Iron Condors and Stupidity

[dagnyt]

Quote from MTE:

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!

Under that interpretation, sometimes a diagonal spread is a buy and sometimes it's a sell. That's not consistent.

If I buy Oct 80C and sell Sep 75C - this is either a buy or sell, depending on how you look at it. It's a buy because you own the further out month, as in a calendar spread.

Or, it's a sell, because you sold the lower strike call as in a vertical call spread.

But, whichever definition you choose, it has nothing to do with credit or debit.


from 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".

This a good point for discussion.

1) I now try to use verb 'trade' rather than buy or sell. It avoids confusion.

2) I was not aware that TOS, or other brokers, used 'sell.'

3) I use the terminology that my broker, InteractiveBrokers uses.

4) Here's why I believe that the way I use the terminology is correct, despite the obvious disagreement. [BTW, I got it wrong in my book. I use 'sell' throughout. But that was because I thought it was 'obvious' that sell is correct. I have since changed my mind.]

Consider a long condor position. I'm sure we all agree that when you have this positon, you BUY the condor;

Long Nov 35 call
Short Nov 40 call
Long the call spread

Long Nov 55 put
Short Nov 50 put.
long the put spread

You buy both spreads. You pay a debit. you own the condor. Just the same as buying the butterfly.

Now the question is, what makes this 'long?" Is it the fact that cash is paid? Probably. When we own a condor, we profit when the stock does not move outside the range.

Let's look at the 'iron' equivalent of this condor, also a position that profits when the stock does not move outside the (same) range.

Long Nov 35 put
Short Nov 40 put
Short the put spread

Long Nov 55 call
Short Nov 50 call
Short the call spread

It seems logical to me that if I am LONG the condor, and the <i>equivalent position</i> is an IRON condor, then I should be LONG the IRON condor as well.

Thus, to me the debate is:

Are we long the iron version because it has the same risk/reward parameter as the regular condor?

Or are we short the iron condor because equivalency doesn't matter. What matters is the fact that we sold two spreads and collected cash.

I vote for equivalency being more important.

But, I do see a point of controversy. Long a call spread is equivalent to being short the put spread. These are surely equivalent. So the argument becomes more subtle. It's okay for a long call spread to be equivalent to being short a put spread because the spreads have different names: put spread vs. call spread.

But because they are both condors (iron being an adjective, and not meant to represent a different spread) then long one is long the other.

I wonder who should make the final decision - but clarity on this point would be a good thing.


Mark

 

[SmithTheTrader]

Quote from dagnyt:

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

Thanks for sharing, at least this let me know i am not alone that can't get the fair price this day in the filling of my IC.. I will give it a try again next week and slashed another 20 cents from mid price, hope will get filled this time..

 

[spindr0]

Quote from riskfreetrading:

I am asking because there are guys who write books about options, and yet fail to answer the above two simple questions.

Someone isn't getting enough attention and approval so he indicts book writers. Awww, how cute!

 

[MTE]

Quote from dagnyt:

This a good point for discussion.

1) I now try to use verb 'trade' rather than buy or sell. It avoids confusion.

2) I was not aware that TOS, or other brokers, used 'sell.'

3) I use the terminology that my broker, InteractiveBrokers uses.

4) Here's why I believe that the way I use the terminology is correct, despite the obvious disagreement. [BTW, I got it wrong in my book. I use 'sell' throughout. But that was because I thought it was 'obvious' that sell is correct. I have since changed my mind.]

Consider a long condor position. I'm sure we all agree that when you have this positon, you BUY the condor;

Long Nov 35 call
Short Nov 40 call
Long the call spread

Long Nov 55 put
Short Nov 50 put.
long the put spread

You buy both spreads. You pay a debit. you own the condor. Just the same as buying the butterfly.

Now the question is, what makes this 'long?" Is it the fact that cash is paid? Probably. When we own a condor, we profit when the stock does not move outside the range.

Let's look at the 'iron' equivalent of this condor, also a position that profits when the stock does not move outside the (same) range.

