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Trading Iron Condors. The Opening Trade. Part II

Part I

Continuing my reply to Frank's questions:

We are discussing SPY iron condors and making choices about the options being traded.


2) The delta of the sold options is important to the probability of success and the probability of reaching a point that requires making adjustments.  It also plays a role in the cash collected.  Thus, it's a key element when constructing the iron condor.

You currently sell options with a 20 delta and one of your complaints is that you adjust too many times before being able to close the trade.

Do not even think about moving from 20 to a higher delta, unless you KNOW it will be comfortable.  You already 'make too many adjustments,' and thus I believe moving beyond 20 delta would be a big mistake at this point in your learning process.

When this experiment is over and you have drawn some conclusions, that's the time to think about (and hopefully discard) the idea of moving to 23 or 24 delta.  Moving to 30 is NOT going to work for someone who already believes he makes too many adjustments.


3) Spread Width plays an important role when choosing your iron condors.  From your questions I can see that you don't have any idea how to make a good strategic choice.  You allow time and premium to be the deciding factors when choosing the iron condor to trade.

You decided to trade 10-12 weeks spreads, chose to sell options with a 20 delta, and decided that the cash premium should be roughly $1.10.  Satisfying those parameters gives you no choice in choosing the iron condor.  Thus, for you, it's 4-point spreads.  That is not an efficient method for choosing trades.  It completely eliinates any judgment on your part.  It ignores your comfort zone (which is something you now realize). Let's see if I can help you make better decisions.

Here's a nuts and bolts idea of how to select your spread width, along with some commentary:

  • Did you know that the 4-point spread is equivalent to owning each of the adjacent 1-point spreads?  in other words, when you trade the 128/132 call spread 50 times, you really traded:
    • 50 of the 128/129 call spreads plus
    • 50 of the 129/130 call spreads plus
    • 50 of the 130/131 call spreads plus
    • 50 of the 131/132 call spreads
  • The only difference is that you save the commissions of trading each of these four spreads by trading them all at one time.  You MUST understand that this is true.  

You cannot trade options without grasping this basic concept:  Trading each of the four spreads is equivalent to trading the 4-point spread.  The risk/reward is identical. 

When you understand the truth of the above, then I hope it becomes clear that choosing the four-point spread is almost guaranteed to be a big mistake. Why?

I understand choosing a spread based on how much premium is collected.  However, people who do that (me) already know the desired spread width.  They do not allow the need to collect a certain premium define the spread width.

In relative importance, spread width comes in far ahead of premium. 

You are not thinking about the position. You made your 'line in the sand' requiements and tht's the end of the thought process.  Trading by rote or very strict rules is not viable – unless you already know that you will like the position forced upon you by the rules.  Clearly that is not the case here.

  • Look at each of the four spreads as an independent trade
    • Do you want to sell the 128/129 call spread?  I know you chose it because the 128C has a 20 delta.  But do you really want to sell this spread?
      • Is the premium sufficient for the risk?
      • Next, do you really want to sell the 129/130 spread?
      • Next, do you want to sell the 130/131 spread?  The premium is getting fairly small
      • Last, do you truly want to sell the 131/132 spread?

I cannot answer any of these questions.  My point is that it is highly unlikely that you want to sell each of these spreads.  If that's true, then sell only the spreads you WANT to sell. Do not sell any other spreads just to get the premium where you prefer it to be.  It forces you to make a BAD trade (BAD because you do not want to own it).

Instead of focusing on a 4-point spread to collect the 1.10 premium, concentrate on the spreads you want to have in your portfolio.  You may decide to stick with the 20-delta and sell only the 128/129 C spread.  Or you may prefer the 128/130.

You also seem to have latched onto the .20 delta option as if it were a requirement.  Perhaps you would feel more comfortable choosing only the 129/130 spread or the 129/131.  You would adjust less often, and that may solve your combination of problems.

Please give serious consideration to each spread that makes up the call and put portions of the iron condor and then choose to trade only the spreads you like.  For margin and risk purposes, it's best to keep the put and call spreads at equal width.  But it is not mandatory.

4) Multiple iron condors with same expiration

You must understand that you already have multiple iron condors in your account.  However, the fact that you don't 'see' the equivalent positions in your account leads you to believe that you own a single iron condor trade.

