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Iron Condors and Stupidity
- Thread starter jwcapital
- Start date
The problem that I have with this is that markets move and you can't know how much in advance so your only edge after placing the trade is your money management.
Hypothetical example of what happened to you:
Suppose XYZ is 200 and your criteria for an IC is 30 pts on each side to either short strike (160/170 and 230/240). On 3/10 XYZ drops to 180 and you roll your calls down to 210/220. XYZ then rallies and your new call spread is in trouble.
Suppose that you had no position and on 3/10 at 180 establsihed an IC. With the same criteria, you'd set up a 140/150 - 210/220 position. The same rally would get the same call spread in trouble.
IMHO, it's the market move that caused the problem not the adjustment. Concluding that adjustments are bad is incorrect... had XYZ not rallied and continued dropping, you would have been glad to have received the extra premium.
Where I agree with you is that rolling down and staying with March was not a good idea since that close to expiration, the premiums are usually bupkus. If iron condoring was my MO, my first choice would have been to roll down and out a month in order to make the premiums worthwhile. If the Mar puts expired, the Apr puts could be added, restoring the same month.
The other thing that I would have considered would have been to slightly reverse backspread the call side (whether staying with Mar or rolling to Apr) in order to guard against a snap back rally.
FWIW, with the volatility of this market, if I were doing IC's, I'd buy a few extra strangles to diminish the volatility risk a bit... but that's just my comfort zone.
Hypothetical example of what happened to you:
Suppose XYZ is 200 and your criteria for an IC is 30 pts on each side to either short strike (160/170 and 230/240). On 3/10 XYZ drops to 180 and you roll your calls down to 210/220. XYZ then rallies and your new call spread is in trouble.
Suppose that you had no position and on 3/10 at 180 establsihed an IC. With the same criteria, you'd set up a 140/150 - 210/220 position. The same rally would get the same call spread in trouble.
IMHO, it's the market move that caused the problem not the adjustment. Concluding that adjustments are bad is incorrect... had XYZ not rallied and continued dropping, you would have been glad to have received the extra premium.
Where I agree with you is that rolling down and staying with March was not a good idea since that close to expiration, the premiums are usually bupkus. If iron condoring was my MO, my first choice would have been to roll down and out a month in order to make the premiums worthwhile. If the Mar puts expired, the Apr puts could be added, restoring the same month.
The other thing that I would have considered would have been to slightly reverse backspread the call side (whether staying with Mar or rolling to Apr) in order to guard against a snap back rally.
FWIW, with the volatility of this market, if I were doing IC's, I'd buy a few extra strangles to diminish the volatility risk a bit... but that's just my comfort zone.
Quote from jwcapital:
Bumping this so others can benefits from my mistakes.
jw , you âmistakeâ was in trading IC in the FIRST place.
Off shelf âneutralâ strategies with exotic names: donât work on the long run
Adjustments, rollovers, money management (lol) : donât work
Thinks about âadjustmentsâ being a new stand alone trade with its own r/r ( and new slippage and commish)â¦has nothing to do with original trade ( in most of the cases)
Quote from jwcapital:
Bumping this so others can benefits from my mistakes.
Again, I don't believe it's fair to say: "I lost money so it must have been a mistake."
Just as it's silly to say: "I made money so it must have been a smart trade."
What you did re-learn - as I'm sure you already knew it - is that you can whipsaw yourself when you cover and then re-sell options." The decision going forward is whether you want to abandon the idea re-writing (after repurchasing).
Mark
Quote from IV_Trader:
jw , you âmistakeâ was in trading IC in the FIRST place.
Off shelf âneutralâ strategies with exotic names: donât work on the long run
Adjustments, rollovers, money management (lol) : donât work
Thinks about âadjustmentsâ being a new stand alone trade with its own r/r ( and new slippage and commish)â¦has nothing to do with original trade ( in most of the cases)
I've respected your contributions to ET, but I don't agree.
There is nothing inherently wrong with trading iron condors.
Money management not only does work (IMO), but you have zero chance of success without mastering it.
I agree that adjustments should be considered as standalone positions - unless the trade is closing a portion of the original position.
Mark
Quote from dagnyt:
I've respected your contributions to ET, but I don't agree.
There is nothing inherently wrong with trading iron condors.
Money management not only does work (IMO), but you have zero chance of success without mastering it.
I agree that adjustments should be considered as standalone positions - unless the trade is closing a portion of the original position.
Mark
Mark , I have no doubt that it works for YOU.
However, there is something inherently wrong with IC (and all others): itâs called negative expectancy. Are you saying than one can make money in option without being right on directions of the stock OR vola at the time of ORIGINAL trade ( via adjustments or mm) ?
