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Steven Place

How to Earn 30% In A Year In A Low Yield Market

By Steven Place, InvestingWithOptions.com


Even with the recent rally in bond yields, the 30 year US Treasury sits at 3%.

That means for every $10,000 you invest, you get back a whopping 300 bucks.

In a year.

Seems pretty disappointing, doesn’t it?

This low-yield market has left investors searching for something...anything that will generate sustainable income.

This has left some to head to the riskier parts of the market.

Remember how Oil MLP’s were all the rage a few years back?

And then crashed?

Too much money chasing the same assets looking for a better return.

What if I could show you a way to earn consistent monthly income that could earn you 10 times over what the 30 year treasury could get you?

30% a year, without a ton of risk… not a bad idea, right?

See, this is a spot in the market normally reserved for sophisticated traders, but because these markets have lower liquidity, you can’t have institutions jam capital and lose the edge in the trade.

Our profitable edge comes from a term called consistent risk premium. It’s been around a long time and I expect it to continue as well.

Where the Edge Comes From

It’s pretty simple.

Behind the fancy suit and tie, humans are still panicky little apes.

And because investors are always scared about something just around the corner, they hedge using the options market.

And that leaves us with something called “volatility risk premium.”

There’s a few different strategies to capture this profit, but my favorite is an iron condor.

Here are the results we’ve had this year with iron condor trading:

We’re currently up 28% with a month to go in the year, so our target of 30% should be hit by the time 2017 rolls around.

What is An Iron Condor?

An iron condor is a strategy that allows you to earn consistent monthly income without needing to guess which way the market is heading.

It’s a combination of two credit spreads and it looks like this:

As long as the market remains range bound, this trade will end up with an easy profit.

This strategy allows you to beat the market without timing the market. You don’t have to stare at charts for 6 hours a day, and you certainly don’t need to watch any financial TV.

You can simply collect your paycheck, month after month.

Yet… there is a catch.

How To Completely Blow Out Your Account

With many clients I’ve seen the same thing.

A trader will have some initial success with iron condors, and start to get a little cocky.

And then all of a sudden.

The big one hits.

Where you see a larger move than what you were prepared for.

All of a sudden, your profits are wiped out by one bad trade gone wrong.

Because unlike what some gurus teach, iron condors are not “set and forget” strategies.

You have to be on your toes to make sure your risk doesn’t get too big.

How to Optimize Your Iron Condor Trades

Here are three tips to help you avoid costly mistakes with your iron condor trading.

1. Respect the True Risk of Iron Condors

You’d think that a massive selloff would be the costliest event to happen to your iron condor trades.

But it’s not.

It’s the upside risk.

There’s a thing called option skew… basically it means that the option premiums are higher on the put side than the call side.

Because of this, the premium you sell on the puts will be much further away from the price of the market.

What does that really mean?

Iron condors start off net short.

It’s better to initiate iron condors after market rallies, not selloffs. That little entry trick will cut a lot of your near term risk.

2. Exit Before It’s Too Late

If you’ve been around the options market, I’m sure you’ve heard about theta.

This is an option Greek that causes the value of an option to decay over time.

Now this is where people get tripped up so pay attention…

This is a chart that many option traders view as gospel.

It shows the exponential time decay of an option position.

That the majority of the theta comes during the last month of an option’s life.

Because iron condors profit from theta, we should want to hold it as long as possible, right?

Not so fast!

This chart is for options that are at the money.

Iron condors sell options that are out of the money.

What this means is that the majority of the decay for an out of the money option will happen between the 60 and 30 to expiration.

After that, the premium becomes “sticky.”

So the trading tip here is to try not to hold an iron condor all the way to expiration. Take your profits and redeploy capital to a new iron condor-- it’s better rewards relative to the risk you’re taking.

3. Aggressively Hedge Your Position

In battle, one of the worst things you can do is lose the high ground.

It compromises your position and makes you an easy target for your enemies.

The same thing can happen with an iron condor trade.

You get a few days of movement in a single direction, and all of a sudden you’re stuck in a bad place praying for some kind of a reversal.

It’s better to have a plan to cut risk before it gets too bad to make sure you keep the high ground.

What’s even better…

If you aggressively hedge, many times you can take the hedge off for profits and use that to pay for the cost of adjusting the trade.

With iron condor trading, all it takes to win is to not lose big. Using these three tips in your trading will help to remove those costly mistakes so you can continue to generate income during the normal times.

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ABOUT THE AUTHOR

Steven Place

Steven Place is the founder and head trader at Investing With Options. He has spent a decade deep in the options market, designing profitable trading systems for himself and his clients.