Low Premium Iron Condors: Follow-up; A Real World Story

Adding my 2 cents to Tom's comment about the low credit, high probability newsletter
condor service: I traded these based on newsletters advice for
over a year and did great. Few adjustments, "easy" money, and I had big

Every month I did well, I allocated a little more of my capital,
and a little more, etc. That all ended in March when the market
crept and crept up to my strikes with low volatility and I found almost no
way out.

The newsletters were of no help and I found out first hand how
quickly a 5% gain can turn into a 50% loss. Then add to the fact that an unlucky
settlement took away another 10%.

Couldn't sleep, slaved over the ticker,
kept putting on additional credit spreads as the newsletters suggested
to help lower some of the loss which only made things worse.
Lost $50,000 in a matter of a week. Had almost an 85% gain up to that
point, but a 50%-60% loss of my account (built up with earlier profits) hurt.

Came out negative after everything.
Look at ALL those newsletters results for March. I know many that changed the way they show results to hide their 50% – 100%
Its not worth the sleepless nights, biting nails, upset stomach when
that 10% of the time you lose money comes along.

I believe in condors, but I go much longer term with farther out
strikes, higher credit, and wider spreads and just adjust casually when
needed – which is not much. I will NEVER go back to front month, low
credit condors again and would warn others to do the same … IMHO



I'm very sorry to hear of your experience. Thanks for sharing. Do remember that we each have our own comfort zones, but I'm in agreement with your preferences.

One item in your note deserves special mention.  It is common practice to 'protect' the call (or put) half of an iron condor by selling extra put (call) spreads and bringing in additional cash.  This idea is unsound, in my opinion, and is at the very bottom of my list of possible adjustments. 

First, the cash collected is never enough to make a significant difference.  In other words, as the problem situation gets worse, the cash collected is dwarfed by the ongoing losses.  But that's not the worst part.  If the market suddenly reverses direction, there is a string of newly opened spreads than can turn what was a truly horrible situation into a catastrophe.  I'm not suggesting that traders shouldn't open new spreads in an attempt to move the position back towards delta neutral, but three conditions must apply:

  • Collect enough cash to make the trade worthwhile
  • Cover farther OTM spreads to avoid the humongous loss
  • Only make the trade when it creates a position you want to own.  It is not mandatory to be delta neutral

As mentioned, I am not a fan of these low-credit iron condors (or credit spreads).  There is no doubt about it, winning often is fun.  Boasting of a 90% win/loss ratio attracts attention.  Newsletter writers boast of their fantastic results.

However, being a winner over the longer term is even more fun. One piece is missing from the boastful stories, and that's a description of what happens the other 10% of the time – when there is no profit. 

There are really only two methods that the newsletter writers can follow.  They can manage risk – by whatever method they choose – or they can close their eyes and accept a very high % win rate over the longer term.

Let's assume a service recommends selling a five-point credit spread and collecting $0.25 when the delta of the short option is five.  This is referred to as a 95% probability trade (definition: The spread will finish out of the money 95% of the time). 

a) No adjustments

If the trader wins 19 times and collects $25 each time, the gain is $475.  If the maximum loss occurs one time in 20 trades, the loss is $475.  [Yes, it is possible that the loss is less than the maximum]

Conclusion: This is not a statistically viable strategy.

b) Adjustments

How about the writer who adjusts?  This trader no longer has 19 winners.  How many wins are recorded depends on the adjustment method.

The good news is that there are no $475 losses.  There will be fewer wins and more losses, but no disasters.  Unless we know the adjustment point for the trader, this is just a guess, but let's assume three losses of $100 and 17 wins at $25 each for a net profit of $125.  Over 20 trades, that's $6.25 per trade, or a 1.3% return on the $475 margin requirement for the trade. 

That's not a bad result.  But it's not sexy, it is not hype material.  It's not the type of returns that a newsletter wants to publicize. 

If I thought I could manage other people's money and earn a steady 15% year after year, I'd advertise it.  But, that's not my business.  I'd rather teach others how to manage risk and trade options.



Honest bit of self-promotion:  This blog has a decent following, but I'd like to reach a wider audience.  If you find these posts to be worthwhile, please help spread the word by tweeting about them or mentioning on other social media.  Many thanks. 

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7 Responses to Low Premium Iron Condors: Follow-up; A Real World Story

