Keith Fitz-Gerald

Lock in 'Iron'-Clad Profits with Condors

by Keith Fitz-Gerald   09/03/08

If you're like most traders, you've been told that the "holy grail" doesn't exist when it comes to trading. Not only do I not believe that, but I believe that you can find yours by the time you've finished reading this article.

New or inexperienced options traders typically buy options that are far out-of-the-money because they are attracted to the notion of limited risk and potentially unlimited returns. What they don't realize is that these options are cheap for a reason -- they rarely move enough to become profitable.

For instance, for a stock trading in the $20 range, the call option at the $25 strike might look attractive if it's trading for just a few cents. But there's a reason why it's selling for practically a song, especially if that $20 stock hasn't moved an inch in the past year.

What are the odds that this stock will move up five points during the lifespan of your options contract? If you're looking at a stock that's on the move and is well on its way to becoming the next Google (GOOG) or Apple (AAPL), then take the deal while you can get it. But if the answer is that the stock is probably not going to get up and go anywhere anytime soon, then you're better off throwing your money into a wishing well.

Ninety percent of all contracts held to expiration expire worthless because folks don't have a plan when they're looking for option plays to add to their portfolios. Don't be like "everyone else."

There's another way that offers an improved risk-to-reward scenario and improved odds of success. It's called the Iron Condor, and I consider it to be the holy grail of options trading.