Tag Archives | options trading iron condors rolling a position trading iron condors options education

Trading Iron Condors: One Rookie’s Perspective

Hi Mark,


Thank you so much for this blog, and for your options education material; it is
greatly appreciated. [Thanks, and I appreciate hearing that]

I discovered that I learn best by doing, so in trading options I
am taking extremely small positions (compared to account size) and just
learning to trade by trading.

Please tell me if what I am doing so far
is acceptable in the long run, if the desire is to grow my account
size:
I have several Iron Condor and several Double Calendar positions
for February's expiration (5 weeks to expiration).

I figured that
I will simply close these positions at a loss if they approach my short
strikes, or close them during the last week (or let them expire
worthless) if they are in clear profit.

The percentages of all these trades to expire worthless was above 60,
most of them were around 70. The risk/reward, if closing out for a
small loss before reaching the short strikes appears to be very good on
all trades, somewhere around 1.1.

So if I close them out at a small
loss, or allow them to take close to max profit, because of the
risk/reward, it seems that I will do well in the long run. This seems
too simple, and I wonder if I am missing something.
Obviously I am new, so I know I am missing a lot. I don't even know how
to "roll the position" yet, I only thought to simply close the trades
if they get close to the strikes, which is far less of a loss than the
max loss.

Any thoughts you have would be greatly appreciated.
Thank you again for this blog and education site.

Mike

***

1) Beginning with smaller size is the right thing to do.  Paper trading is not suitable for everyone.

2) 'Acceptable' is not the word I would use.  I'll voice my opinions, but only you can decide what is acceptable for you and your comfort zone.

3) Owning more than one position at a time may be difficult to manage.  But it you overcome that difficulty, it's an excellent method for gaining experience, and thus, learning more quickly.

4) Closing at a loss at some future stock price is sound practice.  It's usually better to consider adjusting the position, but that can wait.  Don't over-burden yourself by trying to learn too many different things all at once.  Taking the small loss is always a reasonable action.

One thing I want you to do is find a calculator that allows you to see the 'probability of touching.'  That calculator tells you how likely it is that one side of your iron condor will reach a specified price during the lifetime of the position.  If you choose positions that have a 60% probability of reaching your pre-determined exit price, then this methodology will not work for you.  You would be closing at a loss far too often.  You would have to either: make adjustments or choose options less likely to force you to exit the trade.

I'm just telling you to look at the numbers to get an idea of what you can expect.  One such (free) calculator is here, but its usage is limited.

If your options have a 30% of finishing OTM, you will find that there is a 60% chance that the underlying will touch one of the strike prices of an option you sold.  That may make things awkward for you.

5) Allowing them to expire worthless is a worthy goal.  Please keep in mind the risk you are taking for tiny potential rewards.

6) The original probability that the options will expire worthless is no longer relevant.  You considered that number when opening the trade.  Now pay attention to reality.  Time passes (good), the underlying moves (not good) and the probabilities change.

7) What you are missing is the inconsistency of the markets.  When markets are calm, that's the ideal iron condor market.  Sell the call and put spreads and buy them back later.

During the recent market debacle, that would not have worked.  In many cases you would have been stopped out of your positions a day or two after opening them.

You can expect to win more often than you lose – over the longer term.  But not all the time.  One bad period can claim a large portion of your account.

8) 'Rolling' is a position-shifting strategy that is used by far too many people and is inappropriate much of the time.

Forget it for now.  You are studying enough variables to keep you busy.  If you do want to add to your education, I suggest you look into 'adjusting an iron condor.'  Rolling is included in that category.  Please remember that those who tout rolling ignore the risks when explaining how it works.

Overall I like your approach.  There are no guaranteed profits and losses can occur over and over again.  Or you may trade for a whole year with gain after gain.  There is no way to know in advance.  My one warning is do not get overconfident if this brings you one profit after another.  Do not decide that you are ready – and then quadruple your trading size.  Grow gradually.  You are in this for the long term, and I guarantee you will run into some turbulence along the way.

586

Read full story ยท Comments are closed