Tag Archives | paper trading

Trading Iron Condors for a Living

Hi Mark,

I'm Roberto from Italy, sorry for my bad English.

I want to thank you for the professional advice that you give to us.  It's very useful; I bought your "lessons of a lifetime" and it's very
useful too, thanks again.

I know options trading since 2006, but I made very few trades in the
real market, losing a couple of hundreds of $. I take a break from the
real market and go back to study, and I realize that I always need to

My question is: in your opinion it's possible to live by trading? Do you
live by trading? Do you know someone who lives by selling iron condors?
And last but not least, do you know some hedge fund that operate in
options, especially iron condors?

Many thanks from Italy.

I follow you every day.



Buona giornata, Roberto

Thanks for reading the blog, and there is nothing wrong with your English.  Yes, the education process, or the need to study, is something that does not end.  Just think about how professional athletes – Tiger Woods for example – always practice. 

Yes, it is possible to live by trading.  But, it is difficult.  The very first truth is that you must prove to yourself that you are a profitable trader – consistently – before you give up your job and try to trade for a living.

Here is the part that most people fail to recognize:  Novice investors believe they can quickly easily to make enough money to support themselves and their family.  Why would someone believe that to be true?  If you want to determine if you can do it, then you must first make money by practice trading.  That means  using a 'pretend' account, or paper-trading.  If you are successful, and ONLY if you are consistently successful – then is the time to think about trying to trade for a living.

If you cannot make money in this account, there is no reason to believe you can do better with real money.

Next consider your bankroll.  How much can you place in your account and still have enough to meet your daily needs – just in case you don't make any money right away?  Next consider your rate of return.  If you can earn 20% per year, consistently, then you would be a very successful trader.  Some people do far better.  Most do not.

Putting all that together, if you have $100,000 to invest and if you earn 20% per year, can you live on $20,000?  Probably not.  And don't count on earning that 20%.   It's not available to most traders.

You tell me.  Can you make a living as a trader?  Are you willing to devote the time to practice?  Do you have enough cash?  Are you alone, or do you have a family to consider?

If you can meet those difficult barriers to entry, I guarantee that the number one factor that will determine your success (or failure) as a professional trader is your ability to manage risk.  That means you must trade without emotion.  All decisions must be ruled by logic.  You cannot get greedy and you must act decisively when your positions get into trouble. On the other hand, you cannot just take a loss every time the market makes a small move.  Can you do that? Can you handle the pressure?  Practice and find out.

Get started

Practice trading.  Do not use real money.  Open a few different iron condors at one time and manage them.  Take this process seriously – do not look at this as 'only' play  money.  To you, it must seem to be real money.  Succeed at that – and you have a chance. 

Roberto – you may be able to do this.  But not everyone can.  That's why you must know how good you are before making the commitment.  You do not have to be the best.  You just have to be good enough to make enough to meet your needs.

Your questions

I do not live by trading alone.  My positions are not large enough to earn enough cash, unless I get very lucky.  And that's fine.  I am at the stage where I cannot afford the risk. 

Many people claim to live by trading iron condors, but I do not personally know anyone who does that.

There are hedge funds that trade iron condors.  I don't know the names of any.   I suggest that you do NOT pay someone to trade iron condors for you.  That includes hedge funds.  They take 20% of the profits, plus  more in fees, and there is not nearly enough profit left for you.  Most hedge funds require that investors be wealthy before accepting them as clients.

I just published a page that discusses the topic of getting started as a trader.  You may find it helpful.



Lessons of a Lifetime:  My 33 Years as an Option Trader,

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Learning to Trade Equity Options

Reading other blogs, I came across a post from OptionClub.com.

I tried to post a comment, but it was not accepted.  Thus, I reply here.  I don't want to be accused of taking material out of context.  Please read the entire entry. 

I know there are many methods a mentor can use to educate investors who want to learn about options.  Some beginners accept minimal information and quickly learn on their own.  Others require a thorough knowledge before being willing to invest one dollar.  All we educators can do is offer the material in a manner that we believe suits the individual trader. 

When writing books and blogs, I present information and opinion in great detail. believing that the rookie deserves to understand what is being taught, and not merely be given a set of instructions with no idea how to think about trading.

I do not claim that is best for everyone.  However, I take a strong exception to those who tell a rookie almost nothing and expect that person to go out and trade.  But sometimes the expectation is even greater.  The suggestion in the blog post is for the newbie to make a few trades and then revise the trade plan.  What trade plan?  How is that novice supposed to formulate a plan, let alone revise it?