Long Nov 35 put
Short Nov 40 put
Short the put spread

Long Nov 55 call
Short Nov 50 call
Short the call spread

It seems logical to me that if I am LONG the condor, and the <i>equivalent position</i> is an IRON condor, then I should be LONG the IRON condor as well.

Thus, to me the debate is:

Are we long the iron version because it has the same risk/reward parameter as the regular condor?

Or are we short the iron condor because equivalency doesn't matter. What matters is the fact that we sold two spreads and collected cash.

I vote for equivalency being more important.

But, I do see a point of controversy. Long a call spread is equivalent to being short the put spread. These are surely equivalent. So the argument becomes more subtle. It's okay for a long call spread to be equivalent to being short a put spread because the spreads have different names: put spread vs. call spread.

But because they are both condors (iron being an adjective, and not meant to represent a different spread) then long one is long the other.

I wonder who should make the final decision - but clarity on this point would be a good thing.


Mark

Equivalency is totally irrelevant here!

- If you enter a position and pay money for it then you're long and you bought it.
- If you enter a position and you received money for it then you are short and you sold it.

How can you buy something and be short it? Your reasoning doesn't make sense and it is actually confusing.

Another way to look at this - when you enter an iron condor (short the body and long the wings) the worst price you can trade it at is the aggregate bid price. When you exit it the worst price is the ask price. So again, how can you buy something with the max slippage at the bid, or sell something with the max slippage at the ask. It's just goes against everything else in trading.

 

[spindr0]

I don't know what the official terminology is but FWIW, some web sites decribe a long iron condor as selling the two OTM credit spreads.

Most condor sites that I've come across tend to avoid the confusion by describing it as the combination of two credit spreads or selling a strangle and buying a more OTM strangle.

 

[dagnyt]

Quote from MTE:

So again, how can you buy something with the max slippage at the bid, or sell something with the max slippage at the ask. It's just goes against everything else in trading.

I hear you. And you make sense.

But to me, equivalency also makes sense.

I'd like to find a source with the definitive answer.

I was trained as a chemist and nomenclature was crucial. Yes, one could draw the chemical formula, but the name of a specific molecule must be unique with no possible misunderstanding. That's what I'd like to have in the options world.

What about my example:

If I buy Oct 80 call; sell Sep 75 call and pay $0.05, am I buying the diagonal spread?

If I do the same spread but collect $0.05, am I selling the diagonal spread?

Absolutely not! In that scenario no one would be able to tell what someone meant when they said 'buy' the spread. There must be a definition. I don't think cash is the definitive factor in defining buy vs. sell. But if I hear the right argument, I can be convinced I'm wrong.

Mark

 

[jwcapital]

Quote from accutrader:

The movement in the market in worked very well. You were able to close the bear call spread for very little. If you held, you could also have closed the puts for very little.

What I don’t understand from your post is did you after closing the calls, then write another call spread?

SORRY FOR THE LACK OF CLARITY AND SORRY FOR THE CAPS. IT IS JUST EASIER TO READ MY RESPONSES AMONGST YOUR COMMENTS. I HAD EXITED ALL OF MY BEAR CALL SPREADS; THEREFORE, THE IC NO LONGER EXISTED--JUST MY BULL PUT SPREADS.

In your post you say “don’t adjust at all” Then later in that paragraph, you say if the trade moves outside your comfort zone “consider moving the body” Are those not contradictory statements?

NO. ONCE YOU ESTABLISH YOUR IC, DON'T FOOL WITH IT--LIKE I DID. LET IT ALONE AND JUST MANAGE YOUR BEAR CALL SPREADS AND BULL PUT SPREAD AS IF THEY EXISTED INDEPENDENTLY. AND, IF YOU ARE CURRENTLY TRADING IC'S AND THE UNDERLYING IS CONSTANTLY HITTING YOUR SHORT OPTIONS, THEN MOVE THEM FURTHER OTM, IE INTO YOUR COMFORT ZONE. PERSONALLY, I COULDN'T STOMACH SEEING THE UNDERLYING CONSTANTLY HITTING MY SHORT OPTIONS.

I read an interesting article in the last couple of months on Iron Condors. I threw the magazine with the article out but I will go online to see if I can find it.

