What's wrong with Iron Condors

[Cache Landing]

Quote from nfamousyoungest:

Good idea, a good read for noobs is SPX Credit Spread Trader, lengthy but worthit for optioncoach/atticus/Mav74 contributions. Note it was prior to '08 volatility.

I was at one time a heavy participant on that thread and I maintain contact with most of the credit spread advocates from that thread. I even had my own credit spread journal running during that time.

Just a note, that I know of, none of the better known and respected participants on that thread or mine are still trading credit spreads as a main strategy. Most are trading futures. Just thought that such a disclaimer was warranted.

 

[Mike Okistini]

Quote from nfamousyoungest:

Good idea, a good read for noobs is SPX Credit Spread Trader, lengthy but worthit for optioncoach/atticus/Mav74 contributions. Note it was prior to '08 volatility.

That is a key point to be made is that it existed during VIX 10-18 range. Most traders who kept on doing ICs from late 2007 into 2010 without understanding the changed vol environment probably did not do well by simply blindly putting them on without consideration that circumstances changed and the trader has to change with it. Those that understood the shift and adjusted their criteria and trades might have done fine.

 

[Cache Landing]

Quote from newwurldmn:

1. What does "beat the market without taking on significantly greater risk mean?" There are many definitions as to what "the market is" and measures for risk. Is this different from expected value? If not, then name a strategy that would qualify here.

"Beat the market" in any valid argument is referring to generating alpha over the long term. Beating the market without generating alpha is simply increasing risk incrementally to increased reward. My argument is that I've never seen a single verifiable paper explaining a methodical random entry iron condor system that can show statistically significant generation of alpha. Brokers love to try to convince people to trade ICs because they get 3x the commissions and it usually takes years from a person to lose enough to stop trading them.

2. If an investor is trading a particular asset without a specific profit motive on that asset and he isn't driven strictly by profit motive on THAT asset then doesn't that potentially create an expected value positive trade for the counterparty?

No, because he is randomly trading that asset as a hedge. His random entry doesn't carry a gross negative expectancy, it is a net negative expectancy. IOW, it is not the person on the other side of the trade benefiting from the edge loss, it is the broker/exchange. Positive edge for the counterparty is still only created in the skills of that individual. The willingness of someone to take the other side blindly has nothing to do with edge loss.

3. By this standard every trading strategy is expected value negative. Isn't this why most traders do not succeed. What they think is some strategy is really random? The successful ones use their skill to determine when a particular set up isn't random. This applies to all forms of trading and probably investing.

100% true statement IF you are talking about derivatives. All random entry trading in derivatives is value negative. Edge is realized through implementation of some developed skill.

This is not true of the equity markets as a whole. There is a positive drift over time and a trader/investor can realize those gains without recurring transaction costs. This is why 95%+ of all investors make money in the markets while 95% of all traders lose.

 

[Eliot Hosewater]

Quote from nfamousyoungest:

Good idea, a good read for noobs is SPX Credit Spread Trader, lengthy but worthit for optioncoach/atticus/Mav74 contributions. Note it was prior to '08 volatility.

Here's a link. 1410 pages and I think over 10,000 posts.

http://www.elitetrader.com/vb/showthread.php?s=&threadid=49586

 

[sle]

Quote from Cache Landing:
This is not true of the equity markets as a whole. There is a positive drift over time and a trader/investor can realize those gains without recurring transaction costs. This is why 95%+ of all investors make money in the markets while 95% of all traders lose.

Yeah, an investor also has a very different utility curve.

Here is an interesting strategy to ponder upon. Imagine that you have a 100 dollars and a single SPY is trading at 130. You sell a put struck at a 100 and put you 100 into an interest bearing account. If the put expires you just repeat the put sell again. If you get assigned, you now own SPY that you bot at 100 and sell calls at say 120. If you get assigned, you now have 120 dollars in cash and can sell puts at 100. Rinse, repeat.

 

[ForexForex]

Quote from sle:
Here is an interesting strategy to ponder upon. Imagine that you have a 100 dollars and a single SPY is trading at 130. You sell a put struck at a 100 and put you 100 into an interest bearing account. If the put expires you just repeat the put sell again. If you get assigned, you now own SPY that you bot at 100 and sell calls at say 120. If you get assigned, you now have 120 dollars in cash and can sell puts at 100. Rinse, repeat.

Great in a sideways market ..... No good in the real world.
http://finance.yahoo.com/q/bc?s=SPY+Basic+Chart&t=1y

 

[Flotilla]

the bottom line is that ALL spreads are great... you just have to know when you have edge with a spread. I can't think of a spread I haven't made money with... or lost money with at one point in time

Professional traders focus on risk and amateurs focus on profit... if you put on an iron condor every month you will eventually get smoked... but there are plenty of times when condors are the right trade.