The OptionClub post was written in response to this question: "Just what do you have to do to learn how to actually make money in this
trading business?"


Chris makes many valid points, including the idea that an education is the foundation of the trading business.  And it is a business, not a hobby.

Where we disagree is in the practical advice offered.  He wants readers to make a plan and practice trading – with real money.  He dislikes paper trading.  His reasons make sense – for someone who is not a novice trader.

He cautions people to trade one- or two-lots, to learn, and then revise strategies as needed.

Paper trading allows a trader to encounter a myriad of situations, with an opportunity to follow a trade to its conclusion.  By keeping records, the learning process is accelerated.  Imagine owning a real one-lot position and not knowing what to do.  It's much better to avoid the panic of being concerned about money.  The newbie's task is to learn about options and discover how the chosen strategy works under real market conditions. and make some decision, see how it works out, and then decide if it was a good idea. 

The difficult part is learning to recognize 'good' and 'poor' decisions.  The temptation is to allow the results – profit or loss – be the final arbiter.  Good or bad should be based on the soundness of the decision.  That's beyond the newbie's ability at the moment.  But record-keeping, discussions with the mentor, and a multitude of practice examples results in a more transforming the novice into a new trader with some decent experience.

My reply to the question posed above:  To learn how to make money, you MUST first understand options.  Your goal is not to earn cash from the git-go.  If you accept that goal, then there is no point in using real money when your objective is to practice and learn. 

Telling people to go trade is the wrong approach – in my opinion.  Trading when you don't know what to do is absurd.  Making a plan when you don't know the nuances of options is an impossibility.  That's where experience comes into play.

Once you believe you have an understanding of how option prices move up and down (by practice trading), then you can adopt a specific strategy and practice until you believe you understand well enough to invest a small sum of cash in a position.  But there is no urgency.  Learn first, trade later. 

If the new trader learns well, he/she is better positioned to earn profits.  When the original focus (per the questioner) is on making money, then the focus is not where it should be – learning about options.

The response made no mention of risk management, adjustments, exits and various other decisions that a trader must learn.  How can a trader 'revise' strategies when he/she cannot get enough meaningful experience?  How can a trader survive when risk management is not presented as a necessary consideration – right from the beginning? 

I understand that there are many different ways to gain an education and many methods for teaching.  I'm not picking on the OptionClub.  I merely found this blog post worthy of comment.

To me, one of the big problems with option educators is that too many give beginners what they seek – confidence and the incentive to get started too soon.  But they fail to provide enough information.  There are too few details.  Too little guidance. 

I recommend reading, asking questions of people who can be trusted, and paper trading.  I recommend patience.  There is no substitute for seeing trades play out in real time and being forced to make a decision on how to manage the trade.  If the trader does not know when trouble looms, risk is high, or enough profit has been earned, how can that person be expected to make a good decision?  It becomes guesswork.  Winning traders do not make guesses.

Learn first.  Paper trade.  Understand how to limit risk (and it's not by adopting a strategy of buying options).  Even when there is no real cash at stake, to the serious student, the experience has everlasting value.

My response to the blog post:


Understanding the basics of options and how they work is essential.  We agree.

Making a plan?  How is a trader who has zero experience with option strategies supposed to make a plan?  That trader would have a difficult  time choosing which options to trade when establishing a position – how can that trader plan for contingencies?  Impossible.

How can that trader know when to take profits or exit when in a bad situation?

The idea is to learn about a few strategies and pick one that 'feels' as if you may be able to use it.  Then practice trading.  Yes, in a paper trading account.  The idea is to learn about the strategy – not about whether you would trade differently using real money.  That comes much later.  The idea is to learn how the strategy works.  To learn what has to happen to make/lose money.  To acquire some insight into risk management.

The student must encounter situations when risk is unacceptable and test methods to reduce risk.   The learner wants to get hand's on experience deciding when it's time to take profits or abandon the losing trade. 

That's why the rookie is practicing.  To gain experience.  How can that rookie plan ahead with no knowledge of how to solve potential problems?

As the trader practices, he/she reads more about the strategy. Perhaps from multiple sources.   Read about managing risk.  Practice trading and making trade decisions.   If this strategy is viable – then the trader becomes ready to start using real money trading and is able to make a simple plan.  That is the time to begin trading small size.  Now is far too soon.  If the trader canot earn anything when paper trading, thre is zero reason to anticipate doing any better with real cash.

