Debate: Trading Iron Condors is a Death Wish

Hi Mark, have you read this ET discussion about Iron Condor trades?

I found Maverick's post specially interesting (and clear :-)) I'd like to know your opinion about it.




I was a big fan of Maverick (the TV show, starring James Garner, that first aired in 1957). 



I had not seen the recent ET forum, but, I respect Maverick.  It is difficult to argue with his point of view.  Nevertheless, despite the soundness of his argument and the difficulty that traders encounter when using iron condors, I believe that managing risk makes all the difference.  I am attempting to do what he believes cannot be done:  Enter into a trade using a specific option strategy – without a mathematical edge.


Directional trader

I trade much the same way as a directional trader.  I open a position that wins when the market goes my way (nowhere) and make trade decisions – as necessary – to manage risk when the market moves.  Don't misunderstand me.  Trading with a theoretical edge is the best way to go.  However, it is commission intensive because these trades involve trying to make small sums from a large number of spreads.  I'm not willing to play that game.

My initial and adjustment trades sometimes may be made without any theoretical, mathematical edge, but it's the same for a stock trader who buys shares that the market considers to be fairly valued.  If the stock moves his way, the trader profits. 

I agree that making an adjustment is a 'different trade,' but argue that it's okay to add a second trade to the original.  I am not claiming, nor am I trying to profit, by trading a single golden strategy.  To earn a profit, risk management skills play a vital role.  More vital than trading without an original edge.  That feels right to me, even when the quants find my argument to be trivial.

Traditional investing involves trading stock, with adjustments.  Traders scale out of a trade as prices rise, locking in profits and reducing risk.  That's one form of 'adjusting.' 

Some add to a losing trade by purchasing more shares on a decline (many experts hate that plan), and that's adjusting.  The investor knows that this one way to manage risk.

Iron condors may be a losing strategy if the positions are blindly held through expiration every time.  Holding to the end is not part any rational trader's plan. We plan to make adjustments at some point.  We hope not to need the adjustment, but hoping solves nothing.

Here's how I see it. I cannot affect how the market moves.  Sometimes it's gentle and sometimes it's violent.  Often it's between the extremes.

I earn good money when lucky.  That means time passes, the market is gentle, and I exit the trade early.  I earn better than 10% per month on these trades.

When I get unlucky and the market is violent – and by that I am referring to a huge overnight gap – then I lose.  There is nothing to be done except manage the losing trade efficiently.  If I own insurance, I may not lose very much, or I may earn a profit.  But let's assume there is no insurance.

We seldom get an overnight move that destroys a position.  When the markets are volatile, there is almost always time to act.  And worst case scenario – when  a downside disaster occurs, IV is so high that any ITM put spread can be repurchased at a price that is nowhere near the maximum value of $10.  Of course, the bid/ask spreads would be horribly wide in this scenario, but the patient (not panicked) trader can get trades made at reasonable prices.  To be in that non-panicked mode, it means the trader's position sized properly and a non-devastating loss has taken place.

Traders may lose 100 to 150% (i.e., $300 to $450 after collecting $300 for the original trade) when there is a gigantic move.  I have't encountered this situation during the years I've been trading iron condors.  The last such move occurred after 9/11 in 2001.  The May 6 'flash crash' of 2010 was an outlier not because of the big move, but because it was impossible to trade – unless you had entered orders earlier.

In 2008 the volatility did not occur as an overnight move, and there was time to act.

When markets are more volatile than I want them to be, or when they steadily march in one direction, even without being volatile, then adjusting is a huge part part of the successful trader's plan.

Many times adjusting a trade adds to the final profit. The position has lost money, but the new, adjusted position is one I am willing to hold.because it has a good risk/reward profile.  I don't believe a trader should make an adjustment, just to do something.  A trader must want to own the new position. Holding bad trades in an attempt to recover losses is a sure path to blowing up a trading account.

The winning trader makes an adjustment by adding protection, reducing delta, reducing gamma, and definitely reducing the probability of losing additional money.

Again, Maverick's point of view makes sense. But I find that over the years I earn good money when I behave.  Note – when I behave.  When I act with good discipline.  No trader can expect to do well over any extended period of time when taking too much risk or ignoring his/her personal trading rules.

When I have losing months, it's because I stubbornly fail to make the adjustments that I know are necessary or when I hold positions into the front month.  I know from experience that avoiding front-month positons works for me.   I know it, but I often find a reason why holding is okay 'this time.' 

I am confident that traders who 'get it' have the ability to adjust, protect portfolio value, and trade iron condors.  If a trader adjusts well and maintains discipline 100% of the time, then trading iron condors is acceptable. 

The bottom line is that results are up to the trader, not the strategy.  [I recognize the difference between the methods of a quant and his gigantic computer power and financial backing, and ourselves, retail traders.  The quant does get to trade with edge, but still must trade with discipline.  LTCM and 2008 hedge fund blowups demonstrate that to be true.] 

When we display discipline and the correct psychological attitude to be a good trader, the chances are high that we make good money. I don't blame the iron condor strategy when a trader fails to make it.  Itt's the trader's skills that determine success or failure.


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16 Responses to Debate: Trading Iron Condors is a Death Wish

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