Trading Iron Condors as a Source of Income


Earlier question by Joe:

I'm reflecting on the question asked by GW and your response.
If ICs are deemed income trades then how would one generate a
reasonable income on only 10 ICs a month? 
So would you say trading much larger whilst carefully managing risk with
added protection unwise?

Joe: I amended the reply to include this:  Apparently I missed the point.  I do NOT believe that traders should limit their position size to trading 10 IC at one time.  I hope I never said that.  I believe that's a large position size for a beginner, but not for the experienced trader.

My question (which may have been phrased incorrectly) was pertaining to
trading ICs to generate regular income on a consistent basis.

I think I
may have taken your response out of context as I assumed you were
advocating to trade no more than 10 ICs. So to be clear I don't disagree
with your overall thoughts on ICs as income trades but would still like
to know your view on trading ICs in much greater size with good risk management, in order to generate a greater income.

I ask as I have read
and heard from varied sources that there are traders who do this each
month and therefore would like to know if you think it's a feasible way
of trading?

Yes, it's feasible.

But that's not the same as saying that it's a good idea for most traders. in my opinion, to trade on a scale large enough to generate a steady (not every month, but on average) income that is large enough to replace working elsewhere to earn a living, translates into being a
professional trader.

Why did I jump to trading for a living
when all you asked about is making extra income?  If you plan to trade
size, and if you plan to manage positions carefully, you cannot be
working at a full time job.  At least not when the markets are open.

I don't have real statistics, but I am told by sources I believe to be reliable that 'the average trader never makes any money.'
If that's true, then trading is similar to other professions. Only a
few play sports well enough to become professionals and earn a living. But many play as a hobby, on weekends.

It's easier to make a living as a trader than it is to play in
the NFL – but it's still difficult. 
First prove to yourself you can consistently be profitable. If you
believe you have already proven your skills as a risk manager, and
if you believe you have the discipline, then yes, it's feasible to earn a
living. (Or extra income).

Just remember that earning 20%/year doesn't seem to be a great achievement when you see all those Internet ads telling us how easy it is to earn 5 to 10% per month – guaranteed. [Notice to all readers: Those claims are false]  But you know that 20% is an excellent return, especially over a multi-year span.

And yes, you can earn 50% per year and more.  However, the risk required to earn those returns makes it highly likely that you would eventually lose every penny of your trading capital – if you sought such returns.

The key to earning a living as a trader – in my opinion – is to decide how much income you need, remembering that a significant portion must be saved to pay taxes.  Next, come up with an annual return that you believe is realistic for your trading style and current skills.  Keep in mind that your original plan is to manage risk well.  That must include trading fairly conservatively because you cannot afford a large drawdown.  Then calculate how much capital is needed to generate the cash required, assuming your rate of return is realized.  Then get some extra capital for safety.

Conclusion:  If you have a track record of profitability, if you can raise the capital, if you maintain your discipline and not get flustered when you are suddenly trading more size than ever before, then yes -you can earn a living as an iron condor (or other) trader.  

One caution:  Increase size gradually. Do not move from 10 to 50-lots overnight.  Do not then jump from 50 to 100-lots (or whatever your size turns out to be).  Always keep cash in reserve – because you may need that cash for adjustments at a moment's notice.

Joe, the most difficult part to remember is that being a successful professional anything requires skills and practice.  It is feasible.  That is not the same as 'anyone can do it.'

The one warning that I want to mention is:  Do not make any attempt to do this if you are under-capitalized.  It adds too much pressure. If you start to lose – even a little, then you are going to have to try to earn money at a higher return to compensate for having a smaller account.  And Joe, you know that means increased risk.  That in turn increases the risk of ruin.


Bonus: Sign-up through above link and receive a free one year subscription to Expiring Monthly: The Option Trader's Journal

, , , , ,

7 Responses to Trading Iron Condors as a Source of Income

  1. Joe 06/17/2010 at 6:21 AM #

    Thanks for making my question into a post, appreciate the effort put into the reply. Your response is on par with my thoughts and believe being well capitalised is imperative as is attaining the right mind set. I can imagine theres a big mental shift from trading a smaller account to a much larger one.

  2. Mark Wolfinger 06/17/2010 at 9:05 AM #

    Thanks for the good question.
    Joe, mindset is important. For a good reason: risk is so much higher – as is reward potential – that there should be a big mental shift.
    To avoid that shift – it’s imperative to have a great deal of patience when increasing position size. If you are a seasoned stock trader who is relatively new to options, then size can be increased more rapidly. But for most readers of this blog, there is the real danger of overconfidence leading to much larger positions. That is just not wise.
    It’s okay to go from 10-lots to 15 and then 20 over a period of a few of months. I know how it is: a trader is doing well and then greedily doubles size and doubles it again. That trader is not ready for the emotional panic that comes with volatile markets and a potential loss that can wipe out a year’s work.

  3. dave 06/17/2010 at 10:51 PM #

    Hi Mark,
    How do you determine position size ? What can some one use to guide them to determine lot size, contracts traded etc ?

  4. Mark Wolfinger 06/18/2010 at 6:36 AM #

    Obviously, a good question and one that I never addressed.
    I began a reply, and as usual, I run on and on. Too much detail for this space. I’ll put up a full post as a reply – either tomorrow or Monday.

  5. dave 06/18/2010 at 1:51 PM #

    Thanks Mark that would be much appreciated !!!

  6. David 06/22/2010 at 8:04 PM #

    Dear Mark,
    I enjoyed browsing your blog today and I read your rookies and hedge fund books a while back. I’ve been selling OTM cash-secured puts on individual stocks for about a year with moderate success and I’d like your opinion of an option strategy I recently came across consisting of: long 100 shares, long 2 ATM calls, and short 3 OTM calls. The option legs would be put on at approx 0 net cost. It would seem this offers amplified upside extending well above the current price with substantially the same downside exposure as being long the stock. Is there a synthetically equivalent position that would accomplish the same thing? Could this strategy be integrated into a strategy with some degree of downside protection, eg long 100 shares, short 3 OTM calls, long 1 ATM call and long 1 OTM put?
    Thanks, David

  7. Mark Wolfinger 06/22/2010 at 9:08 PM #

    This is exactly what you think it is. It’s a covered call with a profit extender. Thus is a BULLISH position.
    Yes, extended upside
    Yes, same downside risk.
    For discussion, I’m naming the strike prices A (the calls bought) and B (the calls sold)
    Yes, there is are synthetic equivalents. The simplest one is to consider long 100 shares and short one call at strike B to be a covered call position. That makes it a synthetic short put.
    Long 2 A/B call spreads
    Short one B put.
    Clearly a very bullish position with limited, but good upside potential.
    Now the bad news: It takes a very high implied volatility, or a long-term option to find this spread available for no cost on a 2 x 3 ratio. In other words, there will not be that many opportunities. I’ve seen this play before using options on a 1 x 2 ratio. Less upside, but more realistic in terms of finding candidates to trade
    Conclusion: If (big if) you want to do the specified buy-write (and that includes selling a naked put that is already in the money), then this is a good idea. You have zero extra downside risk – so that has to be a plus. You have an extended upside, so that has to be a plus.
    The only negative is selling the ITM put. If you are bullish and can find options priced to give you that 2 x 3 call spread at a price near zero, this is a good strategy.