Q and A. How Many Weeks in a New Iron Condor Position?

Continuing with Josh's questions:

Second, Adam mentioned on his blog (Daily Options Report) that some numbers he ran showed that the optimal time to sell options (so in your terms, buying an IC, among other strategies) is near the end of the prior cycle. In other words open your IC maybe 4-6 weeks out. This is about the same timing I hear from other sources (Dan Sheridan, Think or Swim discussions, Condor Options [4-10 weeks]).

I take it this has to do with the increase in rate of time decay as options near expiration (the inverse of this being the need to control gamma risk).  That is why one should not just do options just before expiration.

I take it from reading your blog that you trade ICs (I would sell sell but you say buy) at about 3 months from expiration. And that this cuts down on the directional risk. So, I wonder if you can compare in more detail the rationale and reasons for trading back month ICs.

Josh

You've touched on the important points, but my answer to this question is the same as my answer to so many options related trading decisions:  There is no 'best' answer.  If Adam can show that there is a significant advantage to initiating credit spreads (or iron condors) when a specific number of trading days remain in the lifetime of the options, I might consider changing my style of trading.  I don't want to make bad mathematical play.  But I'm more comfortable with options that are further out of the money and I refuse to sell credit spreads for small amounts.  To accommodate those needs, I move further out in time.  Nothing scientific.  And if I choose to buy insurance, my portfolio is less subject to a big loss.

I strongly believe that the strategy you use to trade options is important, but it's far from the top of the list of important factors that determine your overall success as a trader.  The specific strategy you choose is merely the tool that you use to apply option strategies.  It's necessary to select a strategy in order to play.  In other words, to make or lose money, you must enter into a trade.

Some strategies are complete gambles, others less so.  Others let you be similar to the house in a casino.  Some positions have great risk/reward ratios, while other are much worse.  But if you adopt a strategy that you understand, you should be okay.  Thus, if trading iron condors is your thing, then any number of weeks will be ok, if you have the skills mentioned below.

It's more important to be able to trade without emotions and to make sound decisions in times of duress.

It's even more important to have good risk management skills, and that includes the ability to manage money.  If you can prevent large losses by taking the proper precautions – and sometimes that means locking in a loss to prevent further losses – you should be a long-term successful trader.  If you protect your assets and never place too much money at risk for one trade, then that makes it even less likely you will have a disaster.  Disasters kill you and take you out of the game.

Yes, you will have drawdowns and periods in which your methods aren't working well.  But if you have the right skills and are flexible with strategy selection, the chances are you will succeed.

I agree that it's right to avoid very short-term iron condor positions because the negative gamma increases risk beyond my comfort point.  Time decay is great, but I'll allow someone else to collect that money.  I'll earn mine more slowly with longer-term positions.  Not long term.  Just longer.  Currently that's 3-4 months.

239
Comments are closed.