I have been delving into options over the past couple of years. I primarily sell covered calls but recently started looking other ways to generate income. I am interested in the Iron Condor and seeking more stock ideas for strategy building. Obviously, I am looking for stocks that tend to stay within a limited range and typically don't have too much fluctuation.
Stock Ideas for Iron Condors
- Thread starter arncap
- Start date
Which can also be read as "typically don't have too much premium." You may want to study the concept of implied volatility.
You seem to have a mistaken idea about how markets work: a belief that there are "better" and "worse" stocks for iron condors (or any other structure.) Consider this thought experiment: if one stock was somehow "better" than others... wouldn't all the smart finance folks in the world immediately pile into that stock and make all that easy money? (Also: would they, with their billions of dollars, leave any for you?) Clearly, that's not the case. In fact, one of the more useful default assumptions you can have is that all trades have an expectancy of $0 at entry (less friction.) If you get more credit, you're taking more risk. If you're buying something cheaper, you have a lower return. That is actually the default behavior of markets (and thus of your portfolio, unless you have some means of doing better. Hint: structure, such as iron condors, etc. doesn't qualify.)
Since IV is a primary driver of option pricing - in fact, thinking of vol as the price of an option can be very useful - a stock with a high IV will offer you the opportunity of getting into a wider IC than one in a lower-vol stock. Take a look at some ICs with the short strikes at, say, 16 delta and the wings a couple of bucks wide - let's say in KO and ROKU (where the underlyings are fairly close in price.) Does the width, and the credit you get, hint at anything? What happens to the option premium when the spot price moves $1 in both? $2? $5? Given the vol/recent moves, how likely is each of them to move by that amount?
I hope you're getting the point here: "not too much fluctuation" is not a useful factor in choosing an underlier for your ICs. Instead, I'd suggest reading up on realized volatility in addition to IV, plus maybe IV% (that is, percentile) and consider how they work in relation to each other. Consider that volatility is mean-reverting - but price isn't. Also, think about the trend of the stock (however you choose to define that); if it has a strong one, then one spread of the IC is more likely to get hit than the other - so maybe it makes sense to skew your IC somewhat in that direction (or do something other than an IC.)
Last thing: I'd suggest backing your mind away from the pervasive story (sold by hucksters to naive retirees at "financial seminars") about ICs being a "safe investment" or an "income strategy." If you believe in one structure being "safer" or think of it as "income producing" - even after the thought experiment I suggested above... well, nobody will be able to help you. You'll just have to get tutored by the market - which charges all the traffic will bear, and often a lot more than that.
It means you should scan for stocks with low historical volatility (HV), ie. below 30 or so.
Well, yeah! If you're a "financial advisor" with an AUM of $112.77 and a ruinous lunch bill of $12.99 at your local Chipotle, holding a "Your Retirement Finances: A Look at the Closest-Held Secrets of Wall Street" seminar at your local golf course clubhouse is sure to get you at least a few suckers.
Cha-CHING, bitches! Iron Condors FTW!!!
[sigh] So is everybody else.
It's not even that people aren't willing to help you; they are. The people in this forum, minus the loud obnoxious morons (who are found everywhere), can be quite helpful. But what you're asking is essentially "now that I've learned that 1+1=2, how do I disprove the theory of relativity?" The kindest thing anyone can say to you right now is "that's... not the way it works."
For illustration I put the strategy for "backtest"* on spy ( 2010-now)
Grey line = spy, orange line = strategy
You basically see curve shift volatility in 01-2018 reflected
- data on spy 2010-now (x-axis are just weekly data points)
- weekly options
- sell 1.0% otm call & put, buy 3.0% otm call & put.
- position sizing normalized etc
- no commissions taken into account, perfect fill at close etc
*data not perfect, some imputation due to a few missing data points, but good enough for aproximination
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