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Debate: Trading Iron Condors is a Death Wish

Hi Mark, have you read this ET discussion about Iron Condor trades?

I found Maverick's post specially interesting (and clear :-)) I'd like to know your opinion about it.




I was a big fan of Maverick (the TV show, starring James Garner, that first aired in 1957). 



I had not seen the recent ET forum, but, I respect Maverick.  It is difficult to argue with his point of view.  Nevertheless, despite the soundness of his argument and the difficulty that traders encounter when using iron condors, I believe that managing risk makes all the difference.  I am attempting to do what he believes cannot be done:  Enter into a trade using a specific option strategy – without a mathematical edge.


Directional trader

I trade much the same way as a directional trader.  I open a position that wins when the market goes my way (nowhere) and make trade decisions – as necessary – to manage risk when the market moves.  Don't misunderstand me.  Trading with a theoretical edge is the best way to go.  However, it is commission intensive because these trades involve trying to make small sums from a large number of spreads.  I'm not willing to play that game.

My initial and adjustment trades sometimes may be made without any theoretical, mathematical edge, but it's the same for a stock trader who buys shares that the market considers to be fairly valued.  If the stock moves his way, the trader profits. 

I agree that making an adjustment is a 'different trade,' but argue that it's okay to add a second trade to the original.  I am not claiming, nor am I trying to profit, by trading a single golden strategy.  To earn a profit, risk management skills play a vital role.  More vital than trading without an original edge.  That feels right to me, even when the quants find my argument to be trivial.

Traditional investing involves trading stock, with adjustments.  Traders scale out of a trade as prices rise, locking in profits and reducing risk.  That's one form of 'adjusting.' 

Some add to a losing trade by purchasing more shares on a decline (many experts hate that plan), and that's adjusting.  The investor knows that this one way to manage risk.

Iron condors may be a losing strategy if the positions are blindly held through expiration every time.  Holding to the end is not part any rational trader's plan. We plan to make adjustments at some point.  We hope not to need the adjustment, but hoping solves nothing.

Here's how I see it. I cannot affect how the market moves.  Sometimes it's gentle and sometimes it's violent.  Often it's between the extremes.

I earn good money when lucky.  That means time passes, the market is gentle, and I exit the trade early.  I earn better than 10% per month on these trades.

When I get unlucky and the market is violent – and by that I am referring to a huge overnight gap – then I lose.  There is nothing to be done except manage the losing trade efficiently.  If I own insurance, I may not lose very much, or I may earn a profit.  But let's assume there is no insurance.

We seldom get an overnight move that destroys a position.  When the markets are volatile, there is almost always time to act.  And worst case scenario – when  a downside disaster occurs, IV is so high that any ITM put spread can be repurchased at a price that is nowhere near the maximum value of $10.  Of course, the bid/ask spreads would be horribly wide in this scenario, but the patient (not panicked) trader can get trades made at reasonable prices.  To be in that non-panicked mode, it means the trader's position sized properly and a non-devastating loss has taken place.

Traders may lose 100 to 150% (i.e., $300 to $450 after collecting $300 for the original trade) when there is a gigantic move.  I have't encountered this situation during the years I've been trading iron condors.  The last such move occurred after 9/11 in 2001.  The May 6 'flash crash' of 2010 was an outlier not because of the big move, but because it was impossible to trade – unless you had entered orders earlier.

In 2008 the volatility did not occur as an overnight move, and there was time to act.

When markets are more volatile than I want them to be, or when they steadily march in one direction, even without being volatile, then adjusting is a huge part part of the successful trader's plan.

Many times adjusting a trade adds to the final profit. The position has lost money, but the new, adjusted position is one I am willing to hold.because it has a good risk/reward profile.  I don't believe a trader should make an adjustment, just to do something.  A trader must want to own the new position. Holding bad trades in an attempt to recover losses is a sure path to blowing up a trading account.

The winning trader makes an adjustment by adding protection, reducing delta, reducing gamma, and definitely reducing the probability of losing additional money.

Again, Maverick's point of view makes sense. But I find that over the years I earn good money when I behave.  Note – when I behave.  When I act with good discipline.  No trader can expect to do well over any extended period of time when taking too much risk or ignoring his/her personal trading rules.

