Follow up: Real Life Iron Condor Trade


Great post as always. I know this would be a bit labor intensive, but is there any way to show a cumulative P&L and risk vs. return for this group of trades?

Thank you Burt, but I have no way to collect the data.

Risk vs. return does not apply. There is no 'return' to measure.  The P/L for one day's closing prices bears no resemblance to prices you get when making real trades to exit.

Neither is there risk to measure. I assume it can be done, but I have no idea how to determine risk for holding a position for a few days or weeks.

For educational purposes this is probably one of the best posts I've read. It provides one with a lesson on how complicated from a risk perspective and number of trades to maintain a position one might want to get. It also makes me wonder whether the opportunity cost (not to mention the trading costs) associated with so many adjustments is worth it relative to a risk-adjusted return.

I don't understand what you mean by 'opportunity cost'.  When you make the original trade, you have no idea what lies ahead or how else the money might be put to use.  I see zero opportunity cost.

You have money to invest.  Then you must select your trade(s).  How else can you operate?  If you don't like the idea that managing iron condors involves serious work, then don't trade iron condors.

Even if you don't go through the P&L, what is your sense of the cumulative risk relative to the after tax and trading cost return?

After tax?  I don't see that either.  All earnings are taxable.  That is independent of the trade.  All I am saying is that I have no idea what you are asking about taxes. 

Burt, there is no way to know the return or the costs before the trade is over.  And the next trade will be different.  My sense is that if you are a good risk manager you will like the return to risk.  If you don't want to bother managing risk, you will fail.  That's my opinion.

Trading costs should never be a consideration when trading.  If they are, you have the wrong broker or are choosing the wrong strategy.  Managing risk is far more important. I cannot imagine failing to make a needed risk adjustment because the commissions would be too costly.  When this trade was opened, our trader had no idea that he would be making so many trades or using as many commission dollars as he did.  Thus, risk does not change.  The risk associated with opening the trade is what matters. Sure tack on some extra dollars to the maximum loss to allow for expenses, but you never know the future.  At any point that risk/reward is no longer satisfactory, that's the time to adjust or exit.

Of course, "complicated" is a relative term. As a former market maker, this "trade" may seem rather rudimentary to you. Would you be able to tease out how "advanced" this number of trades appear to you. What I mean is that a true option rookie would not be likely to handle all the various decisions required. But with experience might approach the amount of adjustments that occurred. Where along the line of rookie to experienced trader would you place this trade?

Burt, there is nothing really complicated about any of the individual trades, and that's how we trade: One step at a time.

Nonetheless, I don't consider this entire series of trades to be suitable for the rookie. That said, if that rookie plans to trade iron condors, then it's important to have some idea of how to make adjustments, when to make them, and some ideas for possible adjustment trades.  This post offers that to any trader.  One cannot just open an iron condor trade and allow it to run to expiration.  There is almost no chance of avoiding blowing up a trading account if a trader adopts that methodology.

For the rookie, this post offers an opportunity to see adjustments made by a real trader.  The rookie can try to discover the rationale behind each move and think about whether that seems logical or misguided.  If unable to make that judgment, then it's a perfect excuse to paper trade iron condors and practice that (or any other) adjustment type.  The rookie is not born as a trader.  there is no substitute for experience.

The whole point behind a post such as that is to enable new traders to understand why the trades were made, how they reduced risk, and whether that specific adjustment is one that suits the individual trader's way of trading. 

There is nothing gospel about the traders choices.  Some traders, not fearing the downside, would have sold more puts when exiting current puts.  Another trader would wait, and then pay less for the puts.  Someone else might buy different insurance  when the trade was initiated.  Following someone else's trade is just an opportunity to see some trades in action and think about them.

To get the most out of this post takes a certain level of understanding about risk management.  That takes experience.  But this is the key point:  Even if your risk management skills are not yet well-honed, even if the idea of managing risk has never previously occurred to you, the idea that it's important to take some action to reduce risk is the idea that must be transmitted.  The rookie trader may not yet make the most appropriate or efficient adjustment, but any adjustment is better than none.  If the rookie learns that doing nothing is unacceptable, that's lesson enough.

So Burt, some of this is for advanced traders, but the concepts can help the rookie trader get a foothold into the idea of risk management and how important it is to survival.

Thanks as always,


You ask about cumulative P/L.  To me it's immaterial.   When you have a position – you have two choices: hold it or don't hold it.

How can it possibly matter whether the position is profitable?  You want it in your portfolio (good risk/reward from right this minute into the future) or you don't.  If you don't want it, exit the trade.

If you keep a position in your portfolio just because you do  ot want to exit and record the loss, then you are going to have a portfolio of high risk trades.  Why would you do that?  When you do not like the trade for any reason (perhaps you have already earned 90% of the maximum profit and are happy with that), get out.  Eliminate the risk and find a better trade.

You can agree or not.  It is gospel in my book.


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One Response to Follow up: Real Life Iron Condor Trade

  1. Burt 12/15/2010 at 7:07 AM #

    Thanks so much for the detailed response. Very helpful.