MODULE 1 – IRON CONDORS www.optionstradingiq.com © Copyright 2017. Options Trading IQ. All Rights reserved.

DISCLAIMER Any information contained in this presentation is for educational purposes only. Neither IQ Financial Services, LLC or Gavin McMaster are licensed financial advisors, registered investment advisors, or registered broker dealers. Neither do they provide investment advice, financial advice or make investment recommendations and they are not in the business of transacting trades. Nothing in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer to buy or sell by IQ Financial Services, LLC or Gavin McMaster of any particular security, transaction or investment. Any trades and / or results covered in this presentation may or may not be live trades. All trades and trading results are believed to be accurately presented. However, since the trades may not have been executed in the market, the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commissions. Therefore there can be no guarantee of accuracy or completeness. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. The risk of loss in trading securities and options in particular can be substantial. Customers must consider all relevant risk factors, including their own personal financial circumstances, before making any financial transaction. Options involve risk and are not suitable for all investors. See the Options Disclosure Document: Characteristics and Risks of Standardized Options, available from www.optionstradingiq.com/risks © Copyright 2017. Options Trading IQ. All Rights reserved.

OUTLINE Iron Condor Theory Iron Condor Trading Plan How to Choose Strike Prices Protection From a Flash Crash Live Trade Set Up With IB 3 © Copyright 2017. Options Trading IQ. All Rights reserved. 3

WHAT IS AN IRON CONDOR? *Please note that the prices and other statistics on the table below are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity, slippage and commissions 4 © Copyright 2017. Options Trading IQ. All Rights reserved. 4

PROBABILITY 5 © Copyright 2017. Options Trading IQ. All Rights reserved. 5

USING PROBABILITY 6 © Copyright 2017. Options Trading IQ. All Rights reserved. 6

WHAT IS AN IRON CONDOR? 7 © Copyright 2017. Options Trading IQ. All Rights reserved. 7

WHY TRADE IRON CONDORS? Consistent Monthly Income High Probability Easy To Manage Avoids Overtrading Non-Directional Short Vega 8 © Copyright 2017. Options Trading IQ. All Rights reserved. 8

IRON CONDOR PLAN © Copyright 2017. Options Trading IQ. All Rights reserved. © Copyright 2017. Options Trading IQ. All Rights reserved. 9

IRON CONDOR PLAN © Copyright 2017. Options Trading IQ. All Rights reserved. © Copyright 2017. Options Trading IQ. All Rights reserved. 10

SELECTING IRON CONDOR STRIKES When selecting iron condor strikes there are 3 main considerations: Where to place the short strikes How wide to enter the spreads (10 points, 20 points etc.) Which expiry month to choose 11 © Copyright 2017. Options Trading IQ. All Rights reserved. 11

SHORT STRIKES There are 3 main ways to choose the short strikes: Use delta. I.e. Sell 10 delta or 15 delta Use standard deviation. i.e. sell strikes 1 or 2 standard deviations away from the current price Use technical analysis Using a combination of all three makes sense, but you also don’t want to overcomplicate things. Some traders will just sell 15 delta iron condors no matter what. There is nothing wrong with that. 12 © Copyright 2017. Options Trading IQ. All Rights reserved. 12

SHORT STRIKE DELTA Using delta is the most common method for choosing iron condor strikes. Here we have a fairly standard iron condor set up. The short puts are at delta 10 and the short calls are at delta 8. Notice that even though the calls have a lower delta, the position still has negative overall delta. This is because of volatility skew. Don’t worry we’ll go over this in more detail shortly. 13 © Copyright 2017. Options Trading IQ. All Rights reserved. 13

SHORT STRIKE DELTA This is what the payoff diagram looks like. The trade is risking $8,500 for a potential gain of $1,500. 14 © Copyright 2017. Options Trading IQ. All Rights reserved. 14

SHORT STRIKE DELTA What if we take a different approach and sell roughly 20 delta strikes? We get a slightly different looking trade. The Greeks aren’t too different, Vega is a bit higher and so is Theta. The Risk / Reward of the trade and management of the trade will be quite different. 15 © Copyright 2017. Options Trading IQ. All Rights reserved. 15

SHORT STRIKE DELTA Here you can see the trade is risking $7,000 for a potential gain of $3,000. Some traders may prefer this style of trading while others may prefer the 10 Delta condor. There is no right or wrong style, try and few different ideas and see what works for you. 16 © Copyright 2017. Options Trading IQ. All Rights reserved. 16

PRO TIP Starting an iron condor with negative Delta can be a good idea. The negative Delta helps to offset the negative Vega. If there is a sharp selloff = Bad for short Vega, but good for short Delta. If you start with positive Delta, a selloff will impact the position badly in terms of both Delta and Vega. 17 © Copyright 2017. Options Trading IQ. All Rights reserved. 17

