Iron Condor

The relative strength indicator is one of the most commonly used technical analysis tools available. Unfortunately it is also one of the most misused. The RSI was a tool developed by famed market technician Welles Wilder during the 1970’s as a way to determine whether a market was overbought or oversold. The formula is rather simple with the average number of up closing days divided by the average number of down closing days. So this indicator essentially measures the size of a stock’s closing gains and compares it with the size of a stock’s closing losses.

According to Larry Connors over at TradingMarkets.com who back tested this indicator from 1995-2006 in over seven millions trades there is no statistically significant edge using a 14 period RSI, which is generally the default setting for this indicator. However when used on a 2 period setting he found that it becomes a very effective tool in one’s technical analysis arsenal. Using the 2 period RSI we define overbought as a reading over 90 and oversold as any reading below 10.

What Connors found was that a stock with a reading of 90 underperformed the benchmark index one week later, and a stock with a reading of 10 outperformed the index by an average of .50%. Furthermore he found that as readings became more overbought or oversold the amount that a stock moved was more substantial. For example if a stock had an RSI reading of 1 or below then within a week the stock averaged a 1% gain over the benchmark index, and if a stock had a reading of 99 or more the stock averaged a loss of -.31% compared to the index.

If you’d like to find out more about technical analysis, stock and options trading then please click on the link in resource box below.

In 1897 Vilfredo Pareto, an Italian Economist wanted to figure out why wealth was so unequally distributed throughout the world. What was it, he wondered, that the rich knew that the poor didn’t? While at the time it seemed self-evident that the majority of the world’s wealth was concentrated in the hands of the few, what wasn’t obvious was the extent of the inequality of distribution and thus the 80/20 rule was born.

Simply put this rule stipulates that in any given time in any given place that approximately 80 percent of the wealth is controlled by 20 percent of the people. While the exact percentages will fluctuate, sometimes it’s 90/10, 75/25, or 60/40 the point is that in all cases the distribution of wealth is skewed to an elite minority. Even more surprising is the fact that more than 100 years later the rule is as relevant today as it was when Pareto came up with it. In fact the 80/20 rule or Pareto theory as it’s come to be known has revolutionized the way we think not only about wealth, but the world in general as it has become applicable to so many facets of life.

For instance when applying it to business we find that 20 percent of a company’s products are responsible for 80 percent of its profits. Likewise 20 percent of customers will provide 80 percent of a company’s revenues. Twenty percent of criminals are responsible for 80 percent of the value of crimes committed. With regard to driving 20 percent drivers are responsible for 80 percent of the accidents.

If you think about life we will spend approximately a one-third of our lives sleeping, one-third of our lives working and the rest of the time trying to have a life. So again the smallest portion of our life is responsible for our greatest amount of joy. So in any given situation the question to ask yourself is what is the 80 percent and what is the 20 percent. In other words if you want to be happy ask yourself what is the 20 percent activity that will account for 80 percent of your happiness. If you want to be wealthy ask yourself what is it that the 20 percent do differently that allows them to control 80 percent of the wealth. If you want your business to be more profitable ask yourself what is the 20 percent that is accounting for 80 percent of your profits and focus in on that.

If you are like most people, in these times of economic uncertainty you are looking for a way to earn extra money, that doesn’t take a lot of time, preferably from home and that doesn’t require a lot of capital to get started. If you fall into this category then options trading might be just what you are looking for. Although trading is a simple business to get started in, it is far from easy and be wary of anybody who tells you differently. Also you may have heard that trading options is risky, and while nothing in life is risk free, there are ways to substantially reduce the risk.

How much money do I need to start?

One of the beautiful things about options trading is it’s one of the few businesses that you can take for a free test drive to see if you can be successful at it. By trading in a simulator you can start your business with no money. Obviously you won’t be earning anything either, but you will be gaining valuable knowledge. You can find a simulator at CBOE.com. After you’ve traded in the simulator for a few months and become consistently profitable you can start with as little as $2,000.

Finding a broker

The first step in getting started in an options business is finding a broker. There are many (excuse the pun) options available, a few of the good ones include, OptionsXpress, TradeStation and Interactive Brokers. These are all members of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which are two organizations that protect you against fraud from financial brokers.

