Just like any aspiring musician can tell you, finding a fitting 3rd chord can be rather elusive. You come up with 2 killer chords, but the song is just not done yet, it needs a 3rd chord to make it a complete, Grammy Award winning, multi platinum selling, everyone singing it in the shower song. Once you find that 3rd chord, life is just more beautiful and it might even get you laid.
But I digress... Today I was diddling with option strategies, because I got this idea that there has to be a 3rd cho.. I mean leg for option traders, making a strategy a no-loser, sure fire winner. Maybe not a huge winner, but a "I don't have to lose sleep over this because the money is in the bank" winner. Well, almost. You see if you sell 2 sides because you don't want to pick a direction and prefer the fence and time decay, those 2 sides usually don't cover the spread. Thus your strategy is going to have a max. loss, even if that is rather small compared to the premium or ROI.
But! If you throw in the 3rd leg maybe later on, you suddenly are over the spread, and the strategy literally can not lose. Or so I thought, thus the Search for the Elusive 3rd Leg was born...
After a few hours of tinkering, here is what I came up with:
1. Sell a near ATM Iron Condor 2-3 months out on a highly volatile stock.
2. If the price doesn't move much, do nothing.
3. When the price moves more than 10% in one direction, sell a vertical spread opposite to that direction, strike is around the original price. (calls if it dropped, puts if it rallies) The spread is the same as the IC's was.
This should be it, the 3 leg making the sum of the premiums more than the spread. But because we want to cover every possibilities:
4. In case the price turns back, once it reaches the other part of the vertical, sell another vertical, the opposite of the first, making it another IC.
I was testing it on TSLA's unrepentant rally, and it seems to work. The reason I use a vertical instead of just plane old naked selling is because it is defined risk and better ROI.
As always, drop me a line if I made a mistake in the above master piece...
Disclaimer: I am aware that technically I am talking about 6 legs and not 3, because IC has 4 and Verticals 2, but just play along, will you? Thanks...
But I digress... Today I was diddling with option strategies, because I got this idea that there has to be a 3rd cho.. I mean leg for option traders, making a strategy a no-loser, sure fire winner. Maybe not a huge winner, but a "I don't have to lose sleep over this because the money is in the bank" winner. Well, almost. You see if you sell 2 sides because you don't want to pick a direction and prefer the fence and time decay, those 2 sides usually don't cover the spread. Thus your strategy is going to have a max. loss, even if that is rather small compared to the premium or ROI.
But! If you throw in the 3rd leg maybe later on, you suddenly are over the spread, and the strategy literally can not lose. Or so I thought, thus the Search for the Elusive 3rd Leg was born...
After a few hours of tinkering, here is what I came up with:
1. Sell a near ATM Iron Condor 2-3 months out on a highly volatile stock.
2. If the price doesn't move much, do nothing.
3. When the price moves more than 10% in one direction, sell a vertical spread opposite to that direction, strike is around the original price. (calls if it dropped, puts if it rallies) The spread is the same as the IC's was.
This should be it, the 3 leg making the sum of the premiums more than the spread. But because we want to cover every possibilities:
4. In case the price turns back, once it reaches the other part of the vertical, sell another vertical, the opposite of the first, making it another IC.
I was testing it on TSLA's unrepentant rally, and it seems to work. The reason I use a vertical instead of just plane old naked selling is because it is defined risk and better ROI.
As always, drop me a line if I made a mistake in the above master piece...
Disclaimer: I am aware that technically I am talking about 6 legs and not 3, because IC has 4 and Verticals 2, but just play along, will you? Thanks...