PRO TIP #2 Unbalanced iron condors can be a good way to trade a trending market. For example in recent years the market has been rallying pretty hard and some traders have been burnt on the call side. Trading less calls than puts can help prevent this. Check it out and see what you think. 18 © Copyright 2017. Options Trading IQ. All Rights reserved. 18

PRO TIP #2 This is what the payoff diagram looks like. You could also sell less put spreads if we enter a bear market. 19 © Copyright 2017. Options Trading IQ. All Rights reserved. 19

STANDARD DEVIATION Some traders like to set their short strikes based on a standard deviation move. For example, using our Standard Deviation calculator we input the parameters for RUT. Current price = 1245, Implied Volatility = 18.67% and Expiry Date is November 17th. 20 © Copyright 2017. Options Trading IQ. All Rights reserved. 20

STANDARD DEVIATION We can see that a 1 Standard Deviation move would be 80.70 points up or down. So placing the short strikes around 1325 and 1165 gives a roughly 68.2% chance of a successful trade. Note: Delta can also be used as a rough guide to probability. Note: A 2 Standard Deviation move is just 80.70 x 2 = 161.40 21 © Copyright 2017. Options Trading IQ. All Rights reserved. 21

TECHNICAL ANALYSIS Some traders also like to use technical analysis when choosing strikes. Looking at the chart below, there is support at 1205 and 1190 so placing the short put below those levels gives some level of comfort. The 200 day moving average is also at 1175. © Copyright 2017. Options Trading IQ. All Rights reserved. 22

HOW WIDE? How wide to set the strikes depends on the instrument being traded. RUT might be 10 or 20 points wide, whereas SPX might be 25 points wide. For RUT, 20 point wide spreads means you are trading half as many contracts. This might be advantageous if commissions costs are a big factor. 10 points wide or 20 points wide will perform fairly similarly. However, when the trade gets close to expiry, the bought options being 20 points away will provide less protection if the stock or index starts moving close to your short strike. 23 © Copyright 2017. Options Trading IQ. All Rights reserved. 23

HOW MANY DAYS TO EXPIRY? The most common type of iron condor is a monthly trade. i.e. around 30 days to expiry. Some people prefer to trade 60 day condors and some people swear by weekly condors. The main thing you need to know is that shorter term trades will fluctuate more quickly and will require more trade management. With longer term trades, traders do no need to react as quickly. 24 © Copyright 2017. Options Trading IQ. All Rights reserved. 24

WEEKLY CONDOR Ratios Look Good, Right? 25 © Copyright 2017. Options Trading IQ. All Rights reserved. 25

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MONTHLY CONDOR Look at the Ratios Notice the Gamma? 27 © Copyright 2017. Options Trading IQ. All Rights reserved. 27

WEEKLY V MONTHLY CONDORS You Do Not Need To React As Quickly With Monthly Condors Ratios on Weekly’s Can Be Deceiving Can Be a Bit More Flexible With Longer Term Trades 28 © Copyright 2017. Options Trading IQ. All Rights reserved. 28

80 DAY CONDOR Different Strokes For Different Folks Ratio Guidelines Will Be Significantly Different Longer Term = Much Higher Vega, Much Lower Theta 29 © Copyright 2017. Options Trading IQ. All Rights reserved. 29

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Delta Is Basically Flat, But It’s 25% of Theta 80 DAY CONDOR Delta Is Basically Flat, But It’s 25% of Theta Vega / Theta Is 10x 31 © Copyright 2017. Options Trading IQ. All Rights reserved. 31

PRO TIP #3 The further out in time you go, the slower the trade will progress. In other words, a 4-5% move in the underlying might see traders needing to adjust a monthly iron condor, but an 80-90 day condor may still be ok. Weekly condors move very, very quickly and leave very little chance for adjustment. 32 © Copyright 2017. Options Trading IQ. All Rights reserved. 32

ROOKIE MISTAKE While entering an iron condor after a sharp selloff might seem like a good idea (due to the volatility spike), many times I have seen this lead to losing trades. In recent years we have seen many V shaped bottoms with sharp rallies after some panic selling. If a trader was to enter an iron condor at the bottom of the market, the call spreads would quickly come under pressure during a sharp reversal rally. 33 © Copyright 2017. Options Trading IQ. All Rights reserved. 33

PROTECTING FROM A FLASH CRASH There is no fail safe way to protect against a Flash Crash. However, buying some deep out-of-the-money puts can provide some protection. It won’t prevent losses, but it can help stem the tide until things settle down. Typically traders will purchase a put around Delta 2 to 4 and pay no more than about $2 per contract. 34 © Copyright 2017. Options Trading IQ. All Rights reserved. 34

PROTECTING FROM A FLASH CRASH 35 © Copyright 2017. Options Trading IQ. All Rights reserved. 35

IRON CONDORS 36 © Copyright 2017. Options Trading IQ. All Rights reserved. 36

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