Consistently Profitable Option Strategy with Steady Income?

Dear Mark,

In your experience in trading iron condors, is there a simple and "safe
strategy" for steady income out there, which if used over and over will
result in a outperformace on the index ?

Just curious as getting into
this world now (have been in stocks and futures for 15 yrs).



As an experienced investor I think you know the answer. In my experience the answer is NO.

Iron condors, as a strategy, are easy to understand.
You can increase safety so that some trades are 'safer' than others.

But 'safe'? No. There is always risk of loss.

If the ideal you seek were truly available, every investor in the
world would be using that strategy – and the profits would be tiny
(because there are people who would be willing to make these trades for
5% per year. And that would drive prices lower and lower).

There are strategies that outperform the index. But these are not
'safe.' They are 'safer.' Covered call writing is such an example. Read
about the CBOE BuyWrite Index, BXM).

Covered calls have less risk than owning the index. But nothing is completely safe.

Collars guarantee limited losses – so from that perspective, they
are safe. But monthly income is not guaranteed. In bear markets, losses
may be small, but there will surely be no income.

Options improve your chances of earning a profit – but there are no guarantees.


11 Responses to Consistently Profitable Option Strategy with Steady Income?

  1. Steve 01/23/2010 at 12:27 PM #

    You tweeted yesterday, “The bid/ask spreads are absurd,”
    Could you explain what you think is a normal spread and what was absurd about yesterday’s bid/ask?
    It would seem a wide bid/ask spread would be normal on a day like yesterday since volatility rose all session long except during the lunch hour where it receded temporarily.

  2. Mark Wolfinger 01/23/2010 at 3:04 PM #

    My opinions are not shared by the majority on this issue
    1) There are rules for how wide the bid ask spread can be.
    2) When I was a MM, when the bid was less than $2, the maximum width was $0.25
    When the bid was less tan $10, the maximum was $0.50.
    3) Yesterday, far OTM RUT Apr options with a 10 delta had a spread that was 60 to seventy cents wide. I do not believe $4 bid; $4.60 offered is a fair, honorable, or ethical market.
    I am virtually alone in my opinion.
    4) Some years ago MMs were given permission to have double-wide or even triple-wide markets under certain conditions.
    5) I don’t know the current rules. I don;t know if those extra-wide markets are still allowed. I know nothing. But I still believe it is horrible to allow those wide markets.
    6) On the other hand, the response to a complaint such as mine should be: “If you don’t like it, buy a membership and come here and make all the tight markets you want to make.”
    7) In my opinion, an option with a low delta does not threaten the MM with big risk. Not does he/she have to sell 500 at one time. There are decent ways to hedge their trades, and thus, there is no need for markets that are so wide.
    On the other hand, the members own the exchange (bot not much longer), they make the rules, the SEC does not prohibit the practice. Why should they voluntarily sacrifice some of their income to accommodate the individual investor. They have nothing to gain.
    Professional traders know the screen market is never the real market, but too many people pay offers and sell bids – another reason for MMs to keep markets wide. ‘Don’t offer a discount until they ask for it.’
    8) You are used to seeing markets widen when the markets are volatile. Just because it’s allowed by the rules – and I’m not sure that it is allowed – does not mean it fair, decent, ethical or humane.

  3. NK 01/23/2010 at 5:58 PM #

    Hi Mark,
    I’ve been thinking about the equivalence of some option strategies, and how to determine which position would be better.
    Take for instance a put debit spread:
    Buy XYZ Jan 60 Put
    Sell XYZ Jan 50 Put
    and a call credit spread:
    Buy XYZ Jan 60 Call
    Sell XYZ Jan 50 Call
    If both the above has the same profit & loss potential, how do you evaluate which is the better position?
    With the debit spread, time decay would chip away at it, while the credit spread would increase in value.

  4. Mark Wolfinger 01/23/2010 at 9:19 PM #

    Complete reply in a Sunday post.
    Short answer. Neither is better. They are equivalent

  5. John Doe 01/24/2010 at 1:48 AM #

    Only exception would be the credit spread could offset a margin balance, resulting in less or no margin interest expense. Hence, the only difference should be TVM (time value of money) – lending vs. borrowing.

  6. Bram 01/24/2010 at 5:33 AM #

    What I am missing here is how big the market was in IV terms. Depending on maturity and (out-of-the-)moneyness of the option a wide market in dollars doesn’t have to be too wide in vol terms. To a large extent I can agree with what you are saying, but the large bid/ask is most likely not coming from deltas being a problem but uncertainty about implied volatility at the strike level. Knowing how wide that implied vol bid/ask is tells me more about how rediculous a quote is or isn’t.

  7. Mark Wolfinger 01/24/2010 at 8:16 AM #

    Yes, TVM is the difference. As long as it’s larger than extra trading expenses.

  8. Mark Wolfinger 01/24/2010 at 8:31 AM #

    Hi Bram,
    One of the options I was trying to trade (part of an iron condor – and yes, I did enter the trade as a single 4-way spread) – was $0.90 bid and $2.00 ask.
    This was an April (almost 3-month option) put about 100-points OTM on an index (RUT) priced near 620.
    That’s obscene by my definition.
    I prefer to take the MMs side, when possible. I believe they get accused of far too much by customers who don’t understand the game.
    But I cannot defend a market that gives a customer no chance to make a profit. Obviously this FOTM put option is not a day trader’s choice, but the customer who does not know that he/she is not forced to sell the bid nor pay the offer (OK, this person should not yet be trading options) is treated mercilessly.
    Do you think this specific quote was reasonable?

  9. Dave 01/24/2010 at 10:52 AM #

    Dear Mark,
    Thank you for your informative posts, and your effort to share knowledge. Complete novice question, Sir: What is the following double-spread called? Selling one OTM put, buying two further OTM puts, selling one still further OTM put. This would appear low-risk, but would this be a net credit spread? In this case, when does it work?

  10. Mark Wolfinger 01/24/2010 at 12:19 PM #

    I’m confused as to why this message appears to come from ‘Dave’ but it doesn’t matter.
    It is a condor. Or a butterfly. Depending on the exact meaning of your words. In either case, you are selling the spread.
    Example of selling a condor:
    Sell 1 RGTO Nov 50 put
    Buy 1 RGTO Nov 55 put
    Buy 1 RGTO Nov 60 put
    Sell 1 RGTO Nov 65 put
    Example of selling a butterfly.
    Sell 1 RGTO Nov 50 put
    Buy 2 RGTO Nov 55 put
    Sell 1 RGTO Nov 60 put
    These are a net credit spreads.
    This position makes money when all four (or three) options expire worthless, or all 4 are ITM at expiration. You keep the credit as your profit.
    If the settlement price of RGTO is between the wings (high and low strikes), the spread is worth more than zero and you must pay something to exit.
    Max value is $500 and that occurs when settlement is:
    a) between the middle strikes of the condor
    b) exactly at the middle strike on the butterfly.

  11. bram 01/25/2010 at 12:04 AM #

    No I agree with you on that one, 0.90-2.00 is absurdly wide