One of the most popular income options strategy is known as the high probability iron condor, which consists of  a call side credit spread and a put side credit spread “facing each other” very far out of the money. For example, on January 19, 2011, at about 10:30 in the morning, the RUT Index was trading at 798. An options trader could have sold a ten lot   March 700-690 put credit spread for 1.00 (selling the 700 puts for 6.40 and buying the 690  puts for 5.40) and simultaneously sold a March 890-900 call credit spread for .50 (selling the 890 calls for 1.60 and buying the 900 calls for 1.10). Excluding commissions, the total spread would have yielded a credit of 1.50 times 1000 options contracts, or a total credit of $1,500 less commissions and exchange fees.

Theoretically, if the RUT index opens  between 700 and 890 on the Friday of  March expiration week, the trader would pocket $1,500, less commissions and exchange fees. On the other, the  worst case scenario of this trade is for  the trader  to pull a Rip Van Winkle, fall asleep for the 59 days it would take for all of these options to expire and find that the RUT index had opened below 690 or above 900 on the Friday of March expiration week. In that case the trader would lose $10,000 less the original $1,500 credit that was received,  for a net loss of $8,500.

As options expirations day approaches, invariably the credit spread on one side of a condor or the other, or in very favorable months both sides, will shrink to 10% or less of its original value. That is because the short option on one or both sides of the trade is so far from the money with so little time left that the market demand for that short has  almost evaporated, dropping the value of that short option and the long protecting it to nearly nothing.

Let’s look at that  same condor today. As of this writing, both the call side and the  put side credit spreads have shrunk to 5 cents in value each, or $100 in total. In other words, the entire condor, for which we received $1,500 could be covered for a cost of $100, netting us a $1,400 gain less commissions and exchange fees.

During my early years of trading options for income, whenever any of my fellow options trainees found themselves in such a situation, my first options mentor and good friend, Dan Sheridan, would question why we were still in the trade as opposed to doing the sensible thing, which would be to close the credit spreads and apply our capital to other trades with appropriate risk-reward trade-offs. I remember one occasion on which my long time trading partner and close friend Anthony was challenged by Dan in just such a situation. He conjured up the following image: “Anthony, just pretend that you had to go in front of the Anthony Corporation Board of Directors and explain why you were still in this condor, when your only remaining upside is $100 while your downside is $8,500. What do you think they’d say?”

There comes a point in each income options trade when the REMAINING potential upside is so minimal that staying in the trade is foolish. Whenever you are in that situation, close your eyes, picture yourself stammering in front of  your own personal board of directors, then open your eyes, put the order in for a dime to close the condor, and move  on to your next ” good trade”.