Putting the Odds in your favor

While this isn’t a comprehensive list there are a few things that you can do to stack the odds in your favor when dealing in stock options. First of all rather than buying puts and calls you can use credit spreads. This method of selling a higher priced option and purchasing a lower priced option alone will stack the odds enormously in your favor simply because this method can allow you to make money whether the markets go up, down or sideways. As a matter of fact using this method can allow you to win as much as 80-90% of the time, which is why professional traders use this type of trade to generate consistent income. The next thing you want to do is a bit of technical analysis and look at the S&P stock index. If the index is moving above it’s 200 day moving average you generally want to be purchasing stocks or using bull put credit spreads. If the index is moving below it’s 200 day moving average you should short sell stocks or use bear call spreads. How much can I earn? This can fluctuate depending on market conditions but by using credit spreads you can make anywhere from 5-20% a month. So with $10,000 you can generate anywhere from $500-$2000 in extra income a month.

Reducing Your Risk

1.Start off by trading in a simulator at CBOE.com

2.Always use a stop loss or have your positions hedged.

3.Never trade with money that you need to pay for you day to day expenses with such as rent and bills. Nervous money always loses.

If you’d like to find out more about options trading and credit spreads click on the link in the resource box below and sign up for a free 10 part course.

These days everybody wants to know how to make the money back that they lost in the stock market. Clearly the answer isn’t to trust a financial adviser because they are likely the person who lost your money to begin with. Seventy-percent of mutual funds under perform the S&P 500 and over the last two years most of them are down double digits. So you may have considered learning to invest your money on your own. Surely you couldn’t do any worse than the so called expert advice that you’ve already received you think to yourself. Amidst all the doom and gloom it’s easy to forget that there are a handful of savvy people who make money in the markets whether they are going up, down or sideways.

The Power of Compounding

The first thing you need to understand is how the stock markets can make you rich and why your job, unless you are the CEO, or have lots of stock options, almost certainly never will. Einstein called compounding the eight wonder of the world. Everybody has heard this riddle. Which one would you rather have $10,000 or a penny that doubled everyday for thirty days? Most people choose the $10,000 never stopping to do the math on the doubling penny. Because for the first twenty days the growth is slow and you only have just over $5,000, but by the end of the thirtieth day you have just over $5,000,000 and that is the power of compounding. So unless you are getting some very large pay raises the chances are that you’re pay check grows linearly, while your earnings in the stock market, if you are doing it correctly can grow exponentially.

Find the Trend

One of the most important lessons to know about the stock market is to not trade against the trend. The question is how to determine the trend. One of the simplest ways is to use a 200 day moving average (DMA) . If the market is trading above the 200 DMA the market is in an uptrend, if it’s below the market is in a downtrend. So you first want to find the overall trend of the S&P. If it is in an uptrend you want to look for stocks that are also in an uptrend to purchase. If the S&P is in a downtrend you want to look for stocks that are in a downtrend to short sell.

Buy Strong Stocks, Sell Weak Stocks

Obviously you want to buy strong stocks in an uptrend, and short sell weak stocks in a downtrend. The question is how do you determine if the stock is weak or strong. One of the easiest ways is to go to the Investors Business Daily website and use their stock grader. When you type in a ticker symbol the site will give you a letter grade from A-E. You want to buy stocks that are a B+ or above and short sell stocks that are a C+ or lower.

Buy Stocks When They Drop, Short Sell Stocks When They Rally

Most times even a strong stock that is an uptrend will pull back and take a breather, likewise a weak stock in a downtrend will usually have a few days when it rallies. This is when you want to enter the stock at either a support or resistance level. You can find some handy tools at a website called Trading Markets that will help you to determine when to enter a stock. Putting it All Together So how does one make money in the stock markets? 1. Determine the trend of the S&P index 2. If the stock market is in an uptrend buy stocks, if it’s in a downtrend short sell stocks 3. If you are buying stocks, buy the strong ones with a grade of B+ or better. If you are short selling, sell weak stocks with a grade of C+ or lower. 4. Buy weak stocks on a pullback, short sell weak stocks on a rally.

Making Money in Sideways Markets

So the only question left is how does one make money in sideways markets? Well the simplest answer is to use options. Most people think that options are very risky and complex, but the truth is that if you don’t know how to use options you are ignoring one of the most useful tools there is in the financial markets. By using a combination of easy to learn trading techniques such as covered call writing, credit spreads and iron condors it is easy to make money whether the markets go up, down or sideways. If you want to find out more about how to make money in the stock markets, credit spreads, iron condors, or covered calls, please click on the link below.