Quote from IV_Trader:
Mark,
However, there is something inherently wrong with IC (and all others): itâs called negative expectancy. Are you saying than one can make money in option without being right on directions of the stock OR vola at the time of ORIGINAL trade ( via adjustments or mm) ?
Hi IV,
This is an old, and important discussion.
If options are fairly priced and there is slippage, then I cannot disagree with the negative expectancy.
But I believe - and I hope that is is not based on the fact that I've been doing this for a long time - that careful risk management is <i>more important</i> than strategy selection and allows iron condor traders to make money.
By 'careful' risk management, I mean not taking big losses. I take losses, I take profits. When I'm willing to lock in a loss to prevent a gigantic loss, that allows me to survive and get back to earning money.
I don't have a bias when I set up the original trade. Let me fudge that. If I think IV is too high, I tend to trade more 3- and 4-month positions. If I think IV is low, I prefer more 2-month positions and perhaps double diagonals. But that's about it. I have no skill in predicting direction and start my trades at a point I think is neutral (not necessarily delta neutral).
I cannot argue with the mathematics that says a negative expectancy is just that. As time passes with no damage, as it does often, the current expectancy has moved to positive.
I know that statement ignores the chances of something dreadful occurring soon after I own the position, but the damage done (loss) is less severe at that time due to the fact that gamma is less.
Overall, it works for me. And I believe it should work for others. I may be asking too much to expect others to manage risk well. I hope not.
Mark
With ICs how do you determine what constitutes managing risk well?Quote from dagnyt:
I may be asking too much to expect others to manage risk well. I hope not.
Mark
I can see that never adjusting or adjusting every time the market makes a small move would be terrible risk management. In between those extremes is a large area.
Quote from sync:
With ICs how do you determine what constitutes managing risk well?
I can see that never adjusting or adjusting every time the market makes a small move would be terrible risk management. In between those extremes is a large area.
Sync, There is no exact definition.
1) Don't continue owning a position that moved beyond the boundaries of your comfort zone.
2) If you NEVER take a large (a relative term) loss you are probably managing risk well. Unless you adjust far too often so that you seldom earn a profit
3) Not trading so many spreads that the maximum loss is more than you can tolerate, even though you NEVER expect to take that maximum loss.
It can get complex: It's difficult to explain coherently in a few words, but I'll try.
You probably know in advance that your comfort zone ends when the index has moved to within X points or X% of the strike price and that you are going to do something at that time.
If X = 0, they you are waiting until the strike price is breached before you adjust 100%.
If you are more conservative, you may decide that 3% (15 points on a 500 point index) is time to act.
Or you may decide that when the delta of your short option reaches X, that's the time to act. There are reasonable alternatives.
'Act' may mean shut down the entire position. Or it may mean make a first stage adjustment: close a portion of the position. In you choose the latter, then there is a stage 2 when you close more and a stage 3 when you exit the remainder of the position.
I find that adjusting in stages, beginning sooner, makes for a smoother ride. But that's a personal decision. Adjusting in one, complete stage is ok also.
Above I referred to 'close' or 'shut down' the position. You may prefer (at stage 1 and 2, not stage 3) to buy extra long options as protection, instead of closing part of the position. That's a personal decision and a style that really has nothing to do with good risk management. As long as you do something constructive. Doing nothing, IMHO, is just wrong - But, if your comfort zone tells you that's the way you want to play, then so be it.
The only other major point to make is that it's wrong to roll the position into another position - just to do 'something.' Closing the trade is one decision and opening a new position is another. It is not necessary to open a new trade 'in an effort' to get back the money just lost. If it's lost, it's lost. When investing again, you want to own a position that suits your needs.
If you do roll, it's not necessary to roll for a cash credit - despite the fact that lots of people believe that is mandatory. It's not essential to trade extra iron condors in an attempt to collect extra premium - again in a desperate effort to get your money back. If you increase the size of your trades, you are increasing risk. Increasing size is okay - on a small scale - and when you are under-invested. But don't take chances just to get even.
This is, IMHO, a long-term winning strategy (I know IV Trader does not agree) and there's time to earn your profits later.
That's how I look at it. It's not gospel. It's my style and my opinion that this works.
Mark
The Rookies Guide to Options
Quote from dagnyt:
By 'careful' risk management, I mean not taking big losses. I take losses, I take profits. When I'm willing to lock in a loss to prevent a gigantic loss, that allows me to survive and get back to earning money.
Mark
I am not sure that the above called MM. You (me too) are evaluating r/r with every passing day and looking for the best (positive or negative) possible exit based on P&L curve