Complacency kills traders who watch their positions and don't adjust... commissions kill traders (more like gamblers) who think they are saving money by going to some crappy retail online brokerage (.50-.60 a contract is the max if you do little volume) and if you're doing a real small amount of volume maybe you're not ready to trade options yet... I read about options for 5 years before I really stated trading... now its not uncommon to trade over 100k contracts in a day (my volume is down huge now that C and BAC don't trace as much)

The only reason I bring this up is to make the point that you have to learn the basics of options, risk management, trading, psychology, etc before you can expect to consistently make money. Think about who you are competing against... What is your edge?

 

[Cache Landing]

Quote from sle:

Yeah, an investor also has a very different utility curve.

Here is an interesting strategy to ponder upon. Imagine that you have a 100 dollars and a single SPY is trading at 130. You sell a put struck at a 100 and put you 100 into an interest bearing account. If the put expires you just repeat the put sell again. If you get assigned, you now own SPY that you bot at 100 and sell calls at say 120. If you get assigned, you now have 120 dollars in cash and can sell puts at 100. Rinse, repeat.

It is very similar to a basic covered call/naked put strategy that I outlined not too long ago on another thread.

This type of strategy is not an absolute return strategy. This is the perfect strategy for someone who doesn't have an edge and doesn't really want to try to get one. IOW, the guy who will otherwise be transferring a certain portion of his income into an investment account every month and just holding it there for the next 40 years. If done like I suggested it will beat the benchmark indexes by about 6% on average, with no significant increase in risk.

The premise is simply efficient use of capital, and knowledge that there will be losing years as the strat carries systemic risk. If SPX is down 15% you will likely be down about 8-9%. IF SPX is up 10% you will likely be up 16%. If SPX is up 50% you will probably underperform that year, but those years are rare anyway.

 

[sle]

Quote from Cache Landing:

It is very similar to a basic covered call/naked put strategy that I outlined not too long ago on another thread.

Yet at the first glance it's unclear if you are just increasing your beta or actually extracting alpha from the market in this strategy. I was just going to throw out this strategy to make people think a little bit. One could think of other "systematic alpha" strategies that make you even more confused, e.g. if I keep selling bond/equity outperformance options that deliver physical and take you out of your position some place near the peak.

 

[newwurldmn]

I'm not sure where this discussion is going, but it seems like it's headed someplace unproductive.

Iron Condors have a place in trading. But they aren't the magic solution. Every trading strategy that I have seen over the last 10 or so years has a market dynamic where it works and where it doesn't.

I don't think the right criteria to determine if a strategy is sound is "random entry." If there is a trading strategy that passes muster by this criteria I would like to know what it is.

Most investors don't beat the market as measured by some index. Most investors do however make money. Buying stocks has a positive expectancy but not necessarily alpha. Whether the right benchmark to determine a strategy is beating the market or beating zero (positive expectency) is based on the goal of generating wealth.

Transaction costs and taxes are always a drag on investing and trading and I agree with you the less you trade (in size and frequency) the more likely you are to make money. The rake does hurt.

I agree with you that brokers talk up iron condors for commissions. They also talk up buywriting and other strategies for the same purpose. They also talk up technical analysis like it's really easy to trade. It's all pretty shady.

But that doesn't mean that iron condors don't have a place. In many situations, the higher commissions are offset by other factors such as lower risk capital/balance sheet usage.

Quote from Cache Landing:

"Beat the market" in any valid argument is referring to generating alpha over the long term. Beating the market without generating alpha is simply increasing risk incrementally to increased reward. My argument is that I've never seen a single verifiable paper explaining a methodical random entry iron condor system that can show statistically significant generation of alpha. Brokers love to try to convince people to trade ICs because they get 3x the commissions and it usually takes years from a person to lose enough to stop trading them.



No, because he is randomly trading that asset as a hedge. His random entry doesn't carry a gross negative expectancy, it is a net negative expectancy. IOW, it is not the person on the other side of the trade benefiting from the edge loss, it is the broker/exchange. Positive edge for the counterparty is still only created in the skills of that individual. The willingness of someone to take the other side blindly has nothing to do with edge loss.


100% true statement IF you are talking about derivatives. All random entry trading in derivatives is value negative. Edge is realized through implementation of some developed skill.

This is not true of the equity markets as a whole. There is a positive drift over time and a trader/investor can realize those gains without recurring transaction costs. This is why 95%+ of all investors make money in the markets while 95% of all traders lose.