Nevertheless, I understand what you mean.  If you sell the 130/131 call spread and also sell the 132/133 call spread (and something similar on the put side), then you 'see' two different iron condors.

There is nothing wrong with doing that.  I do that all the time.  However, I initiate the preferred iron condor.  Then if I want to add to my portfolio, I'll choose a spread that is appropriate at the point of entry.  Many times that's an iron condor with different strike prices.  If you plan to open them simultaneously, be absolutely certain that you WANT to own each position and that you are not making the trades because you like the idea of owning a variety of spreads with the same expiration.


Bottom line: I cannot overemphasize that it is bad policy to choose spreads that fit some preconceived notions. 

As a rookie trader, you have to observe more trades as you gain the needed experience.  But you can, and I strongly recommend that you do, trade positions with the risk/reward that places each trade squarely within your comfort zone.  When you are more experienced, you can try to expand that zone.  But not now.  Now you are learning to trade options and your primary goal is to survive.  It's great to be earning money on a steady basis.  But this game is not quite that easy and I'm pleased that you are not getting overconfident.

Thanks for the excellent questions.



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Trading Iron Condors. The opening trade Part I

Today's post covers an important and popular topic. Choosing the parameters of the original iron condor is a complex issue.  There are strikes and expirationn dates to choose.  Then there's the right underlying and  spread width.  For some traders, there's the timing element.  A fascinating topic and I have much to say.

Here's a recent series of questions:

Hi Mark,

Thank you for maintaining this blog.  your comments have been very helpful to me.

I have been trading condors since April by using SPY at 10 to 12 weeks from expiration, selling the short strike at a delta of .2, I target collecting a premium of $1.10+.  This results in long position at 4 points from the sold position (i.e. sell a 128 call buy a 132 call).

I make partial adjustments if delta reaches .35 by reducing the spread to two positions [MDW: I have no idea what 'two positions' means], reducing the position or converting to a calendar or even a vertical. I have been making money, but at times I feel as if I maybe making too many adjustments (two to four before closing).

I try to exit the positions at 4 weeks to expiration. I found that the $1 premium collected allows me to make adjustments yet still have a profit. My usual position size is 50 to 100 contracts per leg, but at this time, I believe [emphasis added, MDW] the 4 point spread range maybe too risky.

I am considering reducing my exposure from a spread of 4 to one or two. I am using the thinkorswim site and found that if I stay with a .20 delta for the short strike and choose a two-point spread, then premium would be about 70 cents.

To go to a .30 delta and a one-point spread, I would collect about 50 cents; or at a .4 delta the premium is 70 cents.

I am also considering multiple condors with same expiration month such as selling SPY 130/131 and 132/133 call spreads. [MDW: Frank then goes on to offer adjustment ideas, but that's off topic] 

I am most comfortable trading SPY.  I tried using SPX once and got burned by waiting to long to close the trade, and its not as liquid as SPY.

Mark any suggestions you can provide or other factors I should consider would be appreciated.


Happy new year Frank,

I like the questions and the fact that you are seriously considering several alternatives. By the way, you got burned with SPX because you waited too long.  That has nothiing to do with preferring SPY.

There are two problems for me.  The answer you seek requires a great amount of detail, and could easily fill a couple of one-hour webinars.  I simply don't have the time to provide that much detail.

But more importantly, I would be responding from my personal perspective and you must truly trade something that fits within your comfort zone.

In responding to the questions, I'll take the path of offering advice – that I trust will help you find the answers. The comments go directly to your questions.



Let me begin with some comments:

