Iron Condors and Stupidity

[accutrader]

Dagnyt – I liked your article. However, the article that I was thinking about was in the November, 2008 issue of SFO Magazine. http://www.sfomag.com/BackIssues/backissue.aspx?ID=91

It is titled “Dan Harvey – The Supertrader of Index Options”.

Two points from that article are as follows

1. The risk/reward ratio of Iron Condors is terrible. A trader typically risks $10 to make $1 to $1.50.
2. Harvey teaches adjustment. For him, trading is the same as making adjustments. Out of 168 months of condor trading, Harvey has made adjustments every month except one.

After reading that article, I come away thinking that if you want to trade iron condors, it is necessary to learn how to adjust your position and that requires training.

 

[dagnyt]

Quote from accutrader:

the article that I was thinking about was in the November, 2008 issue of SFO Magazine. http://www.sfomag.com/BackIssues/backissue.aspx?ID=91


Two points from that article are as follows

1. The risk/reward ratio of Iron Condors is terrible. A trader typically risks $10 to make $1 to $1.50.
2. Harvey teaches adjustment. For him, trading is the same as making adjustments. Out of 168 months of condor trading, Harvey has made adjustments every month except one.

After reading that article, I come away thinking that if you want to trade iron condors, it is necessary to learn how to adjust your position and that requires training.

I agree that the ability to manage risk - make adjustments - is the key to success. I'm not so sure about needing 'training.'

You can practice by opening some PAPER TRADING iron condors that are unbalanced (not neutral) and which already require adjustment.

Then you can use a PAPER TRADING ACCOUNT to try several types of adjustment until you get a feel for those which are comfortable for you. That's not necessarily the same as those 'which work.' Results don't always tell you if you made reasonable adjustment or a lucky one.

This is a reasonable method for learning and gaining experience. Have a bit of patience because if you truly gain confidence, you can (if you so choose) use this methodology for the rest of your life.

Some Adjustment types:

Close part of the positon
Close all (accept loss and move on)
Buy protection (naked longs)
Roll part
Roll all
Sell extras to bring in more cash (THIS IS A POOR CHOICE)


I like the article you referenced also. But, it's not necessary to establish an IC for a small credit and it's not necessary to 'risk $10 to make $1.

I prefer to risk $7 to make 3.

You can use risk/reward that suits your comfort zone.

But - bottom line - if trading IC doesn't feel right to you, there are alternative option strategies.

Mark

 

[accutrader]

Thanks for the good advice, Mark. Instinctively, IC’s are attractive to me because I like the idea of selling options rather than buying and I like having an insurance call or put so the position is not naked. Also, only one side should lose so the winning side should help the other side if the market moves against the position.

Paper trading does make sense. I am going to see if I can use my demo Interactive Brokers account to follow the trade. When I have tried to follow trades with pen and paper, I don’t follow the trades as well as I should.

I am thinking of using options on the S&P 500 index. If you have any other suggestions, I would appreciate it if you would let me know.

 

[spindr0]

I agree with Mark... you're being way too harsh on yourself and I think that's the result of having given up a profit rather than having done anything stupid.

Option positions are dynamic and they often need adjustments as circumstances change. Unfortunately, you can make those adjustments and the circumstances can change again. What the best thing to have done is only known in hindsight. As it happens, you do what you think is best.

Rhetorical question... As the market reversed to the upside, was there a day not far from the midpoint when you could have bought back a few short calls or added a few add'l long calls to mitigate some of the profit loss, perhaps funded my some small gain on the put side?

 

[riskfreetrading]

Quote from accutrader:

Thanks for the good advice, Mark. Instinctively, IC’s are attractive to me because I like the idea of selling options rather than buying and I like having an insurance call or put so the position is not naked. Also, only one side should lose so the winning side should help the other side if the market moves against the position.

