Same vehicle, Same Strategy, every month

[mayhem28]

How realistic is this for long term success trading options? I've learned a great deal about options for some time now and have been trading iron condors since about June (learned a lot from Mark W's blog, thanks Mark!). Obviously conditions have been ideal and yesterday closed the put side of a
IC (leaving the call side). I don't like the idea of initiating IC's with volatility at the low levels it is now, but folks like Dan S believe these can be year round month after month trades regardless of IV. Obviously buying long calls/puts is also an option but that simply questions the viability of doing the condor in the first place and the whole idea of same strategy every month. On a side note: how concerned do I need to be with stuff like vol skew with condors? I'm guessing skew mostly applies to stuff like calendars, diagonals, where the strategy spans differing months.. then there's intramonth skew.. how vital are these?

Thanks!

 

[MTE]

You are right, iron condors have been working ideally in the last 3 months. So it is not wise to judge your ability/strategy based on this time period. However, I do believe that a strategy such as iron condors can and should be done month in month out, as the overall performance comes from collecting premium most of the time and then occasionally taking a big loss, which is hopefully less than the sum of the previous wins. As a result, missing a month or two due to not being comfortable in a low volatility environment can greatly affect your performance.

For example, you may not trade iron condors for the next 3 months due to low volatility, but nothing happens in these 3 months and you end up missing a good run, then volatility picks up and you decide it is a good time to sell ICs again, but end up taking a loss and you don't have that 3-month cusion.

With that said, I don't believe that one should be limiting him/herself to just iron condors.

The volatility skew between different exprirations doesn't really have a direct impact on an IC, but it may provide some information, which may be useful for your trading.

The volatility skew between the strikes, on the other hand, does affect condors.

Anyway, just my 2 cents.

 

[MarkSebastian]

Quote from MTE:

You are right, iron condors have been working ideally in the last 3 months. So it is not wise to judge your ability/strategy based on this time period. However, I do believe that a strategy such as iron condors can and should be done month in month out, as the overall performance comes from collecting premium most of the time and then occasionally taking a big loss, which is hopefully less than the sum of the previous wins. As a result, missing a month or two due to not being comfortable in a low volatility environment can greatly affect your performance.

For example, you may not trade iron condors for the next 3 months due to low volatility, but nothing happens in these 3 months and you end up missing a good run, then volatility picks up and you decide it is a good time to sell ICs again, but end up taking a loss and you don't have that 3-month cusion.

With that said, I don't believe that one should be limiting him/herself to just iron condors.

The volatility skew between different exprirations doesn't really have a direct impact on an IC, but it may provide some information, which may be useful for your trading.

The volatility skew between the strikes, on the other hand, does affect condors.

Anyway, just my 2 cents.

Would almost be my word for word explaination as well.

 

[spindr0]

Quote from mayhem28:

"Same vehicle, Same Strategy, every month"

How realistic is this for long term success trading options? Obviously conditions have been ideal .

I think you pick the strategy that fits your outlook and market conditions rather than just repetition of the same strategy day in and day out, During the GFC drop, would using most thiings involving short puts have made much sense?

I think that good money management is more imp't for long term success with options. You can adjust positions, close them, buy extra insurance legs as Mark does, whatever. But you can't chow down on maximum losses.

 

[Stanford]

Quote from MTE:

You are right, iron condors have been working ideally in the last 3 months. So it is not wise to judge your ability/strategy based on this time period. However, I do believe that a strategy such as iron condors can and should be done month in month out, as the overall performance comes from collecting premium most of the time and then occasionally taking a big loss, which is hopefully less than the sum of the previous wins. As a result, missing a month or two due to not being comfortable in a low volatility environment can greatly affect your performance.

HI, MTE, why do you have to take big loss doing these. Cant you do adjustments, rolling down or out and reduce those big losses. What are you considering a big loss percentage wise? Thanks Michael

 

[GatlingGun]

Quote from mayhem28:

How realistic is this for long term success trading options? I've learned a great deal about options for some time now and have been trading iron condors since about June (learned a lot from Mark W's blog, thanks Mark!). Obviously conditions have been ideal and yesterday closed the put side of a
IC (leaving the call side). I don't like the idea of initiating IC's with volatility at the low levels it is now, but folks like Dan S believe these can be year round month after month trades regardless of IV.

Thanks!

Hi Mayhem,

I spent some time evaluating IC spread strategies in terms of how they respond to increases in volatility and the impact of volatility on profits... honestly, I'm not sold... especially in a market as wild as this... ICs are rather expensive, complicated and the gains are highly dependent on whether you can time volatility the correct direction... I guess the key word here is "time"... see below for connection.

Quite frankly, the cynical part of me wonders whether those pushing ICs these days tend to be the ones who profit from selling them (either on the brokerage or educational side)... Have you compared profits from a typical year-long series of ICs and the volatility risks vs taking a short / long position (with a generous stop or option hedge) based on broad market timing & momentum indicators?

ThinkorSwim has an option spread calculator that I used to run the numbers... even small increases in volatility (assume I bought @ vol=22 and sold @ vol=24) completely wiped out most of the profits I could get from ICs... buying ICs at higher volatility and shooting for a lower volatility exit seemed to significantly increase front-end costs.

Thoughts?

 

[Stanford]

Gatlinggun, I thought one strateagy of the Iron condors was to have both sides expire worthless, collect the premiium from both credits. If you set the stdrikes far enough out of the money not to be affected, how the volatility affect that at all?

Thanks (from a real rookie at this) Michael

 

[No.Heat]

Same vehicle is nice except by limiting yourself to one your daily volatility is heavily constricted.

 

[MTE]

Quote from Stanford:

Gatlinggun, I thought one strateagy of the Iron condors was to have both sides expire worthless, collect the premiium from both credits. If you set the stdrikes far enough out of the money not to be affected, how the volatility affect that at all?

Thanks (from a real rookie at this) Michael

Changes in volatility do affect daily mark-to-market, but not if you hold to expiration.

 

[MTE]

Quote from Stanford:

HI, MTE, why do you have to take big loss doing these. Cant you do adjustments, rolling down or out and reduce those big losses. What are you considering a big loss percentage wise? Thanks Michael

Well, ideally, you don't have to take a big loss, but sometimes it is inevitable. Personally, I'm not a big fan of adjusting losing positions as you always have to accept a risk/reward ratio that is inferior to a new trade. So I'd rather take a loss and move on to a new trade.

I don't think it is relevant what I consider a big loss percentage wise, as the percentages differ depending on how you size your positions relative to your total capital and what other strategies you may use. I aim for a risk/reward ratio of 2.5-3/1 on my iron condors so if I take a maximum loss then it wipes out about 3 months of profits. If I were trading only iron condors then I would limit my monthly exposure (worst-case scenario) to about 10-15% loss.