Is the Other Guy Making More Money than I am? Does it Matter?

Thanks Mark (referring to this Q & A)

The reason I asked was because I too trade mainly condors,
but with 2-month time frames. I stagger them so I have 2 condors on at
any time, and based on regular margins, I'd say I use about 65% of
capital for each position (adjustment capital included). I have
portfolio margin so I have enough (and actually much more leverage
available) for these positions.

I'm just thinking that in order to
compare results with those who trade condors strictly on a one month
basis, and assuming using 100% capital every time, I would have to
multiply my result by 65% for comparison, or something like that.




I understand how you feel.  It's exactly the same as individual investors who loved to open their 401-k reports the moment they saw them in the mail.

Then during the 2008 debacle, many just tossed them aside, unwilling to look.

When you are making nice money, you want to feel extra good about it by knowing you do better than the vast majority of traders.  Competition and all that.

But those are dangerous waters.  Your competition is yourself.  Defeat the demons: trade with as little emotion as possible, enjoy the good times and be prepared to handle the not-so-good times.  Do not get over-confident.  If you do that you win the competition.

If you earn 20% per year, that's so much better than 99% of the population, does it really matter how you compare with the other 1%?  Does it matter when iron condor traders boast of earning 5 to 10% per month – every month.  You know they are not telling the truth, so there's nothing to compare.

To your specifics:  A successful front-month iron condor trader is going to beat you.  That's all there is to it.  Trading front-month iron condors comes with higher risk and higher rewards.  You have already chosen not to compete with them by adopting a more conservative approach.

That aside, if you use 65% of your capital, you don't multiply by 65%.  You divide.  In other words multiply your results by 100/65 to give you 'what you would have earned if you had been 'all in.'

There's a bigger problem that does not concern you because of portfolio margin.  But it's a real problem for those using Reg T margin.  It's that 'all-in' insanity.  When prospering it's natural to want to bet bigger.  Don't do it (OK, do it – but just a small, manageable amount).

You MUST allow some cash for adjustments.  When you have no remaining capital, when an adjustment is needed, your only option would be to close both sides of an IC simultaneously because that's the only way to reduce margin.  Don't place yourself it that situation.


14 Responses to Is the Other Guy Making More Money than I am? Does it Matter?

  1. Peter 01/19/2010 at 3:42 PM #

    Thanks for the straight response, Mark. My comments may have been misleading because actually I care more about how I am trading overall and what my annual results are. I was thinking that I take the sum of my trade results (each trade as a % based on Reg T margin) for the year, but I have to multiply the sum by 65% to get the annual result for my entire capital.
    I probably should be very satisfied 20%. I have tried trading front month, and it’s been good for small trades, but I don’t dare to put a huge amount of capital in it. Thanks again.

  2. Mark Wolfinger 01/19/2010 at 3:51 PM #

    I don’t believe it’s correct to pro-rate your earnings as if you were fully invested.
    Not being fully invested is a trade decision.
    But, the bottom line is that you should keep your books as you see fit – as long as you pay taxes based on ‘real’ earnings.

  3. Peter 01/19/2010 at 4:14 PM #

    You’re right, it’s how one perceives it. In a way, I’m over-invested if I were using Reg T margin instead of portfolio margin. I would be only able to use 50% capital (including adjustments) for each 2 month condor, so I’m slightly leveraged as well.

  4. Anthony 01/19/2010 at 4:29 PM #

    Not to jump in but this really interests me, the “how much” question. So you are saying that if you have $100,000 available capital you put on a trades in IC’s that would lock up 50% of it if you deemed market conditions favorable to the trades. I am assuming it is the possibility of adjusments that allow this?

  5. Mark Wolfinger 01/19/2010 at 6:36 PM #

    Feel free to jump in. This is an open discussion.
    I cannot decide what you are asking, so perhaps Peter can help.
    The possibility of wanting to make adjustments is what should prevent anyone from using all available margin.

  6. Mark Wolfinger 01/19/2010 at 6:37 PM #

    If you did you 50% for each IC, that would leave you in terrible trouble – with no room for making any adjustments.

  7. Peter 01/19/2010 at 8:03 PM #

    Agreed Mark. What I meant with the 50% (including adjustments) was to leave enough cash for potential adjustments, so my Condor doesn’t take up 50% margin of the capital initially.

  8. Peter 01/19/2010 at 8:10 PM #

    I’m not sure what Anthony meant either. I was stating that I would have two condors on at any one time, and I would allocate 50% capital (for the condor margin, insurance, and adjustment) for each condor. Actually, I leverage to 65% for each condor position using portfolio margin. I don’t know if this answers the question.

  9. John 01/20/2010 at 2:45 AM #

    Hi Mark,
    I have a question about iron condor adjustment. Let say you want to roll one side to a further strike. You can do this by closing the original spread (debit) and opening a new spread (credit). But since the market price is already near the old strike, the adjustment is a net debit. Using the principle of equivalent positions, the same adjustment (in term of risk profile) can be made with a net credit by changing put to call or vice versa of the debit spread. Aside from having a higher margin requirement, do you think there is something wrong with this alternative adjustment? Comparing both adjustments, is there a better choice?

  10. Anthony 01/20/2010 at 5:55 AM #

    Yes, this does help. I am new to position adjustments however. When you open your trades what is a reasonable amount to set aside for adjustments? For example, using a T-margin account say you $100K, you would allocate 50K to the positions. What % would be commited to original margin and what % set aside for adjustment? Forgive my ignorance but I am trying to figure out how the size of positions is viewed from the aspect of account size. I am assuming in some market conditions you would trade with less size and when conditions are favorable your size would be larger – of course this is also determined by your experiance and personal comfort level. Thank you for the help.

  11. Mark Wolfinger 01/20/2010 at 8:14 AM #

    Hi John,
    This deserves a more detailed reply and I will provide one in a separate blog post (in a few days).
    For now:
    1) Paying a debit is not something to go out of your way to avoid
    2) Opening the box spread gains nothing and incurs minor risk plus some expenses.
    3) Short story: I see no reason to make this trade

  12. Mark Wolfinger 01/20/2010 at 8:25 AM #

    Yes account size should vary under the conditions you stated. But using all of your margin is never a good position size.
    It is not ignorant to inquire. It would be foolish not to do so. I applaud you for thinking ahead.
    The main point about adjustments is to avoid running out of cash – which would prevent you from making those adjustments.
    The more important factor to consider is this: You have 100k to invest. Do you really want to put 100% of that into iron condors, or any single strategy?
    You can do that, but the risk is enormous – when all of your assets are in one place.
    On the other hand, if this is only a portion of your investment portfolio and 100k is the amount set aside for iron condors, then that’s a very different situation. If this is the case:
    I would keep about 20% of your maximum margin available to make adjustments. As you gain experience and open and close positions, you will see how margin requirements are affected. That will allow you to judge how much you want to keep available in the future. But please: zero, or near zero, is too dangerous.
    It may turn out that 10% is sufficient for you, but I can assure you that if the time comes when you want to do something to reduce risk and your only choice is to make a trade that reduces margin, your choices are going to be very limited.
    If you want to cover a runaway call spread that is part of an iron condor, when you lack the ability to buy those call spreads (that trade does not reduce margin unless you also buy the put spread) you will be at risk with no good way out of that trouble – except to buy back the entire IC.
    That’s just one example of what can go wrong when you invest ‘all in.’

  13. John 01/20/2010 at 11:31 AM #

    Thanks for the reply. I’ll look forward to more detailed explanations in your new blog post.

  14. Anthony 01/20/2010 at 11:46 AM #

    Thank you Mark, that really helps clarify this for me.