Paper trading does make sense. I am going to see if I can use my demo Interactive Brokers account to follow the trade. When I have tried to follow trades with pen and paper, I don’t follow the trades as well as I should.

I am thinking of using options on the S&P 500 index. If you have any other suggestions, I would appreciate it if you would let me know.

Do you know the prob that the stock visits one of your short strikes under these two scenarios:

1. Short strikes at two STD from stock price.
2. Short strikes at one STD from stock price.

I am asking because there are guys who write books about options, and yet fail to answer the above two simple questions. In addition, you will understand what to expect from the stock's visits to your short strikes. You would be surprised by some of the answers that the probs will reveal to you.

 

[dagnyt]

Quote from accutrader:

I am thinking of using options on the S&P 500 index. If you have any other suggestions, I would appreciate it if you would let me know.

SPX options trade huge volume and that must means customers are willing to trade them.

For me, I gave up when IB was unable to provide electronic executions (that was a couple of years ago, so they may have fast fills now).

Here's another piece of my philosophy: The strategy is not the most important factor that determines your long-term results. The strategy is merely your method of playing the game. You (obviously) must make some trades to get into the game, and strategy selection determines which you buy/sell.

But, it's your ability to manage risk that is the key to success. At least that's my opinion.

By the way, the 'probability of touching' is approximately double the chance of finishing ITM.

For a free (limited use) calculator, see Hoadley: http://www.hoadley.net/options/barrierprobs.aspx?

Mark

 

[MTE]

Quote from dagnyt:

Thanks.

You should not have to 'order' (as in pay for) a copy. Here's the free article:

http://sfomag.com/article.aspx?ID=1277

Mark

The sentence in the beginning of article under "Option terminology" doesn't make any sense at all:
"You buy an iron condor when you sell a call spread and a put spread"

How can two "sells" yield a "buy"!? If you do a trade for a net credit then it is a sell and NOT a buy!

 

[RichardRimes]

That is Marks terminology which for those of us using TOS is confusing because we have both been taught and our platform is exactly as you say...when you are net short you are selling and when you are long you are buying on the TOS platform. But Mark has been very consistent is the term "buying" IC rather than "selling"...I would be interested Mark in exactly why you call it buying as all the market makers and others that have worked in the pit call it "selling".

 

[SmithTheTrader]

Quote from dagnyt:

That's not a fair conclusion. You can establish any risk reward ratio that appeals to you.

Just because the author of that web page likes the idea of collecting $1 for an iron condor does not mean you should do so. For example, my ideal price for a 10-point IC is $3.00 to $3.50 for a 90-day position.

Mark

Mark,
When you setup the 90 days RUT IC options, the bid/ask spread for 90 days options seemed quite wide (>0.5 in general) and just wonder how good/fast you can get filled with a fair price ?

Last Friday, i did give it a try for 90 days RUT options and put in a Buy to Open IC with a slightly lower than mid price (slashed another 0.20 from mid price) but it won't get filled up even i waited for the whole day..

 

[dagnyt]

Quote from SmithTheTrader:

Mark,
When you setup the 90 days RUT IC options, the bid/ask spread for 90 days options seemed quite wide (>0.5 in general) and just wonder how good/fast you can get filled with a fair price ?

Last Friday, i did give it a try for 90 days RUT options and put in a Buy to Open IC with a slightly lower than mid price (slashed another 0.20 from mid price) but it won't get filled up even i waited for the whole day..

These days, it's much more difficult to get a decent fill. Last fall when IV was screaming higher, MMs were anxious to buy vega, and it was much easier.

I find I must go at least 15 cents below the midpoint - and more likely 20 cents, to get a fill on a May or Jun RUT iron condor. I decided to accept those 'poor' prices - to a point. It's disappointing but, for me, if I prefer to be invested, rather than in cash, I accept the not-so-good-price. Once I have a good starter position, I am less anxious to increase it at unfavorable prices.

I've not tried, but another index may be easier to trade right now.

Mark