Are Iron Condors/Iron Butterflys really better than Short Straddles/Strangles?

Quote from option911:

You do not have to buy them black swan wide. I think you will find that even 10 delta calls and puts can work well with this strategy. On top of that, I ALWAYS carry a few front month wings that are less than a 4 delta in the event of a major gap or black swan. I think you will find that you don't actually need them to end up in the money for them to work.

http://www.option911.com
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You are way off the mark here, Mark.

'Even 10 delta calls and puts'.....

Those 10 delta options are the calls and puts I'm selling when I initiate the iron condor position in an index.

They are hardly FOTM options that one might want to buy for protection.

Mark
 
Quote from jones247:

/Set the stop orders for each leg of the short strangle/straddle at the time the order is placed.
Walt
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Stop orders don't work with options as they do with stock. Why?

Is the stop activated when the option trades at or above the stop-limit price?

Or is the stop activated when the bid reaches that level?

Or is it activated when the offer reaches that level?

Or perhaps the bid/ask midpoint?

Those choices make a huge difference.

Then consider this scenario. Your stop loss is set @ $12. The market is wide, and is currently $5 bid; $6 ask.

There is a short-lived fast market due to some irrelevant information that sends a scare into the marketplace.

The quote now changes to $3 bid; $15 ask. Unlikely, yes. Impossible, no.

What happens if your stop-loss is activated and they buy you in at $15? There would be no recourse for you.

This may be an exaggeration of what can happen in reality, but the idea is the same. A widened market could easily trigger the stop when in a normal market that would never happen.

If you insist on using a stop order, base it on the price of the underlying. An OTO order works. When the underlying hits your limit, then the order to buy the call or put is activated.

And there's just one more [problem with stops: A large gap opening leaves you not only unprotected, but also at the mercy of how your broker executes your now-activated stop-loss order.

Not a good idea. Honest.

Mark
 
Quote from dagnyt:

You are way off the mark here, Mark.

'Even 10 delta calls and puts'.....

Those 10 delta options are the calls and puts I'm selling when I initiate the iron condor position in an index.

They are hardly FOTM options that one might want to buy for protection.

Mark
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Mark,

I agree they arent black swan calls and puts (I would have called them 'units' when I was floor trading), but they are cheaper than the 25-30 delta call you would normally buy for a I-Fly; and help with the margin, I was suggesting buying a few of those as a hedge then some options under a 4 delta as well. That combo would protect the position and do very well in a sharp moving market?

Mark S.

http://www.option911.com
 
Quote from jones247:

If there are ways that can improve the risk mgmt and trade mgmt for this strategy, please suggest it. Or if I'm missing a major "weak link" in this strategy, please let me know.
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Stops are not a good idea because as Mark W pointed out, bids can widen, expand wildly,and fill you quickly and poorly. It doesn't happen often but it does.

My suggestion would be the the same as Mark-911. Buy some wing puts and calls that are much much wider than a typical IC/IB but buying them on a ratio. You can even diagonalize them to reduce the daily decay.

Anyway you cut it, a position has risk. You have to model it and tailor the components (R/R) to your liking.
 
Thanks for the contributions guys... Logically & theoretically, I would consider short straddles/strangles to be an unwise strategy. However, I can't help to be influenced by the fact that several individuals became quite wealthy with this strategy.

Even the ones who lost fortunes, typically was averaging down with naked shorts as the market continued to go against them. How often does a black swan event that is so violent that you would not have the ability to get out within a day? Most folks who have been hammered by black swan events typically choose to hold on to their positions, and sometimes will increase their short bets. The holding and/or increasing the short positions is what kills them. Outside of the 1987 crash, I don't think a one day drop on a european style index option was ever so extreme that it would gap down to a blowout.

Nonethelss, I appreciate the feedback. I'll certainly give serious consideration to some of the safety suggestions (i.e. use the price of the underlying to determine when to liquidate the short straddle/strangle and FOTM ratio wings for a major swing in market prices)...

Walt
 
Quote from jones247:

...Outside of the 1987 crash, I don't think a one day drop on a european style index option was ever so extreme that it would gap down to a blowout...
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The problem is hindsight. It is very easy to see now, which crash was the blowout kind and which one wasn't. It is a completely different thing when you are in a position and the crash is taking place.
 
You do not have to buy them black swan wide. I think you will find that even 10 delta calls and puts can work well with this strategy. On top of that, I ALWAYS carry a few front month wings that are less than a 4 delta in the event of a major gap or black swan. I think you will find that you don't actually need them to end up in the money for them to work.

Going far out with 1:2 or more ratio can have the greeks reseamble an IC & even look nice on the modeller, but the margin would be massive.
 
Quote from jones247:

Even the ones who lost fortunes, typically was averaging down with naked shorts as the market continued to go against them. How often does a black swan event that is so violent that you would not have the ability to get out within a day? Most folks who have been hammered by black swan events typically choose to hold on to their positions, and sometimes will increase their short bets. The holding and/or increasing the short positions is what kills them. Outside of the 1987 crash, I don't think a one day drop on a european style index option was ever so extreme that it would gap down to a blowout.
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Once upon a time, I used to write naked puts on a lot of stocks that I "thought" that I wouldn't mind owning. And more often than not, on expiration Friday, I'd roll the ones that were near or out of the money. The routine was no different on Friday 10/16/87. In fact, they looked quite good since the market had dropped 500 or so pts over the past 3 months. Then Black Monday occurred... and I knew that I was going to eat every naked put that I had written.

Not only were underlyings crashing but B/A spreads were Holland Tunnel wide, at least from those who weren't walking away. There was no way to "have the ability to get out within a day."

It would have been nice to "hold on to the positions and increase the short bets." But then there were the margin calls. Those were the heavy growth days (nd price appreciation0 of stocks like DIS, WMT, etc., many of which I gave up in order to get above the maintenance requirement.

Had I had any kind of hedging in place, not only would I have had far more moderate losses but I would have been salivating (with plenty of dry powder) at the bargain basement prices where on a $50 stock, you could sell what should have been a $2 put for 4, 5 or 6 dollars or more.

My lesson 32 years ago was to never take anything on in size that isn't hedged against the unlikely surprise. Make a little less. Never lose a lot more.
 
It is like being a bookie

You make more money when you hold the bets

Until one day you can't pay off

Then you get your legs busted

The above is an **equivalent position**:D
 
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