Setting Profit Targets When Trading Iron Condor

Mark,

What is your personal definition of success in IC trading
represented by percentage return.

For an account that is trading over a 12 month
period what would you consider to be a good vs. superior return?

And
would these same numbers be representative on a year to year basis?


Thanks,

Don

***

This is a question that reappears at regular intervals.  I cannot offer a good answer for option traders.  More than that, I believe the question is inappropriate. What I deem 'good,' someone else may not.  In addition:

  • You are not in competition with anyone
  • You are not playing by the same (self-imposed) rules as others
  • You chose different spreads at different times and at different prices
  • You adjust more quickly or more slowly than others
  • You have a different investment goal
  • You have a different plan
  • You are more aggressive or more conservative
  • You trade big or small size
  • You max out your available margin, or you maintain plenty in reserve

How can anyone define a good return for each and every one of these (and more) possibilities?  Yes, I know you asked about my personal definition, but unless you know where on stand on the issues raised in the above list, how can the number that I give you have any relevance?

***

Don,

You must understand that my personal definition is very dependent on my style of trading, so I ask: How can this answer
have any value to you?

If you are a risk-taker, you must seek a high reward. I would
classify that as 4-5% per month.
If you are very conservative, then 1% per month would be an outstanding
return. Very conservative investors would be ecstatic to earn a return of 12%.

As for me, I'd be happy to average 2% per month on a continuing basis.
That includes allowing for negative months.  That meets my definition of 'good.'

As for year to year return, it's the same 2% per month, which is 24% per
year. However, if I were not withdrawing funds and wanted to compound
earnings, then 2% per month compounded is almost 27% per year.
As I said, I don't see how that tells you anything useful.

From my perspective, superior returns are a matter of good luck. Many months I
earn over 10% without doing anything different.  That's because no adjustments are needed and the options
just fade away – until I repurchase. No skill is required on my part. No
special trades are made to increase results. Just good luck. If I collect $300 premium on a 10-point iron condor and exit by paying $50, then I make $250 when using $700 margin.  That's a 36% return.  And that is a superior result – regardless of whether that takes one, two, or even three months.  It's also far more than I planned to earn when entering into the trade.

I have zero control over how often that happens.  I have no control over how much I may earn when everything is perfect.  All I can control is when to exit or adjust a trade and how much of a loss to take before closing.

My conclusion: Extraordinary returns for an iron condor trader are based on good fortune and such gains are needed on occasion, to cancel losing months.  But if you play for these great results and ignore risk, you will have situations in which the trade mentioned above will lose $700 instead of earning $250.  You cannot achieve superior results when taking such chances.

I define superior as better than 'good.' If you earn 35% per year, consider that to be superior to outstanding – if you do it on a consistent basis. It doesn't signify anything if you do it once.

Don, I hate to see you, or anyone, focus on these numbers. When you
trade iron condors, the actual results are going to be determined by
whether you  exit trades at a loss, or whether you get to ride the
position for a big profit. You can control when to take losses, but have no control over being allowed to comfortably do nothing.

What you can control is how greedy you are and when you cover winning
trades.

What you can control is determining the point at which you make
adjustments.

Do you give up some profits to adjust early, or do you wait until your IC has moved ITM? These alternatives
make a huge difference in your results.
By focusing on earning a specific 'number of dollars,' you may delay when it's important to make an adjustment.  Although it can go either way, this is likely to be a costly error.

If you ignore the numbers and only look at
them after the fact (position closed), then you can decide whether you are meeting your
goals.
If you are not earning enough to please yourself, look at your trades,
your trade plan, your trade journal, and try to figure out what you can change to increase rewards without taking unnecessary risk.  I surely cannot tell you what will work for you. 

Everyone wants to earn a fortune when things are going well, and
increasing position size by 10% may be a reasonable thing to do.  However, be careful not to get too greedy.

When it hits the fan, you must be prepared to earn less, or even lose money, and concentrate on protecting your
assets – assuming you continue to trade iron condors in a volatile market.

I understand your anguish.  I get it when you want profit targets.  To me, trading is working with statistics.  You know your future contains some periods of time that are devastating for uninsured iron condor traders.  You also know that sometimes the markets move up and down, yet remain within your safe range.  In my opinion, this is a matter of luck.  However, if you are a trader who uses technical analysis to choose strike prices, and believe that it works, then good luck may be the result of skillfully selecting appropriate strike prices.

Your job is to make a good trade (based on conditions at the time) and to manage it well.  If you do that, you will not need targets to see that you have been successful.

738

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5 Responses to Setting Profit Targets When Trading Iron Condor

  1. Don 07/12/2010 at 7:02 AM #

    Mark, I found this to be very insightful and helpful. I do understand that there is an element that is out of our control when trading options, which you referred to as “luck” but I think that you sell your process short- the thinking that goes into each trade, the definition of acceptable personal risk, the strikes choosen etc…all contribute to the return an investor can expect. Without comparing to anyone, it certainly is helpful to have this information in a trading journal of some type to review and to “self-coach” the good and the bad in each trade and examine the elements that were in our control vs. what was outside our control and how the factors that were ourside effected the trade. This way, repitivie mistakes are eliminated, a comfort zone is established and a trader can develop their personal style.
    Thanks for the post, there is a lot of good information here!
    Don

  2. Mark Wolfinger 07/13/2010 at 8:21 AM #

    Don,
    Thanks. Glad you get the major point of keeping a journal – looking for ways to avoid repeating mistakes. As long as one does not define a ‘mistake’ as a trade that loses money.

  3. 5teve 07/13/2010 at 5:49 PM #

    Hi, Mark
    when using kite spread for insurance to IC, is it possible the cost of insurance exceed the premium collected? is this a reasonable trade?
    thanks

  4. Mark Wolfinger 07/13/2010 at 8:46 PM #

    Steve,
    You can pay any price you want to pay for insurance. The more you pay, the better the insurance.
    I don’t think it is a good idea to buy kites spreads when implied volatility is high (as it is now). These trades are long vega, and that makes them very expensive.
    The idea of insurance is to protect an asset and to prevent unacceptable losses. If your maximum profit on a trade is $1,000, paying more than $1.000 for insurance makes no sense. Yes, the kite itself may earn a profit when the position it is protecting expires worthless. That would give you a big win.
    But it’s more likley that the entire position would expire worthless – leaving you with a loss.
    I’ve been looking for appropriate kites (in RUT) recently, and have not found any that I am willing to buy.
    To answer your question: I would never do that. I’d find an alternative way to protect the position. If that were also difficult, then I would reduce position size by closing a portion of the IC.
    Regards

  5. 5teve 07/13/2010 at 8:56 PM #

    I see, thanks for your opinion