  • If you believe it is too risky, that's the end of the discussion.  In this matter, do not let anyone try to convince you that your decision is foolish.  'Too risky' is not a fact.  It is an opinion, and yours is the only opinion that counts.  It so happens that I don't like your 4-point spreads, but more on that later
  • You have too little experience to be rock-solid with a single trading idea.  I don't care how much money you have been making or whether you have been a winner in each of these months.  You have not seen enough to understand how the markets truly behave over an extended period of time
  • Experiment now, as you plan to do.  If some of the experiments feel uncomfortable, then you have only two choices.  Don't trade them due to the discomfort, or use a paper-trading account for those trades
  • The fact that you have been trading 50 to 100 condors per month is irrelevant.  For most newcomers, that's far too much size.  if you are trading an account with $10,000 to $12,000 – then your size is egregiously large and you are in way over your head with risk.  On the other hand, if your account has one half million dollars in it, then your size is truly peanuts and you are indeed learning to trade on a small scale. What's more important than contract size is the percentage of your account value that is being tied up in margin for these trades.  I'm not asking you to disclose that, just trying to tell you that contract size says nothing
  • The item that I like best about your inquiry is that you show some fear, despite profits.  That's excellent.  One of the best ways to go broke in a hurry is to become overconfident.  I'm pleased to see that you seem to be avoiding that
  • While making these experimental trades, make it easier on yourself by cutting position size.  Maybe 20 to 30% fewer spreads.  Why? Less pressure while playing with alternatives.  Yes, less profit potential, but the learning experience should prove to be beneficial for a long time, and it pays to do it correctly.  With less pressure to succeed and more time to make observations, you get to study the alternatives in a calmer atmosphere

to be continued…




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Iron Condors and the Greeks

Hello Mark.

1.  Last week I traded an iron condor on Apple (January and February expiration) at 350/360 on call side and 290/300 on put side.

Past Monday, the prices of all four options, January expiration, went up for no apparent reason!  My January positions started showing big losses.  February positions were fine for same company and same strike prices.  What happened?   

The implied volatility for January options increased.  You opened your positions when implied volatility was at its low point.  Because iron condors are positions with negative vega, they lose value when IV increases.  That's what happened to you.  If IV moves downward again, you will recover the losses quickly.  Otherwise, it's going to take the passage of time (without a concurrent stock move) to recover.

Today, both January and February iron condor went up in prices, and again I see big losses.  I thought time erosion and call spread would help me.  

There is more than one greek.  Each contributes to the value of an option independently of the others. 

Theta is your friend.  You earn a small amount each day.  However, that is being offset.  Gamma is the enemy.  If the stock moves too far, then you get short deltas quickly (on a rally) or get too long (on a decline). 

Vega is the culprit you right now.  Vega measures the dollars earned (or lost) every time the implied volatility moves higher or lower by one point.  Right now it is moving higher.

When the market falls and the put spread moves against you, the call spread will NOT decrease in value fast enough to compensate for the loss in the put spread.

It truly upsets me that you thought that selling a call spread for a smallish premium would ever be enough to completely offset the loss on the put side when the market declines.  Sure it helps, but never enough,  The IC strategy is not designed to have one winner to offset the loser.  It is designed to win when the market is not very volatile and doesn't move too far – as time passes. [And there is no need to wait until expiration to grab your profit]


Is it possible for me to calculate option prices, independently? 

Independently of what?  The market determines the prices.  The market determines whether you earn a profit or take a loss.  No you cannot calculate option PRICES independently.

What you can do is calculate a theoretical value for any option. You can make an estimate of where you think the options should be trading.  That calculation may give you the confidence to hold your trade, but it will be your opinion vs. the collected opinions of the rest of the world.

To make the calculations requires that you input an estimated future volatility for each option (that's all four of them) into an option calculator.  Not an easy task for anyone, let alone a rookie trader.  Estimating future volatility is very difficult.  Dare I say impossible for the vast majority?  It is better to allow the marketplace to generate the option values. Then you can make trades that you deem suitable.

You may not have planned it, but you decided it was a good idea to get short AAPL vega at the time you opening the iron condor position.

What happened to you and your trade is that you chose to own negative vega at a bad time.  Not much you can do about that now.

2. My broker, thinkorswim, does not charge commission if I buy back short options if they are worth 5 cents or less.  Is it a good idea to take this offer? 

Yes.  I approve of reducing risk whenever possible.  Paying 5 cents is cheap insurance.  If there is just one day to go prior to expiration, then that's different.  There is no urgency to pay the nickel at that time.  But I love to pay that price (and more) to exit. I am also happy to pay commissions to eliminate the risk.  Free commissions make it a no-brainer for me.

3.  How do I know where (in stock, equity or ETF) a pro like you invests in iron condor? 

You cannot know.  Nor should you care, except perhaps to see it as an example.