  1. Don 08/05/2010 at 11:12 AM #

    Mi Mark, OK I have done my homework on the following scenario and I am confused. My original idea was this
    LEAPS VLO Jan 15 @ 4.35 Short Sept 18 Call at .40
    “The volatility is more than a consideration. This trade is very vega sensitive and I believe that if you make this play repeatedly, your results will be based on IV.”
    I compared the hv and iv and they are relatively close at this point. I then ran the numbers with IV decreasing and it does effect the pricing of the LEAPS however wouldn’t that imply that the stock is not more stable as IV rises in crisis and typically decreases on rallies? Meaning that the stock has become more stable?
    “Yes, restricting the trade to times whee IV is low is the right idea – at least for my comfort zone. However, this is a popular trade technique, and inexperienced traders just ignore IV levels.. An IV crush really hurts. Not just in the premium decline of your long option, but as time passes and you sell new options, you collect less for each.
    Have you missed something? Yes
    a) “The time value would not erode substantially.” Did you use a calculator to see just how much would erode? 45 days should not be small enough to ignore in the life of an 18-month option.”
    I went to the CBOE and ran the numbers but my more important question is this. I have purchased the 15 LEAPS every thing after that is ITM lets go worse case to the upside and they are a takeover target with a 30.00 bid with a closing before my short option expires in September (-Sept 18 Call)This is how I am viewing the trade:
    My long 15 call is worth 15+ any time value
    My short 18 is now costing me -11.60 (12-.40)
    Although not profitable at this time my net original cost was the 4.35-.40 for a net of 3.95 without factoring in any remaining time value for the Jan 15 LEAPS less the net cost of the Sept 18 -11.60 my cost at this point would be 3.40 (15-11.60) exposing me to a .55c loss
    Please let me know what part of the trade I am missing. As we know there is no reward without some risk but I see the two risks as such: 1. Stock sinks under my 15.00 Long strike requiring an investment of capital at a lower strike and 2. the possibility of an dramatic upside move.
    I am interested in hearing your thoughts.
    “b) Do you understand that by the time the stock hits 19, you are short delta and continue to lose money on a continued rally?” I don’t get this part and I am really tring to get this understood
    c) Look at the stock trading at 20. Drop IV by 25%. How does the trade look now? How about 21 on the stock and IV down 50%?
    I have not made any of these calculations. That’s your assignment. When trading LEAPS, you want to know, not guess, what happens in a bunch of ‘what if’ scenarios.
    OK, I did this hundreds of ways so that other readers and you can pick apart my thinking:
    I used 40%IV and then reduced it to 20% for VLO
    I set up the trades as mentioned above
    The 15 LEAPS changes like:
    Stock at 20 40IV 6.51 Stock at 20 20 IV 5.42
    Stock at 21 40IV 7.35 Stock at 21 20 IV 6.35
    Short 18
    Stock at 20 40 IV 2.35 Stock at 20 20 IV 2.05
    Stock at 21 40 IV 3.19 Stock at 21 20 IV 3.02
    I also calulated for 30
    15 LEAPS at 40 IV 15.52 at 20 IV 15.22
    18 Short at 40 IV 12.02 at 20 IV 12.02
    Cost of the 15 LEAPS was 4.35
    Worse case was the 30 15.22-12.02 3.00 Value + .40 Received
    Worse case 2 was 21 6.25-3.02 3.23 Value +.40 Received
    Not winners in a worse case (excepting stock moving severly downward) but not an insurrmountable event either. If the worse case scenario unfolds at a later time I did not do the calculations on value as if this was June of 2011 although the time value of the Call is reduced you have sold some additional short calls (3*.40) in the interim to lower the cost basis.
    Thanks for reviewing this hope I set it up in a way that makes sense.

  2. Mark Wolfinger 08/05/2010 at 1:04 PM #

    Don, I’m going to reply in a blog post within a week or so.
    I welcome questions. But when your provide intricate details of one trade – a trade that no one cares about except for you – and when the reply takes more than an hour of my time, that’s just not fair.
    I gave you an assignment so that you can learn something. I don’t want to see your calculations. If you have a question after doing the exercise, that’s fine. Just ask and I’ll be happy to help you understand a principle.
    Here is the problem as I see it: You (apparently) don’t think in profit and loss in terms of percentages, so a small-looking loss is not significant. When your investment is $395, a ‘small’ loss ($95 in this example; not $55) is large.
    Don – only one thing matters – and it is not the data you collected. Do you like this trade? Do you believe the (estimated) reward) is worth the risk?
    Nothing else counts.

  3. Jason 08/05/2010 at 2:53 PM #

    I think the newsletters know that to justify the monthly fee they have to come out with monthly trades. What fun would a monthly fee be for a service that did 90 to 120 day condors and adjusted periodically? Turtle vs the hare from an excitement standpoint … except I feel the results can turn out the same, if not better.
    I think everone starts with front month until they either realize it takes too much time and stress to monitor or they get sideswiped.
    I now would rather place a 100 point spread on the RUT and adjust out around the halfway mark rather than riding it all the way up to cliff. Not to mention a few better nights of sleep and lunches without having to update my quote screen on the mobile.
    I understand your point of not chasing loss prevention thru additonal spreads however I do like ratio trades during adjustment even though I have heard both sides of the argument. If I can readjust a position from say a 35 delta to an 11 on a far out spread and keep full profit in tact with a few extra contracts added on it seems to work well.

  4. Mark Wolfinger 08/05/2010 at 9:16 PM #

    If they wanted to do so, the newsletters could recommend a 90-day condor every month. What’s wrong with that. In fact, that’s how I trade.
    Jason, IMHO you have some misconceptions, and I’m going to offer my thoughts. I’d like to know whether you agree.
    A full blog post will appear in response. Probably Monday of next week.

  5. Jason 08/06/2010 at 12:48 AM #

    Just my personal experience:
    I am not a huge fan of front month Condors, but I do think butterflies and Calendars work reasonably well for front month.
    I never mix ratio spreads, or at least ratio spreads where I’m short more options then I am long, with IC’s because IMO the risk profiles and how you manage the trades are very different. If I run a ratio, it is its own special trade due to its (potentially) huge downside. They are extremely margin intensive so I always make sure I have plenty of room to make adjustments in case all hell breaks loose.

  6. Mark Wolfinger 08/06/2010 at 7:05 AM #

    Trading style, mindsets, personal preferences all contribute to how we choose our trades.
    Front-month positions work quickly and are definitely the most traded options. If they work for you with certain strategies – nothing else matters.
    I gave up writing naked shorts years ago. They provide excellent returns. At my age, I am far less aggressive and cannot afford to take the (low probability) risk associated with those positions.
    The risk of losing money is small because the odds of getting hurt are small. However, risk is major from the perspective of how much can be lost.

  7. Jason 08/06/2010 at 3:30 PM #

    I used the term ratio spread incorrectly. I meant that I would open more spreads on adjustment than I closed. Nothing naked. My apologies.