When I have losing months, it's because I stubbornly fail to make the adjustments that I know are necessary or when I hold positions into the front month.  I know from experience that avoiding front-month positons works for me.   I know it, but I often find a reason why holding is okay 'this time.' 

I am confident that traders who 'get it' have the ability to adjust, protect portfolio value, and trade iron condors.  If a trader adjusts well and maintains discipline 100% of the time, then trading iron condors is acceptable. 

The bottom line is that results are up to the trader, not the strategy.  [I recognize the difference between the methods of a quant and his gigantic computer power and financial backing, and ourselves, retail traders.  The quant does get to trade with edge, but still must trade with discipline.  LTCM and 2008 hedge fund blowups demonstrate that to be true.] 

When we display discipline and the correct psychological attitude to be a good trader, the chances are high that we make good money. I don't blame the iron condor strategy when a trader fails to make it.  Itt's the trader's skills that determine success or failure.


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Real Life Iron Condor Trade

A reader submitted an iron condor trade, along with each of his adjustments – seeking comments.  He gave me permission to anonymously discuss this trade and how he managed risk.  Overall I believe this represents a well-managed position, worthy of discussion.  The trade was still open when I received (Dec 2, 2010) the details.

This trade represents a real-time scenario in which you can evaluate each idea and think about whether you like what was done or would have considered an (unspecified) alternative.  Does the insurance purchase, or each of the adjustments go along with the way you trade?  If not, it's an opportunity to sit over a trader's shoulder and judge his activity.  I offer this as an opportunity to learn how another trader thinks.

Trade data can be seen in the table at the end of this post.


(1) Sep 16: Trade 20 RUT Dec 530/540;730/740 Iron Condor. Premium $2.815

(2) and (3) Same date, he bought a strangle for insurance:

a) Buy 1 RUT Dec 720 C @ $7.80
b) Buy 1 RUT Dec 560 P @ $4.00

The initial trade involves buying a December iron condor with the strike prices of the short options being 190 [corrected] points apart.  I know that feels as if it's a pretty safe trade with each option being quite far out of the money.  Cash collected: $5,630

Our trader, taking a conservative point of view (which I would never discourage) adds one December strangle to provide some protection against loss.  Cost: $1,180.  Remaining cash: $4,450

(4) BUY +20 CONDOR RUT 100 DEC 10 730/740;760/770 CALL @1.5075 (cost: $3,015)

Two weeks later, trader buys condor [not to be confused with an iron condor], thereby rolling the short call spread from 730/740 to 760/770.  This trade uses almost all of the original cash credit.  Remaining cash: $1,435.  Please note that I'm keeping a running total of the cash premium because I understand that the vast majority of traders want to see that number.  My perspective is that we should make necessary and desirable trades, ignoring the profitability of the original trade because it's necessary to manage the current position well – not the original – to make money.

(5) and (6) On same date, trader covers the short put spread and sells a new put spread – but he sells only half as many (10 vs. 20).  This time he sells the RUT Dec 590/600 put spread. Net cash in: $225.  Remaining cash: $1,660

This type of trade is worthy of special discussion. The put spread was moved for two reasons:  To collect additional cash and to move the position a bit closer to delta neutral.  For some traders, this is perfectly normal.  If you began with no preconceived notion of where the market was headed, it's likely you still feel that way, despite the big rally.  With that in mind, moving the put portion of the iron condor makes sense.  Other traders, fearing a retracement, may not be willing to move the puts. 

Of course, he sold only half as many puts, so did not collect much cash.  From my perspective, $225 is just not enough incentive to make the trade.  And don't forget, that small sum comes before commissions.

My objection is that he did not collect enough cash for this trade.  If this idea of rolling the puts has appeal, then I think another strike or two (i.e., moving the short put to the 610 or 620level, instead of 600) would have been a good idea.  And this is extra true when selling only half as many puts. If he had collected more cash, he could have moved his insurance put (Dec 560) to a higher strike price.  Nevertheless, this is a risk management decision and he did nothing wrong.

(7) Approximately one month later (Nov 3) the call spread is rolled higher once again.  This time the condor costs $0.96 and moves the strikes of the short call spread to 780/790.  Cost: $1,920.  Remaining cash: $260 in the hole.