There is no 'best' premium to collect and there is no best strike price to sell.  Nor is there a best time to enter the trade – unless you are a strict adherent of technical analysis.

You (honestly, I am not making this up) want to own a position that makes you, comfortable.  If you try to guess which position makes someone else comfortable, how is that going to do you any good?  You would not know when that pro makes an adjustment or exits the trade.  You must find trades that please you.  Sure you can read about what I do, but there is no good reason for you to attempt to do the same. But think about this:  You have no idea whether I am struggling, doing ok, or making a ton.  Not am I going to tell you.  It is completely irrelevant.

4. [A later follow-up to the original e-mail conversation] I can see that options pricing is lot more complex than I imagined.  I thought that earlier I place trade for next month, I get better price.  But that is not true.

It is true as far as theta is concerned. However, there are other factors that influence the price of options.

Here is the bottom line for you:  You clearly jumped into trading a strategy with no clear understanding of how it works.  That's fine when trading in a paper-trading account, because that's one good place to learn all about the trades being made.  But when using real money it's just foolish to think you can trade now and learn later. 

I find it very sad that you are in this position.  What is your hurry?  You have the rest of your life to trade and now is the time for learning.



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Following Live Trades


Out of curiosity, if we're following one of your own trades at Options for Rookies Premium, would you be able to writeup a quick sentence or two each time (at most once per day) you re-evaluate the position to describe why you decided to hold it, make an adjustment, or close?

I understand most of the time, it would be 'underlying moved X, still Y% away from shorts, reward still worth risk, holding position' or some such. But still, I think a lot of us would be extremely interested.


Hi davmp,

When writing Follow that Trade, I hope to make it as realistic as possible.  And I'd want to provide information that is of interest to members.  But consider what you are asking:

'At most once per day.'  On most days I NEVER look at the position.  Not even once.  During some weeks, I never look at the position.  Unless I have a position that is very sensitive to theta (and that's a soon to expire position), I see no need to take the time – unless something has happened to the price of the underlying asset.  Sure, if there is a huge decline in implied volatility, I may take a peek to see if the position is worth closing.

When I own an iron condor and the market doesn't move, why would I want to look at the position?  The answer is that there is no reason, and part of good risk management is knowing how to use investing time effectively.  When a position obviously requires no attention, that is what I give it.

I do not make a decision to hold every day.  Holding is my default decision.  I know when to look at the position to see if things are still okay with the trade.  I know that dull markets and positions that gain by collecing theta can be very dull to follow.  The compensation for that is the huge probability of making money on the trade.

More exciting markets make for more interesting opportunities to make adjustments and use those as educational opportunities for readers.  On the other hand, they are often – but not always – money losing situations.  Thus, I'd welcome those with very mixed feelings.

davmp – there are alternatives.  I may initiate a (paper) trade that is far from neutral – a trade that will likely require an adjustment soon.  That's good for educational purposes, but wrong from the persepective of attempting to manage a winning trade.  Thus, I have decisions to make, and that's why reader input is important. 

Consider an adjustment

When I look at the position and believe there is some reason to consider an adjustment, I'll write about that – even when I don't make the adjustment.  And it cannot be only a sentence or two because there is nothing valuable I can pass on in that type of post.  If you see nothing, assume there is nothing to report.

davmp – who would want to see this day after day: "nothing done"?  That would be a major turn off and not at all helpful.

I am hoping that no one will actually enter into the trades I make – for reasons I've stated before, but will offer timely comments when the comment is useful.

davmp: I want to provide information that interests you.  But try to look at this from my perspective:  I would never take the time to calculate: how much the underlying moved, how far it is OTM in either percentages or standard deviations, or comment on whether the reward was worth the risk. [You may assume it is, or else I would be out of the trade].  I don't do that now and I want this to be a realistic experience.

The trades I make and follow on OFRP (and Members will be encouraged to submit trades) are not to be actively traded.  It is necessary to be aware of what the market is doing, but if the underlying moves 0.1%, I do not bother to look at the position.  I want FTT to be realistic, so I will not look at positions for the sole reason of being able to issue a report. 