I am interested in writing iron condors. I would certainly appreciate it if you would help me get started. If you are agreeable, please email me.

I THINK THE BEST WAY TO LEARN IS TO READ THIS FORUM. IT IS AN EXCELLENT AND CURRENT SOURCE OF INFORMATION. ALSO GOOGLE IRON CONDOR AND READ EVERYTHING YOU GET YOUR HANDS ON. UNDERSTAND THE CONCEPT..TRADING IS NOT BLACK AND WHITE AS YOU HAVE READ. MOST OF US HAVE DEVELOPED A BASIC SYSTEM, BUT THE MANAGEMENT REQUIRES SOME GUT AND INTUITION. ALTHOUGH, IT SEEMS THE INTUITION AND GUT IS A KILLER MOST OF THE TIME. THERE ARE A NUMBER OF GOOD PEOPLE THAT CONTRIBUTE HERE...READ, READ, READ. LASTLY, IF YOU AHVE ACCESS TO ONE, I SUGGEST YOU OPEN A PAPER TRADE ACCOUNT SOMEWHERE AND PRACTICE. FOR MY TRADING, IB IS THE BEST BROKER--REAL-TIME PAPER TRADE ACCOUNT, AND REAL-TIME MARGIN REQUIREMENTS, WHICH YOU WILL NEED.

 

[jwcapital]

Quote from MTE:

jwcapital, just out of curiousity, what was the width of the spread (body strike to wing strike, that is) that netted a 6-point credit?

IT VARIES, DEPENDING ON THE VOLATILITY AT THE TIME. WITH ALL DUE RESPECT, YOU NEED TO DEVELOP YOUR WING SPAN (AND BODY WIDTH) ACCORDING TO YOUR OWN COMFORT ZONE. THE LONG OPTIONS ARE YOUR ULTIMATE INSURANCE LEGS. YOUR SHORT OPTION PLACEMENT ALSO DEPENDS ON YOUR COMFORT ZONE. THERE IS NO SET FORMULA AS ANY IC TRADER WILL TELL YOU.

 

[jwcapital]

Quote from accutrader:

I do not want to be negative, jwcapital but while browsing the internet, I came across an article at http://www.ironcondoroptiontradingstrategy.com/iron-condor/iron-condor

that reminded me, rightly or wrongly, why I decided not to pursue IC’s. They have a high probability of success but a poor risk/reward ratio. So there may be several months of small gains and then a couple of months that wipe out the gains.

I would be interested in your comments regarding whether you have been able to manage the risk.

THIS IS A GREAT QUESTION. FUNNY THING. MY SHORT OPTIONS ARE SO FAR OTM THAT THE UNDERLYING HASN'T TOUCHED THEM. I ALSO SUBSCRIBE TO THE MEAN REVERSION THEORY--TO REPEAT THE MARKET BOUNCES AROUND. EVEN IF THE UNDERLYING DID TOUCH, I WOULD HOLD OUT FOR A TIME. SO FAR, I HAVE WITNESSED BOUNCE UP OR DOWN JUST ABOUT EVERY TIME. SOMETIMES THE MARKET SIMPLY STAYS FLAT WITH NO SERIOUS BOUNCE OR PULLBACK. AND YOU KNOW HOW ERRATIC THE AMRKET HAS BEEN THE PAST COUPLE OF YEARS. I HAVE TRADED THROUGHOUT THE LAST TERRIBLE MARKET AND THE ONLY TIME I HAVE SMALL LOSSES OR MINIMAL GAINS IS WHEN I FOOL WITH THE MANAGEMENT OF THE TRADE.

 

[jwcapital]

Quote from 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?

I ACTUALLY SOLD BEAR CALLS ON THE WAY DOWN TO 665 ON THE ES. IT DID GET A PROFIT ON THREE OF THEM. IT IS THE LAST FIVE THAT ARE ARE KILLING ME. BTW, THE AVERAGE STRIKE ON THE CALLS WAS 770--OVER 100 POINTS FROM THE LOW. STILL, I DIVERGED FROM MY PHILOSOPHY. I SIMPLY SHOULD HAVE SAT STILL.