Q: When you suggest placing a limit order so you get in at a good strike price on a butterfly, what is a good strike? I assume it means as close to the middle leg as possible. Am I correct?
A: You want a good fill price. I only do the trades when the stock is near a strike price. The limit order I send in is usually only slightly worse than the midpoint (mark) of the butterfly.
Q: I don’t have that butterfly entry functionality with my broker. Can I just enter each of the 3 legs individually and close them all out individually when ready?
A: You can usually put together some kind of “combo” order, but if not then you will simply need to do the Buying legs before the Selling legs. Otherwise your broker will think you are trying to sell naked calls and will most likely reject the order. When getting out you will have to close your sold positions first as well.
Q: What are the risks involved when you do an iron condor? Also, what do you need to be watching for in order to exit the trade before expiration date so that you don’t wind up buying any stock?
A: The risk in an iron condor would be the difference between the strikes minus the premium you received. So, if you took in a $1 credit for both sides and there was a $5 spread in your strike prices, you would have a $4 risk on the trade. To avoid buying any stock or having stock put to you, keep an eye on the time value of your sold options. If the time value is less than .10, keep a close watch on your position and consider closing it. I’ve only been exercised early a couple of times. Once was on a Thursday after a dividend had been paid out and I woke up to being short several hundred shares of stock – the call was exercised. The other time the stock had a dramatic drop and the time value was at 0 – I didn’t buy back the option and ended up with stock when the put was exercised.
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