Tag Archives | income trades

Trading Iron Condors as a Source of Income

Mark, 

Earlier question by Joe:

I'm reflecting on the question asked by GW and your response.
If ICs are deemed income trades then how would one generate a
reasonable income on only 10 ICs a month? 
So would you say trading much larger whilst carefully managing risk with
added protection unwise?

Joe: I amended the reply to include this:  Apparently I missed the point.  I do NOT believe that traders should limit their position size to trading 10 IC at one time.  I hope I never said that.  I believe that's a large position size for a beginner, but not for the experienced trader.



My question (which may have been phrased incorrectly) was pertaining to
trading ICs to generate regular income on a consistent basis.

I think I
may have taken your response out of context as I assumed you were
advocating to trade no more than 10 ICs. So to be clear I don't disagree
with your overall thoughts on ICs as income trades but would still like
to know your view on trading ICs in much greater size with good risk management, in order to generate a greater income.

I ask as I have read
and heard from varied sources that there are traders who do this each
month and therefore would like to know if you think it's a feasible way
of trading?

Joe,
Yes, it's feasible.

But that's not the same as saying that it's a good idea for most traders. in my opinion, to trade on a scale large enough to generate a steady (not every month, but on average) income that is large enough to replace working elsewhere to earn a living, translates into being a
professional trader.

Why did I jump to trading for a living
when all you asked about is making extra income?  If you plan to trade
size, and if you plan to manage positions carefully, you cannot be
working at a full time job.  At least not when the markets are open.


I don't have real statistics, but I am told by sources I believe to be reliable that 'the average trader never makes any money.'
If that's true, then trading is similar to other professions. Only a
few play sports well enough to become professionals and earn a living. But many play as a hobby, on weekends.

It's easier to make a living as a trader than it is to play in
the NFL – but it's still difficult. 
First prove to yourself you can consistently be profitable. If you
believe you have already proven your skills as a risk manager, and
if you believe you have the discipline, then yes, it's feasible to earn a
living. (Or extra income).

Just remember that earning 20%/year doesn't seem to be a great achievement when you see all those Internet ads telling us how easy it is to earn 5 to 10% per month – guaranteed. [Notice to all readers: Those claims are false]  But you know that 20% is an excellent return, especially over a multi-year span.

And yes, you can earn 50% per year and more.  However, the risk required to earn those returns makes it highly likely that you would eventually lose every penny of your trading capital – if you sought such returns.

The key to earning a living as a trader – in my opinion – is to decide how much income you need, remembering that a significant portion must be saved to pay taxes.  Next, come up with an annual return that you believe is realistic for your trading style and current skills.  Keep in mind that your original plan is to manage risk well.  That must include trading fairly conservatively because you cannot afford a large drawdown.  Then calculate how much capital is needed to generate the cash required, assuming your rate of return is realized.  Then get some extra capital for safety.

Conclusion:  If you have a track record of profitability, if you can raise the capital, if you maintain your discipline and not get flustered when you are suddenly trading more size than ever before, then yes -you can earn a living as an iron condor (or other) trader.  

One caution:  Increase size gradually. Do not move from 10 to 50-lots overnight.  Do not then jump from 50 to 100-lots (or whatever your size turns out to be).  Always keep cash in reserve – because you may need that cash for adjustments at a moment's notice.

Joe, the most difficult part to remember is that being a successful professional anything requires skills and practice.  It is feasible.  That is not the same as 'anyone can do it.'

The one warning that I want to mention is:  Do not make any attempt to do this if you are under-capitalized.  It adds too much pressure. If you start to lose – even a little, then you are going to have to try to earn money at a higher return to compensate for having a smaller account.  And Joe, you know that means increased risk.  That in turn increases the risk of ruin.

719

Bonus: Sign-up through above link and receive a free one year subscription to Expiring Monthly: The Option Trader's Journal

Read full story ยท Comments are closed