Iron Condors: The road to riches or the path to trouble?

When I sit at my desk and write a book or blog post, I do some research and tell my story. However, when interacting with traders, either through blog commentaries, email exchanges, or live interactive discussions, I get a much better picture of the real world.

Many interesting questions arise. Some are easy to answer, while others can be discussed at length in a book chapter or webinar.

One of the topics that draws attention is the desire to estimate how much can be earned by a trader and whether it is a reasonable goal to quit a job and become a successful professional trader. This was the topic of a recent blog post at my premium web site (this post is available at no cost).

Another topic of discussion involves how easy or difficult it is to make good money when trading iron condors. I’d like to share some of that discussion, and surprisingly the major emphasis is not on risk management.

If you are an iron condor trader, then you are aware that the past few months have been pretty good for most traders. The market has moved up, down and up, but never too far, and not too quickly. I suppose that statement is a bit too broad. Anyone who chose strike prices that were not far out of the money may have run into trouble. But those who believe in selling options with a delta of 10 or less probably had a bunch of consecutive winning months. And that’s exactly what happened to some traders with whom I have been in touch.

Trader A recognized that this is a new strategy in his arsenal and wants to know how long it should take before he gets a good feel for his true earnings power when using iron condors. He is happy to have closed six consecutive winning trades but wants to know how many such trades it takes to provide confidence that the results are representative of future expectations.

This is truly a remarkable experience for me. I almost always find a different attitude when a new strategy provides excellent profits. The traders tend to believe that they happened onto a winning strategy. But more than that, the usual feeling is that they are exceptionally talented when it comes to managing a portfolio of those trades. They fail to recognize that the market has been very kind to iron condor traders, and that happens from time to time. The more common result is for the markets to be sufficiently volatile so that iron condor traders encounter very risky situations. That’s when they will be tested to determine how talented they are.

I’m very proud of this trader A. He recognizes that things cannot be this easy. He asks how many such trades he must see before he gets a good feeling for risk and potential profitability. In reply, I told him that it’s not the quantity that matters. Instead it’s the variety. When he finds himself making important risk management decisions – and making them in a manner that truly cuts risk – then he can have confidence that he has the talent to succeed. But not until then.

Of course, there is nothing wrong with having a bunch of winning trades and retiring before facing the inevitable challenge of working with money-losing trades.


4 Responses to Iron Condors: The road to riches or the path to trouble?

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