Iron Condors --help

D

devilfishlane

I would like to put on my 1 st live trade and have some questions. This would be my trade

Iron Condor -SPX (48 days)

10 Feb. 1190 CALL
10 Feb. 1200 CALL

10 Feb. 1000 PUT
10 Feb. 990 PUT

CREDIT 2.10

Basically , as I understand with the SPX at 1115 , the SPX would have to move 75 points up or the DOW would have to move 800 points up in 48 days to see a loss or the SPX would have to move down 125 points or the DOW would have to drop over 1300 points for me to lose on the downside. I know I won't get filled at 2.10 , but lets say 1.95. My risk reward is roughly 4 to 1.

1-- As I explained , are my numbers right? What am I missing? I don't see how I could lose except if a nuclear war breaks out.
 
If the SPX stays between your two short strikes you should be okay at expiration. Thst's best case outcome. Key thing is for you to ensure you take proper risk management on the position so you don't get caught in a losing trade on either end.

As to the fill, the SPX has notorious spreads, so be sure you use limit order and don't be surprised if it doesn't get filled quickly or all-at-once.

(Aside from general intermarket analyis, the Dow's performance is not really relevant here in terms of your spread's performance.)
 
Thanks. It seems that if the SPX is up (or down)1%, the Dow is up 1% to 1.15%. So there has to be some corralation and my numbers seem to be somewhat accurate. Ofcourse if the market moves big, I would buy puts or calls 1 month out to hedge. Any other comments would be great.
 
Quote from devilfishlane:

What am I missing? I don't see how I could lose except if a nuclear war breaks out.
More...

The numbers are not the issue (right now).

Here is what you are missing, and take my word for it, if you don't understand the following, you will NEVER earn money by trading iron condors. NEVER.

What you are missing:

1) 'I don't see how I can lose'

That is an unbelievable statement - but I do believe you mean it. That tells me you do not yet understand this strategy well enough to be going 'live.'

You can lose easily. In fact, this is the type of position that you MUST EXPECT to lose money - (assuming you trade it monthly) at least one time time EVERY YEAR.

2) If you think there is no chance to lose money - what do you think of the people who buy your spread ?

Do you think they are 'idiots' for taking the other side?

Do you think they are just giving you free money?

If this trade cannot lose, why isn't the whole world doing it?

If this trade cannot lose, why is the price near $2. Why hasn't it been driven down to $0.20 or less, by all traders who 'know' this is a free money trade?


Iron condors have a high probability of making a profit. High probability does not mean 100%.

Please be careful.

Mark
http://blog.mdwoptions.com
 
Mark, Thanks for your post. I really didn't mean it can't lose money ever. But from what I understand , the market would have to make a massive move either way to lose. 700 + or over -1200 in 48 days. Also, If I cleared 60% of that 2.1 credit, I'll be long gone. I'll take that bet anyday. From my research, the market doesn't wake one day and drop 1000 points. But if it did start dropping and my deltas shot up I would protect myself with puts or get out altogether, even with a loss once in a while. I now I am new to this game, but how would you play this trade or a similar IC?

Thank you
 
Quote from devilfishlane:

I would like to put on my 1 st live trade and have some questions. This would be my trade

Iron Condor -SPX (48 days)

10 Feb. 1190 CALL
10 Feb. 1200 CALL

10 Feb. 1000 PUT
10 Feb. 990 PUT

CREDIT 2.10

Basically , as I understand with the SPX at 1115 , the SPX would have to move 75 points up or the DOW would have to move 800 points up in 48 days to see a loss or the SPX would have to move down 125 points or the DOW would have to drop over 1300 points for me to lose on the downside. I know I won't get filled at 2.10 , but lets say 1.95. My risk reward is roughly 4 to 1.

Mark's points are all excellent. Crunch the numbers. Credit is 2.10; loss is (assuming SPX finishes above 1200 or below 990) is 10.00-2.10=7.90. So, you are risking 7.9 to make 2.10. So, with your given number of contracts, you are risking $7900.00 to make $2100.00. You need to learn how to manage this trade. You just do not leave it in place until expiration for a number of reasons (read up on the effect of volatility and time on each of the legs). What do you do if the underlying closes at 1192 one day? With IC, the underlying has a higher chance of penetrating the "body strike" than it does finishing there. Also, what calculations did you use to pick your strikes? If they are arbitrary (ignoring technical support and resistance levels), then the market really doesn't care where you place your strikes. At least at support and resistance levels, you have a shot at a rebound.