Steps must be taken in the correct sequence.  Paper-trading for the beginner is one of those steps.



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Learning to use Insurance to Protect Iron Condors


for Trade King

Rolling a
Position: From a Different Perspective

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The following (condensed version) question provides an opportunity to discuss the idea of owning extra options as insurance
against a catastrophe – when trading iron condors.

Hi Mark,

I made the following paper trade after studying Chapter 20 of your book (The Rookie's Guide to Options):

Sold 10 RUT Aug 720/730 C spreads and  BOT 1 RUT Jul 700 call as insurance.  Collected $1,391 for the spread and paid $611 for insurance;  net credit: $780.

Had I not been paper trading and able to pick up some of the bid-ask spread, I would likely have received a $1,430 credit. 

I am puzzled by the current negative theta (-2) for the position.  If RUT remains unchanged, theta would be zero on June 22 and increase to 37 by July 13, when my long call expires.

Insurance provides protection on the upside, and enables a profit on the downside, but eliminates profits from theta for 11 days.  Then theta profits are low until near the Jul expiry date. 

Is this what you would expect, or should I have increased theta on the overall transaction by selling about 13 credit spreads, rather than 10?

Do you think that this transaction represents a reasonable risk/reward if I had been able to receive that $1,430 credit? 



1) If
your paper trading account requires that you pay offers and sell bids,
it's not worthless, but it's pretty bad.  Ask the broker how are
you supposed to gain any useful experience trading when you cannot get
realistic prices for the trades.  I assume you enter spread orders and do not trade the options separately.

It's a good
question to ask.  If they cannot help you, find a free online site to practice.  I have no idea whether the CBOE paper trading is any good. 

2) If the Jul calls expire and if you cannot close the Aug position at favorable
prices, then you are left with a one-month iron condor and no
insurance.  Not the ideal situation.  That is the worst case scenario when using insurance.

You must decide – and yes, I know experience
makes these decisions easier – if the insurance is worth the cost.  Or
if this is the right insurance to own.  Or if this is the right iron
condor (or call spread) to own. 

Consider this scenario: It's expiration week for July and the market takes a big tumble.  Do you own enough insurance? 

Norm, insurance can be helpful.  But it is expensive and not everyone likes paying top dollar and still not being completely protected.  Remember that the least expensive insurance is to cut position size.

3) You
have two ways to make money with iron condors.  Theta.  IV decrease.  

Theta is not the end-all be-all of trading.  If theta is that important
to you, I strongly suggest you avoid buying extra
options.  There are alternatives. 

To learn to handle risk better, you want to experience a number of situations in which you incur problems.  This is my suggestion:

a bunch of trades over several months and see how they play out.  It's best if you have access to a realistic paper-trading account. 

By 'play out,' I am not suggesting that only the P/L results are important.  You want to pay attention to the positions on a daily basis. 

Decisions: Are you
comfortable with (pretend) owning these positions?  Does the long option (bought as insurance) lose time value too
quickly?  Do you feel the insurance is worth the cost? 

To do
this effectively, keep a trade diary.  Write down your thoughts every
trading day. You may like the idea of owning insurance now, but change your opinion later.  Insurance is expensive when IV is elevated.

Track positions with and without insurance.  Discover your comfort zone.  Take your time and collect useful data.


will have many data points and observations.  Record when insurance seems to be worthwhile due to protection.  Record when insurance feels
too costly.  Write in detail.  When you have worked through a bunch of
trades, you will have a valuable book to read.  With YOUR thoughts and
ideas that suit YOUR comfort zone. 

Manage risk – owning insurance does not suggest that you can ignore risk.  Record all thoughts
about your trades.  I can give opinions, but they will not help you in
the long run.  Develop your own.

Does this require an effort?  Yes indeed it is.  I
believe it's very worthwhile.  You gain a lot of good experience
you have good data and the ability to come to reasonable conclusion
about what you are seeing happen on a daily basis. Please avoid the trap of believing that winning every month means you have discovered the ideal.  When profitable, recognize if it was good fortune, or whether you did something to earn the profit.  Same with losses – truly unlucky, or did you neglect to take prudent action?

4) Iron condors have positive theta and negative gamma.  Insurance
comes with just the opposite – positive gamma and negative theta.  At
various times and RUT prices, you can expect to see theta and gamma
change.  That's because the nearer-term option are more theta and gamma
sensitive.  A change in stock price or time – affects these options more
than those in the iron condor (or half of an iron condor). Don't forget that with elevated IV, option prices are higher.  That means your naked long calls erodes much faster than it would if the premium were lower.

