Recently I have some mixed feelings about iron condors (IC), and hope to
benefit by sharing my thoughts here (and hopefully you have some input that
may enlighten me and others who trade IC).
While veterans like you have
mentioned that IC is not a free lunch, I think I have a way to put this
in context. Although IC adjustments are a must for long term success, I
believe these adjustments only make deferred losses (aka preventing an
If all the positions are closed immediately after
adjustments, then it results in an immediate loss. The
deferred losses pile up as more adjustments are made.
adjustments are made, then the IC trader hopes that the market will
treat him kindly so that theta decay is accumulated by enough to cover the
deferred loss, and hopefully have some left as profit.
But hope is
not a strategy, as you have said.
So my conclusions are:
- IC does not have a clear advantage compared to other strategies
- The only feature that makes IC look promising in hindsight is
the upfront collection of premium
Mark, I wonder you agree with my point of view.
1) I do agree with your point that IC do not have a clear advantage
But there is zero advantage to collecting cash upfront, unless that gives you a psychological boost. An equivalent strategy requires the payment of cash upfront, but the result is the same. If that cash is the main reason that you trade IC, I strongly suggest that you reconsider, and perhaps find a strategy that is better suited to your trading talents.
2) I don't believe any strategy has a 'clear advantage' over most other strategies. Some methods work better than others for a given trader because the trader is better equipped to manage the position
a) I believe the 'strategy' tells you which options to buy and sell as your ticket onto the playing field. You can play the 'options trading/investing' game with a variety of strategies
b) Once you open a position, you are on that playing field. At that time, risk management takes over as the vital factor that determines your eventual success (or not)
5) I don't know how you choose to adjust your IC positions, and that information is not important. But it's clear that whatever method you are using, it is not working for you
Here is what is important: AFTER you make the adjustment, do you believe you have a good position? (If the answer is not 'YES'! then you do not want to make this adjustment) Good being defined as:
a) You expect (not hope) to make money with the position as it is RIGHT NOW. Not compared with the original price you received when opening the trade.
b) If you have a market bias, then you anticipate a profit when that bias becomes reality. Neutrality is a market bias
c) If you don't believe the position will be profitable going forward, don't own it. That means don't adjust the original trade. Close the position
Adjusting a position is truly the same as opening a new trade. The major requirement is that the trade is suitable for you. The one advantage to adjustment is that you save a bit of money on commissions, but that should never be a factor. If commissions are too high, find another broker.
d) If you look at adjusting as deferring losses, then I don't believe you are making good trades. Adjustments can be profit centers – they are not only used to 'defer losses.'
Here's an excerpt from an earlier post:
line is that when you make a trade to adjust the position, it's going to
improve what you currently own. That's why it tends to be a money
maker going forward. No guarantee. But you had no guarantee when you
initiated the iron condor in the first place.'
e) My view on adjustments is this
i) The new position is good, meets your criteria for profit and loss potential and fits snugly (with room to spare) within your comfort zone
ii) If EACH of those characteristics is not present, then DO NOT ADJUST. DO not own this position. EXIT
iii) Sit on the sidelines or re-invest your money in a fresh position
iv) Adjustments are not made to defer losses. They are made to give you a good position. Not a reasonable position, not a position you 'don't mind' holding. NOPE. A good position.
v) You have a choice: Exit and open a new, good position. Or adjust. Why adjust if it's not something you WANT to be part of your portfolio? Why defer a loss and keep a bad trade? Don't do it.
6) Bottom Line: Don't think of it as an adjustment. Mentally think of it as a two-step process.
b) Re-open the adjusted trade
If you would not do b) after doing a), then don't adjust. If you don't want to own b), then don't own it.
I understand that you may feel this is too simplistic and that it does not truly provide the guidance you seek. The truth is that there is no 'best' answer. I suggest you do two things, both realistic:
1) Look for alternative adjustment methods
2) Adjust earlier, perhaps in stages
The second issue of Expiring Monthly is coming soon: Monday Apr 19, 2010