Paper trading using one of the many virtual trading systems provided by option brokers, and now CBOE, is so important if you have never traded options. This is especially important trading credit spreads, like Bull Puts and Bear Calls and ultimately Iron Condors. These are special strategy trades that must that must be fully understood before trading with your own funds. You must practice entering, closing and adjusting Bull Put and Bear Call spread trades. You must fully understand an Iron Condor trade and the requirements for making sure your broker only applies margin to one side of this 4 legged trade. And most important you must practice closing these spreads and rolling to new spreads when trades go against you.
I paper traded for six months using OptionsXpress’s virtual trading system before using my own funds. This is the system now used by CBOE so new traders no longer need to apply for a brokerage account to paper trade using a virtual account.
To get started you should establish a virtual trading account with your broker or just use CBOE’s free system. You must practice all types of credit spread trades like:
1. Entering new trades using the current bid.
2. Entering new trades using limits that are higher than the bids, like one half of the bid/ask or midpoint. Then shave 5-10 cents off this midpoint.
3. Enter stop loss orders to close profitable spread trades for 10 cents or less freeing up margin for new trades.
4. Practice adjusting Bull Put and Bear Call credit spreads. You should close and roll to new credit spread trades to collect another credit. This is the most important one to practice and master before committing your own funds.
The 4 types of trades above should be practiced many times over for a period of 2 to 3 months. Never enter into one of these specialty options trades using your own funds until you completely understand all the risks. You must have an exit plan and know exactly what to do when a trade goes against you.
Once of the huge advantages you have with option spreads is that you can break even when a spread trade has to be closed. This is accomplished by adjusting, or rolling, to a new spread trade to collect a new credit. Sometimes this new credit offsets, or exceeds, the debit you incurred closing your original spread. This is a key risk management procedure that you can master paper trading. Once you complete a few of these rolling trades you will really get excited about trading credit spreads and be able to protect your monthly cash flow so that you are always adding net credits to your account.

Using Iron Condors, an investor can generate a solid monthly income and can achieve 10% returns every month, consistently. If you’re tired of whipsaws and drawdowns in your trading account, learn more about iron condor options strategies. The unique and powerful ability of iron condors is that they enable you to make money no matter which way the market goes.

Description of an Iron Condor

An iron condor is a type of options spread trade that involves simultaneously buying and selling multiple contracts in order to capture a particular segment of future market movement.

The iron condor is a neutral strategy that is a combination of a two different options strategies: a bull put spread and bear call spread. A bull put spread strategy is when an investor sells a higher striking option and buys a lower striking option on the same stock with the same expiration date. A bear call spread strategy is when the investor buys call options of a certain strike price and sells the same number of call options of lower strike price on the same stock expiring within the same month.

There should always be an even number of options traded, in multiples of four, so that the trade is always weighted equally with no downside or upside bias. This strategy is non-directional because it works independently of market movement, meaning it does not matter whether the market goes up or down.

Benefits of Iron Condors

The great thing about the iron condor trading strategy is that it is a neutral strategy, which gives you the upper hand. Trading options with iron condors can be a risky and costly trade, but there are several advantages that you will find with no other method.

As mentioned, this is a neutral strategy allowing an investor to make a profit within a large region by balancing both kinds of spreads. One of the biggest advantages to this volatility trading is the limitation of losses you will face. Losses are limited if the stock goes against you in one way or another.

Trading Iron condors can be fairly easy and fast using the Condor Options strategy. An investor can make money with as little as ten minutes per week. In addition, each investor can choose how they handle the risk and volatility. A conservative investor can sell fewer options and invest the returns in a high yield bond. An aggressive investor can sell up to 10 iron condors a week and reinvest the returns with expert advice.

There are many different strategies and investments to choose from within the stock market. Trading options with iron condors has several advantages that can potentially give an investor the upper hand in the stock market and manage the inherent volatility to their maximum benefit.

The description of an iron condor is simple, it is a way an investor can generate a solid monthly income and achieve 10% returns every month, consistently. Trading options with iron condors has several advantages that can potentially give you the upper hand in the stock market.