Everybody agrees that out of this 2 strategies one supposed to be making money in the long run and the other one is not (as a complete mirror of the first one). My belief is that IC is profitable in the long run and reverse IC is not. Hence reverse IC has inherently a negative expectancy.
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Iron Condors
- Thread starter Otis
- Start date
Quote from gkishot:
Everybody agrees that out of this 2 strategies one supposed to be making money in the long run and the other one is not (as a complete mirror of the first one). My belief is that IC is profitable in the long run and reverse IC is not. Hence reverse IC has inherently a negative expectancy.
Hi gkishot,
I have a different understanding with respect to expectancy. If the positions are established otm with indices traded under the european style, then the IC will have a positive expectancy and the reverse IC will have a negative expectancy. However, if the positions are established atm with volatile stocks right before earnings announcements under the american style, then the Reverse IC will have a positive expectancy and the IC will have a negative expectancy.
The issue of positive expectancy is directly correlated with the risk:reward ratio. Whether it's an IC or a Reverse IC, the key is to have the best suited set of conditions and the ideal r:r strike price for the given conditions.
Walt
Have anyone tried combining iron condors and reverse iron condors as a hedge before? I did backtests with a ratio of 10 iron condors to 1 reverse iron condor. It seems to have hedged pretty well in vol times this year and yet gave a decent 5-8% profit each of the range bound months. i.e with RUT at 700. Do 10 800/810/600/590 iron condors for credits and do 1 710/790/690/610 reverse iron condor for a debit. Open 30-40 days before expiration. Close not 10-15 days before expiration.
Quote from dagnyt:
1) 50k may be a modest living, but that's a 50% return on your money.
2) Iron condors can produce remarkable profits when all is going well. That will allow you to meet your target. But don't count on this as normal. 50% is an outstanding return with any strategy and if that's your target, you will be taking too much risk in an attempt to achieve it.
3) One major problems with iron condors is the overconfidence that sets in when you begin with a series of profitable months. [Don't worry - that's not likely to occur right now with these very volatile markets.]
4) Take this as a guarantee: You will not make money every month.
5) You should have more winning months than losing months. But the real risk is that losses can overwhelm profits.
6) The #1 key to sucess is risk management. you must be certain your losses are reasonable and not allowed to grow large - in a desperate attempt to get even. Accept your losses and move on.
7) There are different ways to approach iron condors. European style index options are ideal (SPX, RUT, NDX). But NOT OEX (it's American style).
Assume we are discussing 10-point spreads below: Example:
Sell 900/910 call spread and 800/810 put spread:
a) Some people love selling very FOTM options and collecting 50 cents or less for an iron condor. The probability of success is high, and the maximum profit is $50 per $950 margin requirement.
That's a bad idea, IMHO. Too much can be lost trying for a small profit. You'll win often, but one disaster can wipe out a years worth of profits.
b) Sell a 10 point spread for $2 to $4. less chance of success, but if you earn $1 per month, that's a very good return on margin ($1000 less cash collected).
Some like front month
Others like more time.
Pros and cons to each.
Read more about iron condors at my blog:
http://blog.mdwoptions.com/options_for_rookies/2008/06/recommended-o-3.html
PS It may seem insane to try this method now, but option premium is attractive to sell - if you own insurance.
Mark
http://blog.mdwoptions.com/options_for_rookies/
Thanks Mark for highly informative and educational information. I have ordered your book as well. I am reading this thread with interest. I do credit spreads on Z (FTSE) which is european style.
I would like to read more on Strangles and how to use it successfully. Any resources much appreciated.
Quote from osho67:
Thanks Mark for highly informative and educational information. I have ordered your book as well. I am reading this thread with interest. I do credit spreads on Z (FTSE) which is european style.
I would like to read more on Strangles and how to use it successfully. Any resources much appreciated.
Thanks. Appreciated.
I don't know any resources on strangles. There was a time when I would never consider buying strangles.
The world has changed, and now, I would never consider selling them.
I don't know your comfort zone and your risk parameters, but I'm assuming you want to buy, not sell them.
All I an say is this: They are expensive. But the markets are moving so wildly, that the prices are reasonable with regard to expectation.
Don't hold them too long. With IV so high, time decay is the enemy. But, if scalping is your goal, the market is certainly giving you enough movement to own a positive gamma position. Keep in mind that you'll do better on the downside as IV increases, so allow for that when choosing the call to buy. If too far OTM you'll lose twice on a rally: both the put and call could easily decline in price.
Mark
Quote from dagnyt:
Thanks. Appreciated.
I don't know any resources on strangles. There was a time when I would never consider buying strangles.
The world has changed, and now, I would never consider selling them.
I don't know your comfort zone and your risk parameters, but I'm assuming you want to buy, not sell them.
All I an say is this: They are expensive. But the markets are moving so wildly, that the prices are reasonable with regard to expectation.
Don't hold them too long. With IV so high, time decay is the enemy. But, if scalping is your goal, the market is certainly giving you enough movement to own a positive gamma position. Keep in mind that you'll do better on the downside as IV increases, so allow for that when choosing the call to buy. If too far OTM you'll lose twice on a rally: both the put and call could easily decline in price.
Mark
Thanks Mark for your kind reply.
I had in mind short strangle. I have been reading The complete guide to Option Selling by James Cordier and Michael Gross. IN this book the three recommended spreads are
Short option strangle
Ratio Credit spread
Covered call writing.
Your opinion much appreciated and will be helpful regarding these three strategies. I am not trying to say authors are right or wrong. Just trying to understand another perspective.
Thanks
Quote from osho67:
Thanks Mark for your kind reply.
I had in mind short strangle. I have been reading The complete guide to Option Selling by James Cordier and Michael Gross. IN this book the three recommended spreads are
Short option strangle
Ratio Credit spread
Covered call writing.
Your opinion much appreciated and will be helpful regarding these three strategies. I am not trying to say authors are right or wrong. Just trying to understand another perspective.
Thanks
1) Those strategies are much riskier now, than when the book was written.
2) I'm sure you can see for yourself that the markets are extremely volatile. That means you'll get nice prices for you naked options (a covered call is equivalent to a naked put), but selling naked options here is risky.
3) That does no mean you shouldn't do it. It just means I am not going to do it.
4) I suggest that you be careful not to be greedy. That you size your trade to allow you to remain withing a comfort zone. That you be aware of risk and do not feel that you must own the trade until the options expire. Youa re allowed to clsoe the trade early and lock in a profit, or a loss.
5) In my book (Rookie's Guide to Options), I also recommend covered call writing, but only for bullish investors. I also recommend naked put selling, but only for investors who want to buy stocks.
Most of the book covers strategies with limited risk. To me, in this market, limit risk is more reasonable. But, it's your money and your choice.
Be careful out there.
Mark