(8) At the same time, the trader sells another 10 call Dec 780/790 call spreads, increasing the call position to a 30-lot.  This presents significant extra risk.  I like the fact that he resisted selling extra call spreads until now, but am concerned that risk may be moving beyond his comfort zone.

[I have no details regarding our trader's account size, or tolerance for risk, but he is an experienced trader.  What I don't know is how much experience he has with options]

Cash collected: $1,150.  Remaining cash: $890

(9) and (10)  He sells his extra long Dec 720 call (bought as insurance) and replaces it with one Dec 750 call and one Dec 760 call. Cash collected $440.  Remaining cash: $1,330.

I like this trade. This is a good risk management decision and makes me feel better about the fact that he sold those extra 10 call spreads.  Apparently the plan was to buy extra protection, and this does the trick. 

Those who look at this trade in isolation may feel that it's a bad trade because the trade has negative time decay (theta), and the whole purpose behind trading iron condors is to collect that time premium.  However,  this specific trade is not designed 'to make money' as a standalone trade  It is to own an improved insurance policy.  He now has two calls protecting 30-lots of calls instead of one call protecting 20-lots.  How to manage risk and how much insurance to own (if any) are personal decisions.  All we can do is examine his trades and offer comments.  And hopefully learn something.

(11) (12) (13) This series of trades can be broken into two parts.  First, he bought back his 590/600 put spread and once again moved to higher strikes, selling half as many.  Thus, he is now short only 5 put spreads. Cash collected $115.  He then sold 10 Dec 640/650 spreads, collecting $0.90 for each.  That's another $900 and the remaining cash is: $2,345.

(14) The next day he brought in some cash  by rolling his insurance option to a higher strike (750 to 770).  Cash collected: $665 for a 20-point spread.  I like the idea of taking cash out of insurance by rolling higher.  My experience says that the minimum sale price should be 50% of the maximum value of the spread, and I prefer to collect 60%.  However, the trader may have made this play as a way to get a bit bearish over the short term.  Cash remaining: $3,010

(15) One day later, he sold some of his long insurance and collected $265 for his Dec 770 call.  This is a trade I just don't like.  I understand that we all want to earn good money from our trades, and holding this option to expiration is likely going to cost some cash.  However, once again the cash collected is just too small to justify the risk. He is short a 30-lot call spread, which may be ITM in a day or two. That $265 is too small for the upside risk. Cash remaining: $3,275

To me, this trade is micro management – attempting to achieve the best possible result by taking extra risk. Not a good long-term strategy.

(16) Twelve days later, the market has rallied and the Dec 770 C was repurchased at a price of $730.  I'm pleased he was not stubborn, and did not refuse to bite this bullet.  Good discipline.  Please note that it cost $465 to cover this error in jusgment.  The risk/reward for making that call sale was way out of line.

This was not an expensive lesson, but one worth learning:  Cash remaining: $2,545.

(17) Covered the 5-lot short put spread at $0.25.  I agree with playing it safe for a few dollars. Cash remaining: $2,420.

(18) It's now Dec 1, and theta and gamma are increasing.  He bought a one-lot to reduce his short position.  Don't be afraid to trade a one-lot, if that seems appropriate at the time.   Cost $103. Cash remaining: $2,317

(19) Covered the last of the put spreads at $0.20.  Cost $200.  Cash remaining: $2,117

(20) Sold five dec 690/700 put spreads @ $0.80.  Cash +$400. Remaining cash: $2,517. 

This is the killer trade.  This is the play that can destroy your career.  First, it only adds $400 of profit potential.  Next, it sets up a potential dilemma for the trader.  If the market takes a quick tumble (good for the whole position), it's likely to be too soon (and too expensive) for him to be eager to cover the call spread.  But that little put spread, and the measly $400 it generated threatens to lose a few thousand dollars.  And if he does pay up to cover those puts, then the real dilemma appears: Can he afford to sit by and NOT cover the calls?

Sure, the most likely result is earning part (knowing he will cover prior to expiration) of that $400.  And he will remember how well this worked and may make a similar trade next time.  This is strictly a gambling move.  With so little time prior to expiration, and with a position that already has  negative gamma, it's tempting to collect more and more premium and to move nearer to delta neutral.  However the risk is just too large for the small reward. 

