Iron Condors and Stupidity

JW,

First , a comment on commissions-- these days you should be spending less than $1.00 per option contract and with decent volume you can probably go down to $0.70 or $0.75, or possibly have a blended rate that involves a fixed fee and a low per option rate beyond a certain point. My commissions typically will eat up about 10-15% of each month, all trades included. My style is conservative, and I adjust pretty early compared to many on this board. This does lead to slightly higher commissions paid.

Second, about percentage returns-- it varies based on the insurance spreads. It could go up to 33% or more for a two month cycle if one side of the insurance spreads kicks in at full bore. This won't happen very often, but once or twice a year would really juice up the returns! Otherwise, I'm content to make about 2-3% each month. I don't need to live on it, so I'm just working on accumulating at the moment.
 
2-3% on total capital. I NEVER risk all the capital, so that means I need to aim for higher returns on margin. However, when it comes to account growth, the total growth on capital is what really counts. If I make 30% for a year, I'll know it went well. More than that can happen when insurance spreads pay off. Typically, I'm alright with moving insurance spreads around, but I'd be loathe to take them off until I unloaded the credit spreads. If the underlying is close, I'd take a partial profit the week of expiration. There are lots of judgement calls involved, but in general, I probably won't see many debit spreads max out. I'd hate to leave serious money on the table when it's available (the old bird in hand vs. two in the bush adage comes to mind).
 
If you have let's say $10K ( all cash ) of the total capital how you know how many contracts you can sell ( how much risk you want to take? ) in order to shoot for 2-3% monthly return? For example you are selling iron condors on spy ( currently traded @ ~$90). I am just trying to understand how you calculate the risk and reward. I never understood how to come up with 2-3% monthly return number without taking too much risk.
 
Quote from gkishot:

If you have let's say $10K ( all cash ) of the total capital how you know how many contracts you can sell ( how much risk you want to take? ) in order to shoot for 2-3% monthly return? For example you are selling iron condors on spy. I am just trying to understand how you calculate the risk and reward. I never understood how to come up with 2-3% monthly return number without taking too much risk.
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If you have an account worth $100,000 and you earn $2,500 per month, that's 2-3%

You cannot find a method to earn that amount without taking too much risk? I'm not saying the return is guaranteed, but if you buy 10 iron condors (10-point wide index options) @ 3.00 each, and buy them in by paying 45 cents total, that's $2,500.

Is 10 iron condors too risky for a 100,000 account? If it is too risky for you, you are in the wrong business.

Mark
 
Quote from dagnyt:

If you have an account worth $100,000 and you earn $2,500 per month, that's 2-3%

You cannot find a method to earn that amount without taking too much risk? I'm not saying the return is guaranteed, but if you buy 10 iron condors (10-point wide index options) @ 3.00 each, and buy them in by paying 45 cents total, that's $2,500.

Is 10 iron condors too risky for a 100,000 account? If it is too risky for you, you are in the wrong business.

Mark
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Right Mark, but you don't expect to make $2500 every month. In your case the risk of loss is $10K ( 10 contracts with 10 points width ) and the maximum reward is $3K.

You are probably shooting for the annual profit which is in the ballpark of your risk. That is $10K or maybe less. That would be no more than 10% annual return. What am I getting wrong?
 
I'd echo Mark's comments, for sure, and you should note that he is only putting 10 contracts*10 points wide *100 shares/contract or $10,000 at actual risk in this situation. The other 90% is available for defensive purposes, other trades, stocks or whatever. His approach is closer to the money than some prefer, but I suspect that he is probably able to watch it fairly closely and react quickly, being an author and blogger. The large surplus in margin also allows for decisive action with regard to arresting a disturbing trend in its tracks if necessary.

