Registered: Aug 2011
08-07-12 08:21 AM
The Queen Of The Iron Condors
Find out what one trader did when her favorite trading
vehicle was down 43 points one Monday, en route to a 25%
Julyâ€“October, top-to-bottom loss.
by John Sarkett
her worldwide trading community, Amy Meissner is
known as â€śthe queen of the iron condors.â€ť Part of that
is attitude. There was one recent day when the Russell
2000 (RUT), her favorite trading vehicle, was down 43 points
en route to a 25% Julyâ€“October, top-to-bottom loss.
â€śI wasnâ€™t worried,â€ť she explained. â€śFirst of all, the RUT was
already oversold. Second, the catalyst for the loss was political
wrangling in Washington over the debt ceiling, something that
had been going on for months. And my short put options had
only moved from -8 delta to -14 delta on the open, then -16
during the day, and 16 is where I adjust. It was manageable.â€ť
Itâ€™s that kind of unflappability that makes Meissner wellsuited
to her role as an option queen.
Third timeâ€™s the charm
Meissner began her trading in the 1990s. â€śI learned about options
from an article I had read and I decided to give it a try,â€ť
she explains. â€śIt was much more expensive to trade back then,
and only special brokerage firms would trade options.â€ť
She started by selling SPX credit spreads. The venture
lasted several months before she gave it up. Meissner decided
to give the option initiative another look in 2005, opening a
$20,000 discretionary account with an online advisory firm.
Their specialty: iron condorsAt the outset, it was steady as
she goes. It took about half a year
to boost the account to $28,000, a
40% return â€” stunning, especially
in the aftermath of the 2000â€“01
Then came sudden destruction.
â€śOne Wednesday before expiration,
I was nervous about holding
through Friday, and said I wanted
to cover,â€ť she recalls. â€śThe traders
assured me there was a high statistical
probability of the options
going out at zero.â€ť It was part of
the firmâ€™s method to let options
expire worthless. It was a good
idea, until itâ€™s not.
You know what happened next.
Trying to accumulate the last few
pennies, with no risk management
plan in place other than an aim for
those options to expire worthless,
Meissner lost $14,000 on a large
down move in her account and
was cut in half.
A short time later she received
a postcard in the mail promoting a
new service, something called â€śoption
mentoring.â€ť She was intrigued
enough to give it a go, thinking that
with some hard work she would
be better able to manage her own
funds versus trusting others with
a discretionary account.
So she went back to school, this
time into the school of risk management.
It was her best investment,
she says now, and with annual
returns averaging 22.46% since
trading on her own, it has repaid
itself many times since then.Six years later, Sheridan Option Mentoring is still part of
her team. It was Dan Sheridan who nicknamed her â€śqueen of
the iron condors.â€ť Meissner is â€śone of the most professional
traders in our community, and one of the most consistent,â€ť
he says. â€śShe will tweak her approach from time to time,
but by and large, she approaches the market with admirable
discipline, and as a result, she reaps the rewards.â€ť
Meissnerâ€™s methods have been refined a bit since she started
trading iron condors, but hereâ€™s her latest methodology (Figure
1). Approximately 80 to 88 days out she will sell a Russell 2000
iron condor. She sells the puts at minus 8 delta or so, the calls at
12 delta or thereabouts, and then buys coverage some 30 points
higher on the calls, 30 points lower on the puts. She aims to generate an approximate $4 credit against a $30 risk. The total
cash credit then would be about $4,000 for every 10 contracts
â€” that is, $4 credit x 10 contracts x $100 per contract.
Should the market move against her, which is often the case,
she will adjust at -16 delta, meaning that if the market declines,
she will buy in her put credit spread, and then resell it 30 RUT
points lower. She will sell 150% of the original size as well to
make up for the loss (if the original position was 20 contracts,
she will sell 30 on the adjustment). She can do this two or threetimes before giving up on a trade and either
taking a loss or scratching out.
If the market declines and the call credit
spread goes to 0.40 or under (from an original
$2 or so), she will exit, and not resell
it lower. This removes the possibility of
whiplash should the market bounce back
up and cause a new call spread to become a
loser very quickly. The process is reversed
to the upside (Figure 2).
Changes over the years include days to
expiration and entry style. She began with
more customary 30- and 60-day condors,
one of each, but she has now settled on the longer time frame
due to the volatility in the market. She originally legged into
the trade, selling put credit spread side when the market was
down, selling the call credit spread when the market rebounded,
but since then has decided it is simpler, more effective, and
more carefree to put it all on at once, because losses on one
side will be offset by gains on the other.
Unlike many traders whose ambition is to get big as fast as
possible, which for most means 100-contract condors and up, thus
theoretically putting $90,000 and more of risk on the table each
month, Amy Meissner is more stealth. For every 100 contracts
of a typical 10-point condor, she will trade 25 contracts of a
30-point condor instead, cutting her risk to about $65,000.
Why not 10-point wide strikes in her RUT condors, like most
everyone else in options? Adjusting large quantities of contracts
is a factor. Start with 25, roll twice for adjustments, and you wind
up with about 55 to 60 contracts, versus 225 with a 100-contract
start increased twice at 150%. Fifty-five contracts is much more
manageable than 225 contracts, Meissner says.
Her profit target is approximately 80% of the original credit.
If she is taking in $10,000 on a typical trade on initiation (25
contracts x $4 x $100 per point on the RUT), and she can
offset her positions and capture $8,000, sheâ€™s out. Often this
is the case after 45 days.There will be blood
There will be losers as well. It is
part of the business, expected and
managed. Meissner describes the
process as â€śthree or four steps
forward and one step back.â€ť On the monthly level, she will typically expect to lose or break
even one or two or even three months a year (though in 2011
there were no monthly losses, as you can see from Figure 3)
but keeps the losses to 100% to 150% of her typical monthly
credit â€” that is, $10,000 or so. Employing some quick math,
if she can generate about $8,000, 10 months per year, and
expect losses twice of $10,000, she can still net something
like $60,000 per year, just with the RUT condor alone. And
do it without breaking much of a sweat.Pieces and prospects
Here are a few odds and ends of Meissnerâ€™s
n She uses Investors Intelligence to help formulate
a market opinion. This helps her get
a handle on oversold and overbought conditions
and gives her a second opinion useful
for determining adjustment sizes, leaning
her deltas to long and short, and so on.
n She likes to enter condors on Thursdays
or Fridays to gain weekend decay.
n She sets alerts for both RUT and deltas, sending
messages to her emails and smartphone.
This helps her get off the screen as well.
n She is part of a larger trading community
via Sheridan Option Mentoring. She appropriates
new ideas and concepts and
also contributes as a thoughtful webinar
interview subject. There are some six-plus
hours of her discussions archived on the site,
plus other discussions on her methods.
Boiling it down as simply as possible, Meissner
earns her monthly checks by rolling her
credit spreads. She aims to increase her returns
going forward by being more consistent, to make her condor
work an even smoother-running money machine.
Recently, she purchased an electric motor-assist bicycle
to help her make her 25-mile bike expeditions a little easier
against the ocean winds, a nice metaphor for her powerful
ability to tame and manage the winds of market change.
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