Important note:  He made this trade earlier – and more than once: Selling some OTM puts to collect cash.  The big difference is that this time we are approaching expiration and, as explained above, if this specific trade turns out to be a loser – that would be okay becasue the call portion of the portfolio would earn some decent cash.  But it's much more involved than that.  An increase in imped volatility (due to the market decline) would make it even more difficult for the trader to be willing tp pau u[p to get out of his call position.  And that's the risk.  Taking a loss on the puts and possible still gettting hurt on the calls – that's the worst case scenario.

This is one of those 'let's take the extra cash right now' trades that just feels right.  The market shows no immediate signs of crashing and the trader can make another $300 by covering in a few days – so why not?  Because there is ust too little to gain.  In my opinion, it's already time to exit the December position and making it bigger and more risky is not the long-term winning action.

It's okay to continue to trade December options, but the point is that is too late to increase size and/or risk.

The true risk is not making this specific trade.  Instead it's the fact that winning this bet this time only encourages making a similar, but larger bet next time.  And the next time.  This is one trade that is guaranteed to blow up.  The obvious problem of a potental loss in the trade is not THE problem.  It's the overconfidence that gets a trader to the point where selling extra premium become the #1 choice for adjusting positions.  Although that is an acceptable method when the trader can afford to take more risk, the play is not to be made for insignificant sums – especially when time is short.  If the reward is too small, it's just not worth any risk (in my opinion).

He has been very conservative with the put selling.  Covering early, reducing size, covering again.  But this small trade is just to CTM (close to the money) for comfort.   Obviously it's our trader's comfort zone that matters here, however, some trades have a bad risk/reward ratio – and this is one of them.

If I get a further update, I'll let you know.  This is where the position stands as of December 2


1 9/16/2010 SELL -20 IRON CONDOR RUT 100 DEC 10 730/740/540/530 CALL/PUT @2.815 LMT
2 9/16/2010 BUY +1 RUT 100 DEC 10 720 CALL @7.80 LMT
3 9/16/2010 BUY +1 RUT 100 DEC 10 460 PUT @4.00 LMT
4 9/30/2010 BUY +20 CONDOR RUT 100 DEC 10 730/740/760/770 CALL @1.5075 LMT
5 9/30/2010 BUY +20 VERTICAL RUT 100 DEC 10 540/530 PUT @.45 LMT
6 9/30/2010 SELL -10 VERTICAL RUT 100 DEC 10 600/590 PUT @1.125 LMT
7 11/3/2010 BUY +20 CONDOR RUT 100 DEC 10 760/770/780/790 CALL @.96 LMT
8 11/3/2010 SELL -10 VERTICAL RUT 100 DEC 10 780/790 CALL @1.15 LMT
9 11/3/2010 SELL -1 VERTICAL RUT 100 DEC 10 720/750 CALL @12.00 LMT
10 11/3/2010 BUY +1 RUT 100 DEC 10 760 CALL @7.60 LMT
11 11/3/2010 SELL -5 VERTICAL RUT 100 DEC 10 620/610 PUT @.89 LMT
12 11/3/2010 BUY +10 VERTICAL RUT 100 DEC 10 600/590 PUT @.33 LMT
13 11/3/2010 SELL -10 VERTICAL RUT 100 DEC 10 650/640 PUT @.90 LMT
14 11/3/2010 SELL -1 VERTICAL RUT 100 DEC 10 750/770 CALL @6.65 LMT
15 11/4/2010 SELL -1 RUT 100 DEC 10 770 CALL @2.65 LMT
16 11/16/2010 BUY +1 RUT 100 DEC 10 770 CALL @7.30 LMT
17 11/22/2010 BUY +5 VERTICAL RUT 100 DEC 10 620/610 PUT @.25 LMT
18 12/1/2010 BUY +1 VERTICAL RUT 100 DEC 10 780/790 CALL @1.03 LMT
19 12/2/2010 BUY +10 VERTICAL RUT 100 DEC 10 650/640 PUT @.20 LMT
20 12/2/2010 SELL -5 VERTICAL RUT 100 DEC 10 700/690 PUT @.80 LM

 Table. List of trades


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Adjustments and trading costs

A recent comment from Fran (from Spain), who writes an options blog in Spanish, raises an important point.  The obvious goal for traders is to make money and one sure-fire method for increasing profits is to reduce expenses. [This assumes that using a less expensive broker does not result in losing money via poor trade execution].

