What's wrong with Iron Condors

[newwurldmn]

That would actually be an interesting study. Enter into a 1 month iron condor (with some set parameters) and see if the trade generally makes money.

It's been shown in many papers that there are derivatives trades that are expected value positive (normally short vol strategies). Obviously, there are catches to these trades.

Just because there is a buyer and a seller and it's zero sum doesn't mean one side isn't expected to win, even with transaction costs.

Like a poker game in a casino, the whole table loses (agreed on that point), but that doesn't mean that one player isn't purposely losing money just to get a free hotel room and someone else playing him has an expected value positive position.

Additionally, people trade derivatives for many reasons and I can easily construct a derivatives trade where both parties can win.

A buywriter sells a call and the stock pins at his strike (he makes his premium). But the stock is incredibly whippy and The buyer of the call delta hedges and makes money on gamma.

Applied randomly, most trading strategies are expected value negative, which is why most traders don't make money. That is trades with defined epiry or defined stop limits.

I agree with you on investing strategies (buying and holding and looking for value creation as there is constant value creation).

 

[jb514]

Quote from Cache Landing:

But the statistical fact still remains that ICs carry a significant negative expectancy and it is only the skill of the trader that can overcome it.

I thought you had a different view based on your previous post. I very much agree with this.

 

[Cache Landing]

Quote from newwurldmn:

It's been shown in many papers that there are derivatives trades that are expected value positive (normally short vol strategies). Obviously, there are catches to these trades.

There aren't any such papers that I'm aware of which include random entry as a parameter. If random entry isn't a parameter then the study is flawed. Example, if I show that bull put verticals have a positive expectancy when implemented at IV > 40. This doesn't suggest that selling vertical spreads is value positive, just that there is an edge under specific conditions that a trader can exploit.

Just because there is a buyer and a seller and it's zero sum doesn't mean one side isn't expected to win, even with transaction costs.

Like a poker game in a casino, the whole table loses (agreed on that point), but that doesn't mean that one player isn't purposely losing money just to get a free hotel room and someone else playing him has an expected value positive position.

Yes, that is exactly what it means if players are of equal skill. The two aren't analogous. There is no reward to be had in purposely losing money in the markets. So anyone in the market who does that is an extreme outlier and will not affect overall statistics.

Additionally, people trade derivatives for many reasons and I can easily construct a derivatives trade where both parties can win.

A buywriter sells a call and the stock pins at his strike (he makes his premium). But the stock is incredibly whippy and The buyer of the call delta hedges and makes money on gamma.

You cannot construct a trade in which both parties make money, without introducing subsequent or additional trades. I will agree that you can create a trade in which both parties accomplish their design, but it always involves one trader willingly losing a small amount to protect his portfolio. He is then not winning, but simply not losing as much. It is not possible to create a derivatives trade in which all parties involved make money.

In your example above, the call buyer made no money unless he sold his call prior to expiry to a third person, who lost money. It is zero sum. If you create a trade in which two parties win, then there is by default a third or fourth party involved who loses.

 

[Cache Landing]

Quote from jb514:

I thought you had a different view based on your previous post. I very much agree with this.

I'm not around here much anymore, but I've made my opinions known before. I was once a vertical spread trader. With that, comes iron condors too since they are simply two vertical spreads.

What I realized is that the skill you refer to was the reason I was making money in options and it was better utilized in futures. Example, and IC is a directional trade. Or better stated it is an anti-direction trade or a volatility contraction trade. There are simply better ways to take advantage of this than trading an IC, once you have learned all the nuances.

If your skill is in trading direction, then you should be trading futures. Options provide an instrument that is fairly well suited to trading volatility, so if trading them, it is my opinion that they should never be entered randomly and premium selling in high vol environments is one of the few net positive trades. This is a very boring style of trading and the reward:risk is much lower than my current strat, so there is little incentive for me to trade options this way anymore.