Follow the Trade is real life.  It requires patience until action is needed – or at least considered.  That's why I hope to follow more than one trade at one time.  That will eventually present a real problem when the market gets volatile (and that is the reason why I trade only one underlying asset) and there are several positions at risk simultaneously

I try to never turn down a request, but what you ask is not possible.  It's not in the best interests of readers. 


December 2010 issue of Expiring Monthly was published yesterday.

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OTM spread prices


Interesting discussion.

Maverick talks about the fair value of the vertical spreads. I have been wondering about that recently.

For a real life example, at this moment (Dec 14) the Jan SPY 119 Put and the Jan SPY 128 Call both have a probability of expiring in the money of 25%. Yet the Jan 119/118 Put spread is about $0.17, and the Jan 128/129 Call spread is $0.25.

I would have expected that with both short strikes having the same probability of expiring, the vertical spreads would cost about the same, but this is not the case. Furthermore, it seems to me that the Call spread is probably reasonably priced (25 cent credit for 25% probability of expiring) but the put spread offers a poor reward for the amount of risk entailed when selling.

I am guessing that trading this condor or its equivalent would probably be a losing proposition over the long term, for the reasons Maverick points out.




I agree that opening iron condors and ignoring them is probably a losing proposition.  However, no serious trader should do that.  It's pure gambling.  And that's okay for gamblers, not for traders.

When you own investments of any type; when your money is at risk as you seek to earn profits, closing your eyes and hoping that all will be well is simply not viable.  Note to passive investors:  You rebalance portfolios periodically, and thus do not completely ignore your holdings.

Iron condor trading requires active risk management, and that completely changes the odds of success.  So Mav may be theoretically correct, but in practice, a skilled risk manager can take care of business and earn money.  But I must emphasize that it is not a simple task.


I am finding it very difficult to find the words to reply to your observation.  Let's try this:

The Jan 119P and the Jan 128C may each have a 25 delta, but the Jan 118P and the Jan 129C do not have the same delta.  In fact, the Jan 118P delta is more than two points higher than that of the Jan 129C. That affects why the spreads are not equally priced.

Let's consider looking at this from another perspective. Think of the SPY iron condor as positions in two different, but 100% correlated stocks: SPYC for which we sold a call spread.  Also SPYP for which we sold a put spread.

My explanation:

  • SPYC trades with a lower implied volatility than SPYP
  • The two stocks have an identical historical volatility (because each is really SPY), but history tells us that SPYP options are more valuable than SPYC options.  How is that possible?  SPYP put options have undergone huge price surges more often than the call options of SPYC.  SPYC option holders occasionally earned large profits, but that's the result of slow and steady movement in the price of the underlying stock – and not from sudden, large price changes.  Thus, when looking at options that are equally far out of the money, puts trade at higher prices than calls because both buyers and sellers know that there's an added chance for a big price change.  That's why there is a volatility skew
  • The volatility skew results in lower struck options having a higher implied volatility than higher struck options
    • Volatility skew is not linear, but the trend continues through the entire string of options.  The term 'volatility smile' refers to that non-linearity
    • The difference in implied volatility between the two calls (0.50) is less than the difference in implied volatility between the two puts (0.70)
    • That extra 0.20 volatility point difference boosts the price of the farther OTM put compared with the call [i.e., the put is closer in value to it's neighbor than the call]
    • Thus, the put spread is narrower and the call spread is wider
    • We did not use equidistant calls and puts in this discussion.  Instead we worked with equal delta calls and puts, but the reasoning is identical


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    Follow up: Real Life Iron Condor Trade


    Great post as always. I know this would be a bit labor intensive, but is there any way to show a cumulative P&L and risk vs. return for this group of trades?

    Thank you Burt, but I have no way to collect the data.

    Risk vs. return does not apply. There is no 'return' to measure.  The P/L for one day's closing prices bears no resemblance to prices you get when making real trades to exit.

    Neither is there risk to measure. I assume it can be done, but I have no idea how to determine risk for holding a position for a few days or weeks.

    For educational purposes this is probably one of the best posts I've read. It provides one with a lesson on how complicated from a risk perspective and number of trades to maintain a position one might want to get. It also makes me wonder whether the opportunity cost (not to mention the trading costs) associated with so many adjustments is worth it relative to a risk-adjusted return.

