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Iron Condors and Trading Style

Dear Mark,

Since completing The Rookie's Guide To Options, I've moved
on and have been furiously trying to absorb the information provided in
your blogs. I wanted to give a big thanks for keeping all this
information available (and organized into sections).

I wanted to tell
you about a 'webinar' on iron condors that I listened to over the
weekend, offered by an online broker. The 30 minute presentation was
ultimately more of an advertisement for the guy's brokerage firm than
educational, but I did pick up a couple of points, mostly pertinent to
his own views on condors but enlightening nonetheless.

1) He strives for his condors to expire rather than to close them and
has even opened them on the morning of expiration day

2) He closes a condor if the delta reaches .45

It seemed obvious his
techniques were riskier than what you suggest in your book, but I was a
little surprised at how different your approaches really are. First,
though I'm not sure if you've ever explicitly said so, I've presumed
you choose to open condors at least 2 months in advance and typically
close them when you've made a satisfactory gain from theta decay,
preferably far from expiration to avoid high gamma and the rapid swings
that stocks go through as expiration day nears.

His view on delta came
after I asked him how delta and theta affected his condor decisions…
I was hoping to get some tips on where to open condor positions based
on those values; his .45 delta seemed like a sensible guideline but
with regard to theta he laughed,
"We don't pay attention to theta, we just want to burn through it as
quickly as possible!" I rolled my eyes after that.

Admittedly, my
knowledge is just about nil when it comes to using greeks for my
positions, but it seemed clear to me that one's acceptable value of
delta would change with the amount of theta left on the option.

next non sequitur statement sort of confirmed that:
"If we can make even just a 17% gain on a condor in its first week,
we'll take that and close the position"

So, my conclusion after the
event is that there's a lot of different methods out there, and those
supporting the riskier moves seem to be the more outspoken ones.

think I'll hang out here and gather more information a while longer
before I open any index spreads.

By the way, if you have any readers
who are getting frustrated at not getting the options approval level
they want with their online brokers, I figured something out. In
addition to having the prerequisite liquid assets and net worth, you
need to check off 'aggressive growth' and 'speculation' as your
investing style, instead of simply 'growth' which is what I had been
choosing. It's hard not arguing with the people at the other end of the
line that spreads are supposed to be protective, not speculative.


Hi Andy,

1) I'm reorganizing those categories.  There will be fewer categories and hopefully that will make it easier to find previous posts

2) Overall comment.  I have no problem with much of what he does.  A lot of it is 'style.'  But when he is 'willing' to 'settle' for 17% in one week, there are only a few conclusions I can draw:

a) He has no idea how to calculate percentage return.  or

b) He is a trillionaire – and clearly the wealthiest person in the world.  Seventeen percent in a month, turns $1 into $6.50 in a single year; or

c) He lies

I vote for choice a).

3) It's not 'wrong' to trade very short-term iron condors.  It's just too risky for me.  This is a personal comfort-zone decision.

But he does run a brokerage and wants clients to generate commissions by trading more frequently.  I admit that I am surprised that he appears to pay little attention to risk. After all, it's in his best interests to promote strategies that are profitable and not too risky.

4) Closing at a 45 delta is as reasonable as other alternatives.  He apparently does not attempt any adjustments, which is also a trading style decision.  I have no quarrel with this action – for the right investor.  It's not to my personal liking.

Other traders would choose a different delta, but it is a reasonable way to limit losses.

Keep in mind that I don't really 'suggest' when to close or adjust.  I try to indicate what I believe is a workable trading style, with reasonable risk.  But those terms are relative and it's right for you, or any reader, to select his/her own parameters when managing risk.  If you are comfortable, making money, and don't feel the 'need' to take more risk, then you are doing just fine.

5) I did explicitly say that my (typically) 3-month iron condor suits me and my risk profile.  I recommend that readers consider that as one alternative.  I don't believe my style is suitable for all, and encourage you to carefully think about (or practice trading) different types of iron condors (different expiration, delta of options sold, etc) to find your own comfort zone.  This process is not completed overnight.

I do not like being negative gamma on short-term options.  Someone else may prefer the higher risk and higher reward.  That's not 'wrong' – it's just wrong for me.

6) I believe it pays to be aware of theta and vega, and especially gamma – but the truth is that if he has a system of opening new trades and exiting those trades when he perceives risk is high, how can anyone say that is 'bad' or too risky?  Obviously it makes you and me uncomfortable, and we choose to manage risk differently.

7) When looking at delta near 50, you know the option is trading nearly ATM.  Theta is attractive; gamma is dangerous.  Play 'em or fold 'em.  That's the decision.

It's a compromise:  Less time means a smaller probability that the move will occur.  That encourages you to hold and collect that time decay.  But, if the move does occur, gamma is worse and the option can move to 100 delta very quickly – maximizing losses.  This is, as already mentioned, a personal trading style/comfort zone/risk-reward decision. 

That 45 delta is always going to mean 'nearly at the money.'  The truth is that he exits when he feels the underlying has a chance to quickly  move into the money.  I cannot argue with that, although I prefer to exit sooner.

It may feel unscientific or too lax of a method for you, but I don't find exiting at 45 delta (or 40 or 50 or ?) to be unreasonable.

8) The longer you 'hang around here' the more information you will gather.  My goal is to have readers use that information to form opinions, think for themselves, and not depend on me, or anyone else, to suggest specific trading styles.  And don't forget that being flexible is important – i.e., trading style can change as you gain experience and as market conditions change.

9) Good suggestion for 'permissions' but it's also easy to change brokers.  Some allow any trader to trade any position.  That can be dangerous for rookies, but that freedom is available.

10) I don't know if they don't recognize that spreads represent reduced risk, or if it's easier for them not to challenge old guidelines.  But it is a constant reminder that ignorance plays too large of a role in determining how our world operates.


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