 

[baro-san]

Quote from jb514:

I've read a lot of that thread and I feel like you made some fundamental errors. The most prevalent argument against, is them being ruined by a black swan. I can't really find a good reason to suggest that the strategy is inherently negative expectation.

What does Eudaemon have proof of?

When you have no directional and / or volatility bias, the slippage and commissions lead to negative expectation.

 

[sle]

Quote from Cache Landing:

In your example above, the call buyer made no money unless he sold his call prior to expiry to a third person, who lost money. It is zero sum. If you create a trade in which two parties win, then there is by default a third or fourth party involved who loses.

Not true, both option seller and option buyer could make money as long as they do not hedge delta at the same time. Obviously, all that is happening is that losses are transfered via delta hedges onto some third party in the market.

 

[rew]

Quote from jb514:

Please explain how this is not true.

You are basically saying that if playing blackjack is negative expectancy, dealing must be as well.

In this case the dealer the not the guy buying the spread that you're selling, but the market maker who is buying options at the bid, selling at the ask, and keeping the entire book hedged to a delta of 0. So long as he prices volatility correctly (no mean feat) he makes his spread. A retail trader is not going to make money in options unless he's exceptionally good at judging when volatility is high or low, and/or at judging market direction.

 

[newwurldmn]

1. Many banks produce such papers. They show systematic strategies such as selling every expiry or on the first of the month. Selling vol works in those theoretical worlds where size and risk tolerance remain constant irregardless of pnl and drawdowns.

2. People engage in trades to lose money all the time. Primarily this is because they are hedging. People buy puts to hedge long portfolios and they generally hope the puts expire worthless. They lose on their options but make more on their portfolios.

So if someone is willing to buy a protective put to hedge his portfolio and he's overpaying for this put, am I not expected value positive in selling the put to him?

Quote from Cache Landing:

There aren't any such papers that I'm aware of which include random entry as a parameter. If random entry isn't a parameter then the study is flawed. Example, if I show that bull put verticals have a positive expectancy when implemented at IV > 40. This doesn't suggest that selling vertical spreads is value positive, just that there is an edge under specific conditions that a trader can exploit.



Yes, that is exactly what it means if players are of equal skill. The two aren't analogous. There is no reward to be had in purposely losing money in the markets. So anyone in the market who does that is an extreme outlier and will not affect overall statistics.



You cannot construct a trade in which both parties make money, without introducing subsequent or additional trades. I will agree that you can create a trade in which both parties accomplish their design, but it always involves one trader willingly losing a small amount to protect his portfolio. He is then not winning, but simply not losing as much. It is not possible to create a derivatives trade in which all parties involved make money.

In your example above, the call buyer made no money unless he sold his call prior to expiry to a third person, who lost money. It is zero sum. If you create a trade in which two parties win, then there is by default a third or fourth party involved who loses.

 

[Cache Landing]

Quote from sle:

Not true, both option seller and option buyer could make money as long as they do not hedge delta at the same time. Obviously, all that is happening is that losses are transfered via delta hedges onto some third party in the market.

You just disagreed with me and then restated my exact point.

 

[Cache Landing]

Quote from newwurldmn:

1. Many banks produce such papers. They show systematic strategies such as selling every expiry or on the first of the month. Selling vol works in those theoretical worlds where size and risk tolerance remain constant irregardless of pnl and drawdowns.

I should've been more clear. There are no papers like that which promote a strategy that beats the market without taking on significantly greater risk.

2. People engage in trades to lose money all the time. Primarily this is because they are hedging. People buy puts to hedge long portfolios and they generally hope the puts expire worthless. They lose on their options but make more on their portfolios.

I made that exact same point. The goal isn't to lose money, it is to purchase peace of mind. Besides that, it is a completely different argument and is distorting the point.

So if someone is willing to buy a protective put to hedge his portfolio and he's overpaying for this put, am I not expected value positive in selling the put to him?

No. Because if entered randomly, then current market price is the correct price. He is overpaying equal to transaction costs, and you are underselling equal to transaction costs. Without a direction or volatility edge, both of you have a negative expectancy.