If owning positive theta is an essential part of
the strategy for you, then take that into consideration when choosing which option to buy as insurance. 

'Insurance' is just one idea.  Buying it when IV is
elevated, as it is now, makes that idea costly.  I don't own any
insurance at today's prices.  With high IV, I prefer to either trade
fewer iron condors, or move a bit farther OTM – reducing my need for

5) Do I think this trade has reasonable risk/reward prospects?

is not the right question to ask, although I do understand why you do ask.

I don't know if you will exit
at a specific profit (or loss) level.  I don't know how aggressive you
will be when making adjustments.  I don't know how you will treat this
trade if the market moves lower. 

Thus, I  have no idea what the
risk/reward is.  The position looks reasonable.  Personally, I'd prefer
to be short (a little) more vega at these levels.  Thus,to maintain risk at a reasonable level, I'd not buy insurance and I
would trade fewer than 10 iron condors.  But that's my comfort

To answer an earlier question: no I would not sell extra call spreads just to gain positive theta.  Theta is not a good reason to accept extra risk.



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Some Thoughts on Paper Trading

Not everyone believes in paper trading.  Here are the thoughts (link no longer active) of one nay-sayer.  The primary reason is that it's not real money and that no emotions are involved in the decision-making process.  In addition, there's a temptation to turn the paper trading into a game.

I cannot disagree more.  First, the successful trader must learn to control emotions, and if you can make emotionless decisions when it's practice money you may be on your way to doing the same with real money.  

If you want to be a winning trader, you should begin by taking paper
trading seriously.  You must concentrate on making good decisions and  it's a good to experiment.  In
fact, that's part of the learning process.  Try something, decide if that
trade fits within your comfort zone and try to learn from this new (for you)
type of trade.  It's an intelligent idea for trying out a new strategy.

Important: Do not decide that any new trading idea is 'good' or
'bad' based on one result.  There is always some luck involved
when investing, trading or any other activity for which the outcome is uncertain.  Consider the trade chosen and the result.  Decide if the
result was reasonable or an unlikely outcome.  Analyze whether you were
comfortable owning the position day after day.  Rinse and repeat.

That's the learning process.  It takes time. 
Please remember that there are millions of kids who want to be professional
athletes.  Some put in lots of practice time and are able to make their
college teams.  Some make it to the professional level.  But very few are Michael Jordan. He did not get there by taking shortcuts.

Practice is one key ingredient to success.  Talent is
another.  Not everyone can be a winning trader.  If you practice and
learn and still cannot make money, there is no reason to believe you will do
any better when trading with real cash.

To me, the difficult part is the patience required.  A
day trader makes many trades over a short period of time.  He/she gains
experience quickly.  But for option traders who hold positions, such as
covered calls, butterflys, or iron condors – a single trade can take a month or
two.  That requires enormous patience when trading with play money.

Anyone using a paper account wants to get practice and experiment with
various ideas.  But it does take
time.  You can trade real money and a practice account at the same time,
but one ingredient for success is the ability to recognize when you don't know
enough to make good trade decisions.  It's seldom as easy as: open the trade, close the trade and deposit your winnings
in the bank.  Many times questions arise and decisions must be made along
the way. 

Do I suddenly have too much risk?  How can I fix that?

Did I earn enough profit?  Should I exit now and take

The position is not working.  Exit or wait?

The market is suddenly more volatile.  What should I

Am I trading proper position size?  How can I find out?

The answers are not obvious.  It takes experience
to get a better understanding of how decisions are made.  Sure you can
trade with real money, but only if you place a very small portion of your
assets at risk.  If you have a $100,000 account, you can afford to trade
one-lots instead of paper trading (although I recommend paper trading). 
But if you have $10,000, you don't want to lose $500 or $1,000 per trade just
to get your feet wet.  It's not worth the risk.

If you can handle multiple positions without getting
confused, that is one way to learn and gain experience more quickly.  For multiple positions, I
suggest different expiration months or different stocks (or ETFs or indexes) to
keep each position isolated from the others



"I am currently reading your book " The Rookies
Guide To Options" and must say that it is excellent.  I have no experience
trading options and was always a little "scared" of the subject but your book
puts everything into perspective i
n a very reader friendly manner." TK


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