Some time ago I penned an article (free registration required) supporting the idea of reducing trading costs as a 'sure-thing investment.'

Fran's comments:

1) What about transaction costs with all these adjustments? The best adjustment strategy (in my opinion :-)) is to  reduce position size, because in the long run, transaction costs are another risk to manage and make a big difference in your trading performance.

2) if you have a verified trading edge, how does your adjustment bias affect this advantage? Have you tested it?

Hard questions to answer for a lot of options traders, but that trader must be sure that when cutting costs, edge is not being eroded. You must manage risk with low cost trades. Here, less is more



I never object to size reduction as an adjustment. In fact, it is a method that should be used more frequently.  I believe there exists a trader mindset that equates exiting a trade, or even reducing position size, with doing something unacceptable: giving up and accepting a loss.  This is a loser's mindset because every successful trader understands the importance of limiting losses and exercising sound money management.

I know that winning traders recognize that it's impossible for each trade to be profitable. But more than that, they understand the importance of not fighting when the odds are not on their side.  Taking losses when necessary is an important aspect of the trading game.

On the other hand, I don't believe that size reduction should be an automatic decision.  It is often advisable (i.e., profitable) to adjust a position, rather than cut its size. 

Most traders consider 'being forced' to make an adjustment to be an unfortunate situation.  They miss the fact that adjustments can increase both the likelihood of earning a profit and the size of that profit. That is not something to be ignored.

Yes, transaction costs are important – and that's especially true for those who trade one and two-lots with a broker who tacks a 'per trade' fee onto the regular commissions. I have no idea how costly commissions are in Spain, but US traders can find good brokers with very low commissions.  Low enough to make them a very small consideration when making trade decisions.



I don't worry about 'edge' when making an adjustment.   I have only two concerns:

  • Does this adjusted trade give me a position I want to own? [I'm not likely to want to own it if I had to give up much edge to create it.]  Do I like the profit potential? 
  • Does this adjusted trade truly make the position less risky? Have I reduced the probability of losing money (from today into the future)? Is the amount at risk (both short-term and worst case scenario) acceptable?

If both sets of conditions are met, I pay the commissions and make the trade.

As to 'edge': I do not make a trade that I believe adds negative edge. I will not accept a position that is worse that it is right now (when an adjustment is needed). I prefer to take the loss and find a new, better position to own than to add negative edge to my current position.  However, 'edge' is not easy to measure because it depends on making an accurate forecast for future volatility of the underlying. In other words, our volatility forecast must be accurate before we can determine the value of the options, and the edge, we own in our posiitons.

Fran, Much of this is art vs. science. It's also a matter of personal comfort. Not every trader has yet learned the importance of being willing to accept a loss on a given trade.

Avoiding that loss can result in poor adjustment decisions.  Why?  The mindset that requires the trader to hold a position, also forces the trader into making almost any adjustment.  This is especially true when  rolling the position to a later expiration date,  with the hope of eventually earning a profit.  I have a friend who makes 'ugly' adjustments in preference to exiting the trade. 

Traders with that "I must do something to my position – but will not lock in a loss" mindset are not on the success path.  These traders would do much better to consider reducing or exiting a trade that has run into trouble

Thanks for the discussion



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Too Many Adjustments

Continuing the discussion:


I don't feel comfortable getting too close
to the money with iron condors. I am happy going just inside one standard deviation.

Yesterday I rolled a 3-point wide SPY IC from Oct to Nov to get more "centered"
and collected between $0.98 and $1.20 on 10 lots.  The new position is just inside one
standard deviation.

Of course it's no longer centered after another
rally today.  By the way, do you think this rally will be over soon?

plan is to collect .3 in 4 weeks and then roll to Dec to get "centered"

I also have a 1-lot of an OCT NDX IC, opened with 50- point spreads (low 1650
high 2000) a little bit outside one standard deviation, and collected $7.50.

Again the plan is hold 4 weeks and roll to get centered.

One more question: when would you suggest adjusting both my open
positions in case of a big movement?



You raise some important points, worthy of discussion.

