Trading Iron Condors in 2011

It’s 4½ months into the year and I’ve found this to be one of the easy periods for iron condor traders. Of course, that’s a personal opinion, based on my results. Here’s someone who seems to disagree, yet has made decent money with this strategy.

Christopher Smith at TheOptionClub.com

This year I committed to an experiment that has me trading an iron condor on the SPX every month – regardless of market conditions. The purpose of this exercise is to demonstrate techniques for managing risk and prove that with diligent risk management it is quite possible to limit losses while still creating profitable opportunities.

This year has not been particularly favorable for iron condors, but we have managed to avoid any significant loss and currently we have what amounts to a 20% yield on capital of $5,000 while risking approximately $4,000 or 80% of the capital – holding $1,000 or 20% in reserve.

One of us is living on a different planet. If not, then this comment illustrates that trade selection and risk management techniques vary tremendously among traders. I always knew that traders are different, but cannot see how Chris sees early 2011 as not favorable for iron condors and from my perspective, I could not disagree more.

It’s not a good year for the strategy, but he has already earned 20%?

I think it’s been a very easy year and have earned more during this period than I have ever as a retail investor (over a comparable period of time). I mention this for one reason: I didn’t have to do anything. No skills required. Just trade the iron condors and then exit. Perhaps a minor adjustment or two, but nothing special. I know these returns are not going to continue. And to be honest, I don’t expect to ever see a five month run that is this profitable again. Nor one as easy to manage.

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8 Responses to Trading Iron Condors in 2011

  1. Jason 05/18/2011 at 9:49 AM #

    I’ve found this time period to be hard also.

    Hard to keep from jumping for joy! My portfolio has performed the same, I’ve considered taking a break over the summer just to reduce some stress and focus on work/life balance.

    • Mark D Wolfinger 05/18/2011 at 10:53 AM #

      Jason,

      Breaks are good.
      Life balance is more important.

      Just be sure you want to do this when things are going well. I promise that profits will be much more difficult to earn – but I don’t know when.

      Thanks for sharing your experiences

  2. Wayne 05/18/2011 at 10:35 AM #

    Yes, this has been a good year, I’ve had good return so far this year with my iron condor.

    As a Gold member, I learn from the conversation in our forum that when everything is going well, it is an especially important time not to get overconfident.

    Here’s what I am going to do: I will reduce my position size because I know that the market will not always be this nonvolatile and I will be forced to make adjustment that could result in losses. Although I have learned some adjustment methods, it’s one thing to know what they are, yet quite a different thing to use them when real money is on the line. (Of course, we know there is paper trading as a learning opportunity, but we have also found limitation in using fake money.) So, I think I have to conclude that using real money–small size–is what I need to do, to test the adjustment methods I’ve learned.

    • Mark D Wolfinger 05/18/2011 at 10:57 AM #

      Wayne,

      Yes. Adjustments take time. That’s why we begin with a few examples. I also give my thought process with the hopes that you can understand the rationale for a given adjustment type. But more importantly, I want you to know when that adjustment is not a good fir for you, your trading style, your risk tolerance etc. There are enough alternatives that you will be able find more than one that suits your needs. And if not – reducing size and exiting are always acceptable methods for reducing risk.

      Don’t be in a hurry. We’ve just gotten started with learning and talking about risk management techniques.

      Regards

  3. Dmitry 05/18/2011 at 2:55 PM #

    now it reads:
    “currently we have what amounts to a 20% _annualized_ yield on capital of $5,000”

    • Mark D Wolfinger 05/18/2011 at 3:24 PM #

      LOL.

      I guess he is having a difficult time. Im amazed.

      Thanks Dmitry.

  4. Mark D Wolfinger 05/19/2011 at 7:37 AM #

    Lies,

    I tend to accept Mark’s view in the broad sense. There are times when it is better to trade specific strategies than other times.

    But to refer to those who consistently trade the same strategy – while ignoring market conditions – as ‘fools’ depicts a certain level of arrogance that he has not earned.

    Like Mark S, I hold strong opinions, and would defend certain trading concepts and my philosophy of trading against the world. However, I frequently tell my readers and students that I am stating my strongly-held opinions and they should feel free to disagree. Mark S apparently lacks the maturity to recognize that he does not have all the answers.

    As to your question: I have NO DOUBT that the principle underlying Mark’s statement is accurate. I believe that a trader can do marginally better by adjusting strategies when it’s time to make a trade . However, I do enter iron condors based more on the calendar (and when I have enough margin room to make new trades), rather than on my estimate of when conditions are right.

    I am not convinced – and to be honest, I have no real world data to study – that the difference is significant.

    A professional trader (I barely have time to trade these days, let alone think of myself as a professional trader) has all the time required to devote to his/her business and may be able to do the studies and data collection. That person may also have the ability to recognize when times are better for an iron condor than other times. However, I tend to look at Mark’s thoughts the same way that I look at technical analysis. It may be useful, but it may not be so easy to use the information and come to good, money-making decisions. I honestly don’t know how much difference his idea makes in terms of profits. I am not a believer in using charts – at least not at the beginner level. I know it takes years to learn to use charts successfully. Likewise,I do not know what it takes to be able to decide whether today is a good time for an iron condor.

    I prefer to accept the law of averages and depend on my skills as a risk manager to handle situations that prove to be difficult for iron condor traders. Do not misunderstand. If I thought there were a meaningful edge to be gained by using other strategies, I would. For example, I use the double diagonal when I believe (or fear) that implied volatility is likely to move higher, rather than lower. But beyond that, I’ll leave market prognostication to those who believe they have the ability to profit from predicting the future.

    My bottom line is that I do not know the future and prefer to spend far less time when choosing my trades. If you have the time to make or read the studies and discover and advantage, then of course you should take advantage of that. But I spend my time writing, replying to questions, preparing videos and simply do not want to micromanage my trading. I never suggest that anyone else trade that way.

    Regards

  5. Lies 05/19/2011 at 7:56 AM #

    Thanks for the reply!