Is this a viable Iron Condor Strategy

[shainadir]

I am new to options and have had some success with iron condors the past few months. I usually pick my ICs with the puts and calls with gammas at .10. Today, I had to close out the call sides for my Aug SPX because they were getting a little too close for comfort. I still have the puts.

This got me thinking about future iron condors. How viable is a strategy where the puts and calls are at higher gammas around .30-.35 with higher credit. If im out of the money on both sides at expiration, then I will earn more with the higher credit. If the strike gets closer to either side, I will close the side that it nears and will have a good chance that the other side will expire otm.

I am work now so I dont have a chance to backtest this but is this a viable strategy or am I just thinking out of my ass?

 

[dagnyt]

Quote from shainadir:

How viable is a strategy where the puts and calls are at higher gammas around .30-.35 with higher credit. If im out of the money on both sides at expiration, then I will earn more with the higher credit. If the strike gets closer to either side, I will close the side that it nears and will have a good chance that the other side will expire otm.

I am work now so I dont have a chance to backtest this but is this a viable strategy or am I just thinking out of my ass?

There has been much debate on ET over the years about the viability of trading CTM (closer to the money) IV vs. OTM (further out of the money options).

To me the winners of the debate are those who favor CTM positions. But in real life, I ignore that debate and prefer OTM options.

There is always a trade-off. Gain something, give up something else.

The major argument in favor of CTM iron condors is that you collect a high credit. That, in turns, reduces the maximum loss. That's obviously good. But, there is an increased likelihood that one of the spreads will finish ITM.

Thus do you prefer less risk (per spread) coupled with an increased probability of incurring a loss?

Or do you prefer a smaller reward, along with a higher probability of earning that reward?

Then there's also the adjustment problem. When losses are smaller, do you adjust a risky position less frequently? Or perhaps you don't adjust at all. This is an individual decision, but one that is important to your overall results.

Bottom line: Neither is 'better' than the other because prudent risk management is the essential ingredient for long-term success. If you are working full time, you may be better served by owning positions that are less likely to turn into trouble and less likely to require an adjustment.

Mark
http://blog.mdwoptions.com/options_for_rookies

 

[shainadir]

Thanks for your reply Mark.

If I close out the side that is closer to the money, wont i break even or win a little most of the time should the other side expire out of the money?

...by the way, I own a copy of your book and thats how I learned to trade iron condors.

 

[Kedwards]

Quote from shainadir:



If I close out the side that is closer to the money, wont i break even or win a little most of the time should the other side expire out of the money?

Shainadir, download Think or Swim's desktop software. It has a risk profile analyzer in which it will tell you your breakevens, you just have to input your position size (strikes, expiry, # of contracts,etc). You can also adjust for time and volatility to see the mark to market gain/loss you'll have based on the movement of the underlying.

IMO, visualizing your risk profile is important. You'll know when you'll have an "oh shit" moment (based on where underlying is) before "oh shit" happens. I think that's important for a strategy like verticals, where adjustments should be planned ahead of time in case of 'unexpected' 3% up/down days.

 

[dagnyt]

Quote from shainadir:

If I close out the side that is closer to the money, wont i break even or win a little most of the time should the other side expire out of the money?

...by the way, I own a copy of your book and thats how I learned to trade iron condors.

Sure you will. IF THE OTHER SIDE DOESN'T BITE YOU IN THE ASS.

One of the key points made in the book is that you cannot afford to cover the losing side of an iron condor and then just ignore the other side. There is still a very good chance that it will soon move into the money.

And that's especially true when you are trading CTM options. When one side moves into the money, the other side is away - but not that far away. I'm not saying you MUST cover that winning side, but it's risky to leave it out there - all alone and unhedged.

If taking that risk suits you, fine. But don't HOPE that it goes away quietly. Hope is not a good strategy.

Thanks for the book and good trading,

Mark

 

[MTE]

Quote from shainadir:

I am new to options and have had some success with iron condors the past few months. I usually pick my ICs with the puts and calls with gammas at .10. Today, I had to close out the call sides for my Aug SPX because they were getting a little too close for comfort. I still have the puts.

This got me thinking about future iron condors. How viable is a strategy where the puts and calls are at higher gammas around .30-.35 with higher credit. If im out of the money on both sides at expiration, then I will earn more with the higher credit. If the strike gets closer to either side, I will close the side that it nears and will have a good chance that the other side will expire otm.