In my situation, I take a slightly different approach. I can't check the screen more than once or twice during the day so I stay a little further away on both sides (gives me a bit more time to react) which means I use relatively more contracts, insurance spreads, and a larger percentage of my margin, but I still don't need to use a huge chunk of it. In fact, I started this cycle with less than 25% in use, and still have plenty available for various adjustment possibilities. Of course, the insurance spreads actually reduce the margin required in most circumstances, and also assist with the balancing of the position with regard to delta, etc. They are working very well for me, and I suspect that once in a while they might also pay a nice bonus, too.

The other thing that I would say is that writing 20 point spreads for 0.50 is taking quite a bit of risk for a minor reward. Going too far away from the money means that you are doing a lot of waiting around, and you don't have much in the way of credits to use if the market suddenly starts trending hard in one direction, and it won't matter very much which way it goes. The deltas will start to explode at you, and you will be staring at a nasty loss relative to your potential gain.

My feeling is that you should definitely be looking to move out if the net cost of buying your way out is less than 0.20, and maybe even more than that. In fact, occasionally, I actually buy a few of those little cheap guys for defensive purposes, particulary if the market looks like it might possibly turn around and go in the opposite way soon. At that point, they are often even cheaper than you might expect. You can easily do that if you collect a decent credit and still have your net return running at 2%+.
 
Quote from gkishot:

Right Mark, but you don't expect to make $2500 every month. In your case the risk of loss is $10K ( 10 contracts with 10 points width ) and the maximum reward is $3K.

You are probably shooting for the annual profit which is in the ballpark of your risk. That is $10K or maybe less. That would be no more than 10% annual return. What am I getting wrong?
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The maximum loss is only $7k, not $10k.

If you believe that the mentioned methodology might produce about $10k on average, then triple the commitment and use 30% of your capital, aiming for 30k (30% return).

That means trading 30 of those iron condors per month. And that still a very limited risk proposition. You should NEVER have a loss anywhere near the monthly maximum, unless you trade with blinders on.

I recognize that if were that easy to make 30%, everyone would be using this method. All I am trying to state is that you can try to achieve that result without huge risk. You may not achieve it, and there's certainly no guarantee of achieving it - but it's a reasonable goal with reasonable risk. At least that's how I see it. Your personal comfort zone may look at it differently, and neither one of us would be 'wrong.'


Another way to look at the situation is: If I have 100k and I'm only going to use 10k of margin, then I would move that 90k elsewhere and calculate my monthly potential return based on investing 10k.

All I was trying to say that it's easy to <b>target</b> 2-3% without a great deal of risk.

Mark
 
Unfortunately, there are a lot of websites out there that promote a set it and forget it mentality when it comes to iron condors. What that means in the end is that you set your positions and you can forget about having your margin money (sooner or later)!

For some people, they simply adjust by closing their position, and that can work just fine if you have a standard stop and out you go. For others like me, we try to add value to our positions as opportunities arise, and react to the market movement in other situations. What everyone must do to be successful at this is have a plan and know when and how to respond to various situations. It also helps to have done some analysis of the weaknesses inherent in your strategy. I know what I like to see, and I also know what will cause serious damage to my strategy. If that happens some month, then I will exit and forget about the the "need" to make 2-3%. It's much better to give up a little than to lose a huge chunk. I know that my plan is fairly robust and will work most of the time, but nothing is bulletproof, so anyone contemplating IC's based on this discussion needs to seriously realize that anytime margin is at risk it can be lost, and not think it is a license to print money.
 
Quote from Whisky:

So what kind of % total net returns on your accounts did you guys make this last expiration month?.

How does that compare with the average returns you guys expect to make over a large number of months?.

I know everyone trades differently, so I'm not asking for specific numbers, but percentages, to see how widespread the results have been.

I'm kind of stuck with the idea of the need for some type of timing method (price or volatility or both) to make adjustments and the absolute need to keep transaction costs minimal, to realize a positive expected value over time. (And being always net short volatility to gain the time decay edge).

Please all feel free to comment, and thanks in advance.

JW
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My return was 2.5% in May cycle, max. risk was 8.9% of the total capital. Generally, I aim to make about 18-20% per year.
 
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