1) 'Too close to the money' is not a well-defined term because it is 100% relative and strictly a personal comfort zone decision.  It's neither right nor wrong to refuse to trade close-to-the-money iron condors. 

2) I promise that you don't want to know my opinion on where the stock market is headed next.  My prognostication record is dismal.  Yet, because you ask, I don't understand why the DOW is not near 5,000 instead of 10,000.

3) I think you roll far too frequently

This is important.  Why do you 'get centered' every expiration? 

Do you believe that reduces risk?

Do you believe this is an efficient method of trading?

Do you believe it's necessary to get neutral frequently?

Why do you do this.  There must be an answer.  Did someone suggest doing that?

Unless you are at, or approaching, the limit of your comfort zone, why are you exiting your current position? 

4) Here is a good idea that will make your trading far more effective: Cut your trade size in half. Use half your capital for a Nov position and the other half for Dec.

This is my recommendation.  Do not accept it if it violates your comfort zone.  But:

There is no need to 'get centered.'  It may be better to move just the calls or just the puts.   It may be better to reduce size.

The idea is to get centered when YOU are not satisfied with the current position.  That means too much risk or too many delta out of line etc.  It does not mean taking a perfectly good position and rolling it out one month just to get centered.

Your methods include: Too much trading.  Too many commissions.  Too many adjustments. Far yoo much cash going to your broker.

5) Why think of it as rolling?  Here's what I suggest.  Use your Nov position.   Adjust, exit, roll, etc ONLY WHEN IT'S THE RIGHT THING TO DO.  That means when YOU want to take action.  Do not roll just to get centered.  It does cost real commission dollars to get centered.

Open a Dec position when you are ready to do so.  Each of these positions is half your current size.  You own these Nov and Dec positions simultaneously.  Now, trade them separately.  When ready, close Nov.  Then sell January when ready.  Do not roll to Jan.  Just close Nov when ready.  After you do that, open Jan when those options become available for trading.

Manage Dec options the same way.  Trade the spread on its own.  Close when ready and then open a Feb position.  There is no need to roll. 

6) NDX trade

I have no suggestions for when YOU should adjust your current positions.  I don't know your comfort zone.  Nor do I know how far OTM you allow your short options to be before rolling. 

I don't believe in rolling.  I think it's a poor strategy that people adopt because of insufficient information. It should be a two-step process.  If you want to exit the current position, then exit.  If you want to open a new position, then open it.  The problem with rolling is that traders feel obligated to exit AND make a new trade at the same time.  Often, that new trade is ill-advised, too risky, or chosen for the wrong reasons (to collect cash instead of paying a debit).

Rolling should be two separate decisions.  It's okay to roll in a single trade, but ONLY when you want to exit the old and open the specific new trade.  In your situation, I don't understand why you are exiting the current trade.

A 'big move' is another term that is not well-defined.  Thus, I have no idea what it means to you and have nothing to suggest about whether you should make adjustments to your positions if that 'big' move occurs.  The same rules apply.  Make a trade plan to think ahead and consider at what price point you would become uncomfortable.  Then update that plan as time passes. If you don't recognize discomfort when it arrives, then go with the trade plan.

7) My recent record

I made zero adjustments out of necessity in recent times.  I bought in all my RUT Sep 10-point call spreads when they declined 15 and 20 cents.  And over the past few days, did the same with the put spreads.  I have no Sep positions and in fact, have already bought in a good portion of my Oct call spreads at 20 cents – on the recent decline.  I'm hoping to collect a few Oct put spreads on this rally, but nothing yet.

I never felt the need to adjust.  The moves never brought my shorts to a point where I considered the position to be risky.  Obviously you and I have different comfort zones, but if I rolled to get centered as you do, I'd have rolled many times.  I don't believe that's a good reason for making trades.

In my opinion, do not adjust when there is a big move.  Adjust when your position is not what you want it to be.  That's when you feel that your short options are too close to being ATM.  that may come after a big move or a small move.  And it's not an all or none decisions.  As you know, you can adjust in stages.

8) One more item I do not understand.  You collected over $1 for the November spread and your target is to earn 30 cents over the next four weeks?  Then you plan to exit?  Question:  Is the target profit of 30 cents worth the risk?  That's not very much profit. [Yes, it is a 10% gain on margin, but it's less than 1/3 of the premium collected]


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