rule is stay away from earnings when trading credit spreads. However since you have broken all of those rules (I am assuming, just from what I am reading here) lets see if we can work through this.
OK your Bull Put part of the trade should be very profitable, wait till tomorrow when volatility should start coming down and buy the spread back. You do not want to risk the last three weeks with an open position that only has a few cents more of gain left in it. You can just close the short position, the sold 45, and leave the long put alone. Why spend commission on something that is worth almost nothing and could go up if the stock falters in the next 3 weeks?
The Bear Call portion is a complete loss right now. Wait for some volatility to reduce and see where your position lies. One of my rules for trading credit spreads also applies to IC’s get out when it breaks a support/resistance line. As for an adjustment, the next month out offers very little in relief, maybe .40 and you would have to hold for 60 more days for a resistance point of 60. You can get a better credit if you adjusted to the July 55/60 spread but you might be in the same position you are in now if the stock continues some upward momentum, 55 is awfully close even though it is the next resistance line for holding a position for 60 days. The current months adjustment would not be worth it, you need some time to make up for your loss.
So what would I do now if I was stuck in this position? Buy back my 45 put for the profitable trade. Hold my Bear Call position for the next couple of days to see what the stock and volatility are going to do, but get out at the first opportune moment. Do not wait any longer than you have to. If the stock drops and tests the support now at 50 get out, do not worry about if it will break the support thinking maybe it will, just get out. Your trade did not go like you planned you need to exit when you can which is if the stock drops or volatility drops so that you limit your loss. If you are lucky…very lucky…the stock will drop back below 50 tomorrow.
Dan, I found your blog from Technorati. An interesting blog and we share lot of common interests as I am also mostly an income trader. I am looking forward to reading your blogposts.
Profitable trading,
OptionPundit
What if i am going to keep buying more positions at 50/55 spread when only stock price upside if down just do nothing untill expire day?
Then i may reduce risk and losses.
What do you think Dr.dan
Maybe i can apply this concepe to the future credit spread trading.
Do you think its good or bad idea?
Please give any comment.
[...] I described in one of my last posts Credit Spreads, Iron Condors, Butterflys and Diagonal Spreads how I make money using options. However there are other opinions out there and definitely many more techniques. [...]
Dr. Dan
What do we going to do with X in this case ?
Just hold on till exp? or close the position with lose? or any adustment?
thank you