    I don't understand what you mean by 'opportunity cost'.  When you make the original trade, you have no idea what lies ahead or how else the money might be put to use.  I see zero opportunity cost.

    You have money to invest.  Then you must select your trade(s).  How else can you operate?  If you don't like the idea that managing iron condors involves serious work, then don't trade iron condors.

    Even if you don't go through the P&L, what is your sense of the cumulative risk relative to the after tax and trading cost return?

    After tax?  I don't see that either.  All earnings are taxable.  That is independent of the trade.  All I am saying is that I have no idea what you are asking about taxes. 

    Burt, there is no way to know the return or the costs before the trade is over.  And the next trade will be different.  My sense is that if you are a good risk manager you will like the return to risk.  If you don't want to bother managing risk, you will fail.  That's my opinion.

    Trading costs should never be a consideration when trading.  If they are, you have the wrong broker or are choosing the wrong strategy.  Managing risk is far more important. I cannot imagine failing to make a needed risk adjustment because the commissions would be too costly.  When this trade was opened, our trader had no idea that he would be making so many trades or using as many commission dollars as he did.  Thus, risk does not change.  The risk associated with opening the trade is what matters. Sure tack on some extra dollars to the maximum loss to allow for expenses, but you never know the future.  At any point that risk/reward is no longer satisfactory, that's the time to adjust or exit.

    Of course, "complicated" is a relative term. As a former market maker, this "trade" may seem rather rudimentary to you. Would you be able to tease out how "advanced" this number of trades appear to you. What I mean is that a true option rookie would not be likely to handle all the various decisions required. But with experience might approach the amount of adjustments that occurred. Where along the line of rookie to experienced trader would you place this trade?

    Burt, there is nothing really complicated about any of the individual trades, and that's how we trade: One step at a time.

    Nonetheless, I don't consider this entire series of trades to be suitable for the rookie. That said, if that rookie plans to trade iron condors, then it's important to have some idea of how to make adjustments, when to make them, and some ideas for possible adjustment trades.  This post offers that to any trader.  One cannot just open an iron condor trade and allow it to run to expiration.  There is almost no chance of avoiding blowing up a trading account if a trader adopts that methodology.

    For the rookie, this post offers an opportunity to see adjustments made by a real trader.  The rookie can try to discover the rationale behind each move and think about whether that seems logical or misguided.  If unable to make that judgment, then it's a perfect excuse to paper trade iron condors and practice that (or any other) adjustment type.  The rookie is not born as a trader.  there is no substitute for experience.

    The whole point behind a post such as that is to enable new traders to understand why the trades were made, how they reduced risk, and whether that specific adjustment is one that suits the individual trader's way of trading. 

    There is nothing gospel about the traders choices.  Some traders, not fearing the downside, would have sold more puts when exiting current puts.  Another trader would wait, and then pay less for the puts.  Someone else might buy different insurance  when the trade was initiated.  Following someone else's trade is just an opportunity to see some trades in action and think about them.

    To get the most out of this post takes a certain level of understanding about risk management.  That takes experience.  But this is the key point:  Even if your risk management skills are not yet well-honed, even if the idea of managing risk has never previously occurred to you, the idea that it's important to take some action to reduce risk is the idea that must be transmitted.  The rookie trader may not yet make the most appropriate or efficient adjustment, but any adjustment is better than none.  If the rookie learns that doing nothing is unacceptable, that's lesson enough.

    So Burt, some of this is for advanced traders, but the concepts can help the rookie trader get a foothold into the idea of risk management and how important it is to survival.

    Thanks as always,


    You ask about cumulative P/L.  To me it's immaterial.   When you have a position – you have two choices: hold it or don't hold it.

    How can it possibly matter whether the position is profitable?  You want it in your portfolio (good risk/reward from right this minute into the future) or you don't.  If you don't want it, exit the trade.

    If you keep a position in your portfolio just because you do  ot want to exit and record the loss, then you are going to have a portfolio of high risk trades.  Why would you do that?  When you do not like the trade for any reason (perhaps you have already earned 90% of the maximum profit and are happy with that), get out.  Eliminate the risk and find a better trade.

    You can agree or not.  It is gospel in my book.


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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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