Iron Condor return/risk

L

larryb

I have a question regarding return/risk and need your input. I currently have the following CME pit traded Dec 2003 S&P 500 future (SP) option Iron Condor which I entered on Nov 13th when the price was approx 1055.

Long put 965, Short put 985, Short call 1120, Long call 1140 and I collected a total of 2.0 pts x $250 or $500 less commissions and fees of $24 x 4 legs for a net of $404. This required approx $2300 in margin. The 20 point difference in the strikes "limits" my loss to 20pts less the 2 pts premium received x $250 = $4500 of Risk.
This, if my thinking is correct, means I have a return to risk of $404 to $4500 or 9%. Is my strategy reasonable? Am I insane to risk that much for so little a return? If either strikes were penetrated what exit strategy should I incorporate?

Any opinions/suggestions/advise ?
 
I am using a broker to help me learn the ropes and as such am paying the high commissions. Who would you recommend i use for this pit traded product?
 
an alternative might be IB and using another index or options on es, you might save a lot on commissions. You have to be able to leg in yourself however wich might be a litlle more difficult for a beginner.
 
Quote from larryb:

I have a question regarding return/risk and need your input. I currently have the following CME pit traded Dec 2003 S&P 500 future (SP) option Iron Condor which I entered on Nov 13th when the price was approx 1055.

Long put 965, Short put 985, Short call 1120, Long call 1140 and I collected a total of 2.0 pts x $250 or $500 less commissions and fees of $24 x 4 legs for a net of $404. This required approx $2300 in margin. The 20 point difference in the strikes "limits" my loss to 20pts less the 2 pts premium received x $250 = $4500 of Risk.
This, if my thinking is correct, means I have a return to risk of $404 to $4500 or 9%. Is my strategy reasonable? Am I insane to risk that much for so little a return? If either strikes were penetrated what exit strategy should I incorporate?

Any opinions/suggestions/advise ?
More...

Wow, that risk to reward ratio is horrible! No, I would never do that trade. Why are your strikes so far out. When you buy the wings on your condor you want to have them tight since that is where all your risk is coming from. The only thing I can say for certain is this, if you keep putting on trades with that risk to reward ratio you won't have to worry about trading and high commissions for very long. LOL.
 
My advice is if you are willing to risk more than your max possible gain, look at some other strategies.

Without getting into an explanation, (do your own homework), think about "back spreads". You can do them for little outlay (margin) if you work out your ratios carefully. Possibly start with a small credit. Maybe not a high percentage winning strategy, but when they do work, you can make an unlimited profit with a pre-defined maximum loss. You only lose in a "dead spot". anywhere else is safe or profitable.

And generally, I belive you can put on larger positions with less money. I never traded these retail, so I am not completely sure how margins are calculated. As an exchange member, the "haircut" was just the equivalent of the max possible loss.

Check the rules. Look at the strategy. It sounds like a trade that might be of interest to you. And like your trades, you can be on both sides of the market at the same time. If you start with a credit on each side, at least you will have that in the end. (It will never be a large credit, but a credit is a credit).

One last thing. While trading these on the floor gave me an advantage (not having to deal with margin requirements), my commissions then were more than retail commissions are now. So that should help.

I don't know where you live, or how much capital you have to trade. But maybe taking a seat on an options exchange would be worthwhile. The lease costs are extremely low now. The learning curve is very steep and fast. A few months on the floor is an effort and expense that will give you a "doctorate" in options trading. If you come out behind, consider it as tuition.

Good luck,
:)RS
 
The back spread (I believe it is what I would call a ratio spread, but not quite sure, might be that it is the exact opposite position) is certainly a good idea for individual stocks, since they tend to either remain range bound or make huge moves (compared to indices), and you will profit nicely in either one of those cases.
 
Seems like Iron Condors, unless one tightens the range between the strikes of the sold call and the sold put, results in a high risk to low reward. I used a wide range of 135 points thinking it
will not be threatened in the 4 to 5 weeks to expiration (unless there is an awful terrorist attack causing a string of circiut breaker limit down days) and earning $404 on a margin (collateral) of $2300 results in a super monthly return. Even doubling the margin for price swings gives one an enviable annualized return.

My friend is using the same CME pit traded S&P 500 Future (SP) Options product I am using and he has more guts than I do in that he is writing short strangles with no long hedge options, like my Iron Condor. Isn't he taking an awful unlimited risk? What do you recommend I say to him to keep him away from financial disaster? Do you have any antedotes/experiences I can share with him regarding short strangles?

I know the SPX is the S&P 500 Index and I am not using that product. My options are on the S&P 500 Future (SP) CME pit traded product. Do you guys know of any advantage with one over the other?

My iron condor commission with fees cost is $24 x 4 legs for a net of $404. Is this cost excessive? I do not know what is the going
/reasonable amount.
 
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