Incidentally, I do follow tech analysis, and since the SPX has broken out of its narrow trading range, there really isn't any short-term or intermediate term resistance. Yes, you can look at the top from last week, but it must be retested to assume it is a strong resistance point. Just some points to think about. Once the trade is placed, you need to manage it.
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I would adjust the trade through buying next month out puts, if my deltas went up to around 28-30. Or take the troubled side off ,wait a couple days to settle and reset. Or take off half the position.

I hope to invest $100-150 K in IC's and Calenders in a yr or so, once I learn more. So if I lose 30% - 40% of the $7900 invested now (due to a massive move) I could deal with it. (not to sound like a smartass). I plan to put on 1 or 2 trades a month(10 contracts each) for 1 yr, learn and see how it goes. I appreciate everyones input and corrective criticism.
 
Quote from devilfishlane:

Mark, Thanks for your post. I really didn't mean it can't lose money ever. But from what I understand , the market would have to make a massive move either way to lose. 700 + or over -1200 in 48 days. Also, If I cleared 60% of that 2.1 credit, I'll be long gone. I'll take that bet anyday. From my research, the market doesn't wake one day and drop 1000 points. But if it did start dropping and my deltas shot up I would protect myself with puts or get out altogether, even with a loss once in a while. I now I am new to this game, but how would you play this trade or a similar IC?

Thank you
More...

Agreeing with jwc:

1) It's not quite right to assume the market must move 700 or 1200 points in 48 days. Think how much you would lose if the market moved half that amount in one week. Or three quarters of that amount in two weeks.

2) What do you do then? Do you tell yourself there are now only 41 (or 34) days, so you can afford to wait?

Do you exit the trade and take the loss?

Do you make any adjustments?

3) The point is that once you have much more immediate risk - far more than the original trade, rolling the endangered portion of the IC to the next month seems like a good idea.

But what do you do when the market moves significantly - in the same direction? Do you roll again?

4) Do you, as most rookies (and I confess some experienced traders recommend), do and sell extra options so that you can roll for a cash credit?

That's not the path to profitiability. That's just increasing risk at each stage.

5) I get the allure of rolling farther OTM, but it does not work. Not over the long-term.

You must believe - as I am sure you do - that unexpected events do occur and that one day you will encounter a move big enougn to wipe out the account.

unless you are certain to keep position size at a reasonable level - and that means taking losses when the market moves against you.

6) It's fine to 'take that bet any day.' But the one thing you must do is avoid sizing a position so that when the inevitable happens, you cannot survive.

When you profit month after month from this strategy, it's easy to ignore what I am telling you here and to keep increasing size and enjoying your growing account.

But it will not last. Guaranteed.

Best of luck. Not telling you what to do. Just want to be certain you understand what is at stake.

Mark
 
You also need to ask yourself how you will be able to handle the psychology of multiple losses. The trade-off of a high probability system is that it typically wins frequently but small and losers tend to be infrequent, but quite a bit larger than the winners (If you find a high probability system with a good risk/reward ratio, then I'd say you've got a good thing going). It sounds good on paper, but when you get two losers in a row and it wipes out your last 5 good trades, it takes a strong stomach to stick to your discipline.
You sound like you have a decent amount of capital, but I would suggest starting with 1 contract rather than 10 or try SPY contracts rather than SPX while you are learning and you'll get the same learning experience at 1/10 the exposure.
 
Quote from devilfishlane:

Thanks. It seems that if the SPX is up (or down)1%, the Dow is up 1% to 1.15%. So there has to be some corralation and my numbers seem to be somewhat accurate. Of course if the market moves big, I would buy puts or calls 1 month out to hedge. Any other comments would be great.
More...
Of course there's a correlation because all (most?) of the DOW stocks are in the SPX. Since the sample size of the DOW is smaller, it will tend to be more volatile. But as someone else pointed out, it's irrelevant and that's because the P&L of your position is based on the SPX and its options.

As far as buying puts and calls if the market moves big, that sounds good on paper but by the time that occurs, your condors will be in toruble and those protective legs will be more expensive (the underlying will be closer to your short strikes and most likely, IV will have ramped up).
 
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