Bread & Butter Iron Condors

[diaoptions]

Quote from rocky_raccoon:

Not sure about your math but 7.5:1 risk/reward does not seem very attractive.

For an IC that risk/reward ratio (7.5:1) is very good. Lower ratios usually mean that you have entered the position very close to the underlining price and the short option maybe one or two strikes out from the long options. You end up with little room for price movement.

 

[TskTsk]

Quote from rocky_raccoon:
There is one more thing about ICs. They are vega negative and thus work best when IV has just peaked and about to fall down. Hence, I view them as a special occasion trade (IV spike) and not as a "bread & butter" strategy.

This is true. I like to substitute ICs for double calendars if IV is low, as they are less short vol than an IC.

As for risk / reward....even 100:1 can be considered a good RR if the probabilities are below. looking at RR without probabilities is pointless.

 

[cdcaveman]

Quote from TskTsk:

This is true. I like to substitute ICs for double calendars if IV is low, as they are less short vol than an IC.

As for risk / reward....even 100:1 can be considered a good RR if the probabilities are below. looking at RR without probabilities is pointless.

By double Calender you mean long a call Calender and long a put calender

 

[rocky_raccoon]

Quote from TskTsk:

This is true. I like to substitute ICs for double calendars if IV is low, as they are less short vol than an IC.

As for risk / reward....even 100:1 can be considered a good RR if the probabilities are below. looking at RR without probabilities is pointless.

Agree, but calculating probabilities based on deltas is not an exact science. There is no way to calculate probability of future moves because we only have past data to operate with and past does not predict the future. Some options newsletter writer got burned in Jan-Mar'12 (~20% loss) because of the market rally that had "only" 5% chance to happen.

I guess an IC or double calendar should be placed inside a wide longer term strangle, so that the overall position is theta negative, and vega/gamma positive with possibilities of large gains in case of the rare events.

 

[cdcaveman]

Your making it more complex then you need.. watch the adhd.... not sticking to close to condors now are we... every trade has its place based on vol... term structureetc... look at a particular instrument.. give examples specifically

Near term butterfly. Longer term credit ratio spreading.

 

[webicknell]

I think I need to go to Option University....

Honestly, I never trader an option before March of this year. Read a few books... started with Covered Calls and Naked Puts as many do. This killed me... Premiums were good... Lost my shirt on the stocks/ETFs.

Moved to Credit Spreads and ICs... Knock on Wood... Have not had to "adjust" any so far.... Only trading credit spreads on NDX, RUT and some IWM... no individual stocks. Up almost 10% since I started. I did have a very scarry week in July (4th of July week, but I survived it).

I do use delta as my primary indicator to tell me if I am far enough OTM to have a safe trade.

Been looking at other option strategies (Diagonals, Calendars and Butterflies) but have not executed one in real money yet.

I am assuming it is time and experience and more reading before I can have intelligent conversations with most of you...

This is a fantastic thread.

 

[cdcaveman]

Dude I know only a little more then you do..... if that
.

Your doing good

 

[TskTsk]

Quote from rocky_raccoon:

Agree, but calculating probabilities based on deltas is not an exact science. There is no way to calculate probability of future moves because we only have past data to operate with and past does not predict the future. Some options newsletter writer got burned in Jan-Mar'12 (~20% loss) because of the market rally that had "only" 5% chance to happen.

I guess an IC or double calendar should be placed inside a wide longer term strangle, so that the overall position is theta negative, and vega/gamma positive with possibilities of large gains in case of the rare events.

Black-Scholes are based on assumptions of risk neutrality. The skew really shows the model has a flaw, because markets are not normally distributed and IV skew makes up for fat tail risk. The delta (dual delta) is the correct measure of probability as per the markets current belief, but I agree that it's extremely hard to predict wheter or not the premium is correctly priced as you never know the risk of impact of a black swan event, neither does the market, so it makes an educated guess (which is often wrong)

Quote from cdcaveman:

By double Calender you mean long a call Calender and long a put calender

That's correct.

 

[cdcaveman]

No amount of skew can make up for black swans. That's by definition...a little more risk premium because of fat tails sure.. but to be technical a black swan isn't predictable and is never and could never be quote on quote priced in... way out wings have no way of being prices right. Never sell always buy
.
I am a taleb fanatic obviously haha.

In the same light your better off sometimes managing tighter condors the selling way out wings for pennies. To some extent... and guassian probability distros are all we have this doesn't make them any good

 

[TskTsk]

The whole point of the skew is to make up for the fact that OTM options have paid off far more often than norm distribution would predict. Skew exists because fat tails exist. Wheter or not it's overstated, the only way to determine this is looking at historical data. And most historical data shows it's indeed overstated.