I saw on Twitter that yesterday you traded the RUT Apr 540/550; 700/710 IC. Today, this April IC is priced at about $2.60 midpoint. The same IC for March expiration is priced at $1.52.
I am interested in how you look at these two expiration dates for the same IC strike prices.
The risk vs. reward (worst and best case) for the April exp is lose $740
and gain $260 (2.8 ratio). For March the worst loss is $848 and the
best gain is $152 (5.6 ratio). April has 83 days to expiration while the March has 55 days to
expiration, so obviously there is more time risk for the April
expiration to get into a problem (which is why premium is higher).
My basic question is: do you find yourself often
comparing the premium for different expiration dates, and do you have some
calculation method to help you determine whether one is more attractive
than the other? If there is not a calculation method, how do you
My personal feeling at this point is that the $1.52 credit for the March IC is not very much relative to the risk.
Also, and I know I am not saying anything you don't know 100 times
over, but if implied volatility were to decline significantly further,
then the credits for Iron Condors would decline significantly such that
an IC strategy could be much more exposed to a large market move than
currently. The risk/reward ratios above would be much worse and
potentially not worth trading. I assume that is why you have pursued
using more insurance for protection.
Thanks. – Jeff
There's a whole lot of 'stuff' packed into this short question.
Your premise is inaccurate, although you could not possibly know that.
chose the wrong iron condors for comparison purposes. I would NOT
choose same strikes for the 2-month IC. I am not willing to accept
anything close to $1.50 premium for a 10-point IC in RUT.
2) I prefer the higher premium – with the higher delta – iron condor. I'd love to give you a mathematical reason why that's true. But I have none. I usually feel more comfortable with the 3-month position than the 2-month.
A rigorous mathematical study to find the iron condor with the highest expected return may be worthwhile. But not for me. I prefer the simple approach.
3) To trade March options, I would look at strikes that are 10- or 20- points closer to being ATM. That's the real comparison for me. I require a premium >$2.00 for a 2-month iron condor. $1.50 is a non-starter.
4) I have another consideration. I already own March positions and this is my method for diversification.
5) R/R ratios are important considerations – but you don't have to calculate them. For me, a $2.50 minimum credit turns into a 3:1 ratio. And I prefer better than that. A $3.00 minimum give me a 2.33 ratio. Thus, I never bother with this number, knowing that my premium requirement takes it into consideration.
6) Your point about insurance brings up an interesting point:
When markets are not volatile; when IC premiums are on the small side; when the R/R is worse than usual – it seems that insurance is needed.
But, the truth is that the premium is 'low' for a reason: because the markets are non-volatile; the IC is less likely to run into trouble; less need for insurance.
It's a vicious circle. At some point insurance may be a very good idea. But when? Because it's costly, most prefer to trade iron condors without insurance.
7) No specific strategy is good enough (in my opinion) so that it's always the method of choice. Some market conditions suggest alternatives. One simple example is that you may not want to be short vega (as you are with an IC), and should choose something different at that time.