I am work now so I dont have a chance to backtest this but is this a viable strategy or am I just thinking out of my ass?

You keep referring to gamma, but I presume you meant delta and not gamma!?

 

[Optionspoet]

In my experience, very-CTM or ATM options have yielded better results. But they require more experience as the amount of trade and money management skills needed increase.

As with all trades, you must understand your plan before initiating the trade and you have to stick to it once entered. However, the closer to the money that you are, the less time you have to react and execute.

Try reducing size at first until you become comfortable with the adjustments, the underlying, and how the greeks impact your position. Once you have something to compare against, you can make your own call as to which is better.

 

[JohnGreen]

Optionspoet has a very good point.

With CTM options, the action is much faster. Even a 10 point move can have spectacular results, both good and bad. I'd say playing CTM is better left for those who can watch and adjust at any moment. Otherwise, it's easier to deal with further OTM options and make adjustments infrequently. A ten point move won't make much difference in your position if your closest short is 100 points from the money.

Psychology also plays a big role. Can you stand large shifts in your account value? Are your nerves like steel, or do you buckle under pressure? Do you freeze when the "heat" is on, and stand there like a sitting duck surrounded by hunters in the fall? If you can answer those questions truthfully, you'll have a much better idea what to do.

In my case, I usually am OTM, mostly because I have another job, and can't watch all the time. I also like the probability aspect of OTM, even though I know very well that one cannot become complacent because of the risk of relatively large losses compared to the premium taken in.

 

[dagnyt]

Quote from JohnGreen:

Psychology also plays a big role. Can you stand large shifts in your account value? Are your nerves like steel, or do you buckle under pressure? Do you freeze when the "heat" is on, and stand there like a sitting duck surrounded by hunters in the fall? If you can answer those questions truthfully, you'll have a much better idea what to do.
.

John,

I'm disagree with you this time.

Traits such as:

'nerves of steel'

'buckle under pressure'

have no place in the vocabulary of a trader. If you have nerves of steel, then you are holding a position when you shouldn't. If it takes nerves of steel to avoid bucking under pressure, then you are holding positions that are way out of your comfort zone. That's a bad idea.

If you hold such positions, you are refusing to lock in a loss.. You are gambling - in an attempt to turn a loser into a winner.

Those are not the traits of a successful trader. Sound risk management cannot be ignored.

Mark

 

[spindr0]

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Quote from JohnGreen:

Psychology also plays a big role. Can you stand large shifts in your account value? Are your nerves like steel, or do you buckle under pressure? Do you freeze when the "heat" is on, and stand there like a sitting duck surrounded by hunters in the fall? If you can answer those questions truthfully, you'll have a much better idea what to do.
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Quote from dagnyt:

I'm disagree with you this time. Traits such as:

'nerves of steel'
'buckle under pressure'

have no place in the vocabulary of a trader. If you have nerves of steel, then you are holding a position when you shouldn't. If it takes nerves of steel to avoid bucking under pressure, then you are holding positions that are way out of your comfort zone. That's a bad idea.

If you hold such positions, you are refusing to lock in a loss.. You are gambling - in an attempt to turn a loser into a winner. Those are not the traits of a successful trader. Sound risk management cannot be ignored.

I'm going to have to disagree with you Mark, not because of what John thinks but because of what I think that he thinks

I suspect that you're interpreting the psychological trading traits that he mentioned as sticking with a loser out of stubbornness. I also think that as a iron condor kinda guy (hedged) with a 2-3 month time frame, that makes you more of an 'investor' than a trader who is more subject to these pressures.

When you have a large position and the sh*t hits the fan, do you stand there like a deer in the headlights, bemoaning the loss, wondering what to do? Do you have to grab some notes or a book to reference adjustments or stop loss rules?

Does the stress lead you toward anxiety or does the adrenaline flow jump start your concentration? Does your discipline kick in? Does your mind go into high gear, working out possible scenaros as price continues to gyrate? Do you hang in there? Close the position? Add/subtract something from one side? Can you ignore your changing account value while you focus on your challenged position?

Nerves of steel means exactly what John suggested, eg. withstanding the duress rather than buckling under the pressure. IMHO, it is essential for "trading" and is the emotional component that you bring to the table when you attempt to practice sound money management.