Condor Credit Spreads: Most common misconceptions, mistakes, lessons
- Thread starter tradingjournals
- Start date
If the goal is to put on an iron condor, the most common misconception I come across is that one should put on an iron condor or do nothing. Each side should be considered independently for its risk/reward. Many times only one side will be attractive. The other side may be put on at a later time if it becomes attractive.
Newer traders frequently forget that the second side of an iron condor requires no additional margin and thus they do not evaluate the rewards properly.
Newer traders frequently forget that the second side of an iron condor requires no additional margin and thus they do not evaluate the rewards properly.
One of the most common misconceptions about Iron Condors I encounter is the notion that there is any difference between an Iron Condor and an ordinary condor or between iron butterflies and regular butterflies. They're really the same respective organisms, just with different skin color, if you'll pardon the metaphor cocktail. Obviously the iron condors and butterflies employ both puts and calls, whereas regular condors and butterflies use either calls or puts, but not both. Still, the risk profile of iron butterflies and condors is exactly the same as regular butterflies and condors, and thus there is absolutely no reason to prefer one type over the other, unless you can somehow spot a better deal on one than the other. If that were the case, and the difference were not negligible, you'd have an arbitrage opportunity: you could sell the more expensive spread, say it were the iron one, buy the regular spread, and capitalize off the difference with no risk. I'm not at all suggesting to go out and look for those opportunities, as the 8 leg trade would be prohibitively expensive to put on, most likely, and the probability of finding such an opportunity would be nil. The point in mentioning it is just to say that iron condors and butterflies are perfectly interchangeable with regular condors and butterflies and, if they weren't, there would be a risk-free profit available to the astute ornithologist or entomologist.
This seems, at first, somewhat implausible as the long iron spreads are put on for a credit, while the regular condors and butterflies are put on for a debit (assuming the middle strike is about ATM). While that is true, it will be clear by examining a risk graph that the maximum profit of the regular butterfly and condor is the same as the credit of a comparable iron butterfly and condor. Put another way, a trader is no more likely to be able to keep the initial credit of the iron b/c spreads than he is to earn the maximum profit on the regular b/c spreads. Furthermore, the breakeven points in the iron b/c and regular b/c are identical.
Seeing how many Google ads about iron spreads appear lining the right side of the monitor, and the fecundity of discussion about iron spreads heard on this and other boards, you begin to get the sense that the iron spreads are unique strategies, with benefits and risks that separate them from all other strategies, but that simply is not true. The same can be said about covered calls and naked puts: exactly the same strategy. Even the dividend earned on the underlier leg of a covered call is priced into the put (normally). Both strategies are alike in every conceivable way, yet traders insist on distinguishing between them.
I don't know, maybe traders think the word iron means they can't lose as much money. I know if I were putting my money on something as fragile and ephemeral as a butterfly, I'd want it to be made of iron too. Unfortunately, the reality is that one is no more ironclad than the other.
This seems, at first, somewhat implausible as the long iron spreads are put on for a credit, while the regular condors and butterflies are put on for a debit (assuming the middle strike is about ATM). While that is true, it will be clear by examining a risk graph that the maximum profit of the regular butterfly and condor is the same as the credit of a comparable iron butterfly and condor. Put another way, a trader is no more likely to be able to keep the initial credit of the iron b/c spreads than he is to earn the maximum profit on the regular b/c spreads. Furthermore, the breakeven points in the iron b/c and regular b/c are identical.
Seeing how many Google ads about iron spreads appear lining the right side of the monitor, and the fecundity of discussion about iron spreads heard on this and other boards, you begin to get the sense that the iron spreads are unique strategies, with benefits and risks that separate them from all other strategies, but that simply is not true. The same can be said about covered calls and naked puts: exactly the same strategy. Even the dividend earned on the underlier leg of a covered call is priced into the put (normally). Both strategies are alike in every conceivable way, yet traders insist on distinguishing between them.
I don't know, maybe traders think the word iron means they can't lose as much money. I know if I were putting my money on something as fragile and ephemeral as a butterfly, I'd want it to be made of iron too. Unfortunately, the reality is that one is no more ironclad than the other.
Good analysis.
Pictures are always a useful aid for those of us who still have trouble visualizing from just a word description.
and?
If for example you have 5 ic 5 fly 3 verticals etc.. it's much easier to add up the gamma, vega, and theta to give you the overall snapshot of your position then trying to figure out by looking at the combos. IB has this feature as does tos.
Still dont know what you are saying have anything to do with my statement.
I think stoic is trying to tell you it's based on a normal distribution, as is most financial arithmetic. You have to do your own independent analysis to come up with the correct distribution to evaluate those greeks.
Me, I take them as a reasonable approximation. It's a nice shortcut to understanding where you are overall, but taking them literally would be foolish.
I use my own distributions (multiple - different ones work for different types of analysis), worked out between myself and my son - I know the real world, he knows the math to get me to where I need to be - and I go from there.
Me, I take them as a reasonable approximation. It's a nice shortcut to understanding where you are overall, but taking them literally would be foolish.
I use my own distributions (multiple - different ones work for different types of analysis), worked out between myself and my son - I know the real world, he knows the math to get me to where I need to be - and I go from there.