why is iron condor ever a good idea?
- Thread starter 1a2b3cppp
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I feel like I am responding to a bot.
Think of an IC as a double-digital. Valuation of proximal strike of a double no touch/2. The R/R of the minimum-strike IC will equate to the ATM fly. You cannot simply label an IC a bad idea bc you don't understand how structuring relates to probability.
Think of an IC as a double-digital. Valuation of proximal strike of a double no touch/2. The R/R of the minimum-strike IC will equate to the ATM fly. You cannot simply label an IC a bad idea bc you don't understand how structuring relates to probability.
Can you describe it in such a way that someone who doesn't know a lot about options would learn from you?
To my knowledge, options are like stocks except you are able to do two things:
Use tons of leverage.
Make money by betting on volatility.
However I feel like this iron condor is the opposite of what you'd want to do.
I remember thinking straddles were the best can't lose system ever until I realized that price has to go really far for you to make any money.
Will the only time to use an iron condor be when you are fairly certain price isn't going to exit a range? Then if so, why not just short the top and buy the bottom?
>> To my knowledge, options are like stocks [...]
Options are NOTHING like stocks.
Louis Jean-Baptiste Alphonse Bachelier was a French mathematician credited with being the first person to model the stochastic process now called Brownian motion, as part of his PhD thesis The Theory of Speculation (Théorie de la spéculation, published 1900), with the purpose of VALUING STOCK OPTIONS. Bachelier is considered as the forefather of mathematical finance and a pioneer in the study of stochastic processes.
Again to those who continue to say that options are like stocks: you have no idea what you're dealing with.
Options are NOTHING like stocks.
Louis Jean-Baptiste Alphonse Bachelier was a French mathematician credited with being the first person to model the stochastic process now called Brownian motion, as part of his PhD thesis The Theory of Speculation (Théorie de la spéculation, published 1900), with the purpose of VALUING STOCK OPTIONS. Bachelier is considered as the forefather of mathematical finance and a pioneer in the study of stochastic processes.
Again to those who continue to say that options are like stocks: you have no idea what you're dealing with.
Spreads do one thing really well: multiply legs and per contract commissions on marketable orders. Brokers love 'em...that's why they plaster all their cool strategy tools all over their site. Market makers love 'em because they get to take a lot of extra premium with a delta-hedge no more complex than a single leg and an absolute limit on their losses if it gaps. This should leave one logical conclusion for the other party to this transaction.
The strategies are good to know very well (and well worth the market tuition of trading them long and short in a small account). They're useful for getting the mindset of how you can trade around single leg positions and get pretty complicated positions as you take what's cheap and short what's expensive to keep a nice delta / gamma / theta exposure (that sounds really complex, but you'll get the feel for it trading all types of spreads).
I would suggest taking a look at these positions, maybe trading some, and give special effort to calendar spreads (and diagonals and straddles). It's a good way to learn how volatility works.
The strategies are good to know very well (and well worth the market tuition of trading them long and short in a small account). They're useful for getting the mindset of how you can trade around single leg positions and get pretty complicated positions as you take what's cheap and short what's expensive to keep a nice delta / gamma / theta exposure (that sounds really complex, but you'll get the feel for it trading all types of spreads).
I would suggest taking a look at these positions, maybe trading some, and give special effort to calendar spreads (and diagonals and straddles). It's a good way to learn how volatility works.
Then I see this picture:
That looks like a terrible risk reward. Barely any potential profit, and if price moves anywhere at all you lose money. How does this fit into a trading plan? You are certain the stock isn't going to change? Makes no sense.
Iron Condors are - if properly structured - high probability low return strategies. You can use them on stocks but as stocks can and do gap up or crash down it makes more sense to use them on indices. If you learn ho to avoid the maximum loss and hedge anytime your short sides are challenged you can make decent returns. Its a great instrument for the right underlying and situation. When volatility for the indexes was over 20 it was in fact a pretty good way of making money.
You want a hedged premium selling strategy and your playing the expected probability/volatility. You really have to take a hard look at the expected moves and unlike straight premium selling it is hedged so the probability of death is eliminated as you might have with a straight naked sale. Depending on where you set you strikes you often look to be profitable over a common range - some folks do 1 sigma - lose money outside of the range, but with a capped loss. Active management is also a huge plus. Very popular in cash-settled index options. We built a product at Schwab that does it 1 sigma. It's available on the mobile platform and on StreetSmart. I think the US only and it's calculated on every name where CBOE broadcast a volatility metric. So all the indices, but also names like Apple, Amazon, Google, etc. Anywhere CBOE broadcasts a volatility metric. Schwab also does it on futures options. Your account has to be futures enabled to see the tool. Tool lives in the "IDEA HUB".
Skew really hurts because you "overpay" for the protection. Doesn't in of itself mean you won't make money, but more so reduces your overall expectation.
Skew really hurts because you "overpay" for the protection. Doesn't in of itself mean you won't make money, but more so reduces your overall expectation.
IC is for stocks that will go sideways or volatile but still range bound. I have a thread on using IC on TSLA and for 11 months I got the range right, writing 4 ICs 3 months out.
Even when the stock moves against one side, if you time it right (closing the calls and puts separately), you can close that side with a smaller loss or even with profit.
With ICs or verticals YOU decide the risk/reward ratio. Going out 3 months it is usually close to 50:50, and that isn't terrible odds. You also can close it earlier than the expiry.
Even when the stock moves against one side, if you time it right (closing the calls and puts separately), you can close that side with a smaller loss or even with profit.
With ICs or verticals YOU decide the risk/reward ratio. Going out 3 months it is usually close to 50:50, and that isn't terrible odds. You also can close it earlier than the expiry.