Quote from zhangw:
I have some experience on selling DOTM spreads on SPX, RUT & GOOG, but I have never done buying Iron Condors. Before using this strategy, I need to research, study, get some experiences from others, and do paper trading. </b>
Not to oversimplify, but an IC is merely TWO DOTM spreads done simultaneously. One in calls, one it puts. (But you already knew that.) Of course then don't have to be DOTM, but if that's your preference, then that's your preference.
<b>Compare these two strategies:
Margin Requirement: same
Maximum Gain: $1,150 vs $2,250
Maximum Loss: $8,850 vs $2,750
Probability of winning the trade: 79% vs 65%
Risk/Reward: Bad vs No bad
Please advise:
1. Whether my analysis is correct.
2. How to control my risk by adjustment.
3. Is it a viable strategy in this volatile market?
4. SPX, SPY, QQQQ, Individual Stock with higher price, like IBM/GS, for this strategy which one I should use that I can get better return? </b>
When you switched to iron condors, you changed the put spread you were selling? Why did you do that? Is your outlook for the stock different because you are trading an IC rather than a spread? That makes no sense to me.
Of course your risk is less with the iron condor. The primary reason is because you are selling 5-point spreads, rather than the 10-point spread you had in mind originally. Thus, THE COMPARISONS ARE MEANINGLESS. You cannot compare a 10-pointer with a 5-pointer and expect the risks to me similar.
In addition, the risk/reward is always better for the iron condor because you collect more premium. That means (for similar width spreads) that the potential profit is better and the maximum loss is also better. Does that mean that ICs are always better than simply selling put spreads? No. When buying the IC, the probability of having a winning trade is less than when you sell only the put (or call) spread. That's because you can lose on either end with an IC
And keep in mind, the maximum loss you describe is only true if you hold to expiration or exercise good discipline. It's quite easy to have the market move substantially higher and you close the call spread at a loss. You should close out the put spread at the same time (because there is so little potential profit remaining). If you fail to do that, a subsequent market downturn can result in an additional loss from the put spread.
It's a viable strategy, but no one gives away money. there is risk to owning IC positions.
Asking which one to use to get a 'better return' is the WRONG QUESTION. When you buy iron condors (or sell DOTM spreads) you are placing a bet on the market. Choose the underlying that makes you more comfortable. You can get great returns on GOOG, but do you really want to take the risk? That's the question for you to answer.
You should look to trade within your own comfort zone - trade an underlying that allows you to sleep at night - seeking the highest return is NOT the right choice.
Mark
The risk/reward ratio is theoretically always the same.