When you BUY an iron condor, you sell the call spread and sell the put spread. That's where the terminology 'iron' comes into play. The equivalent positions are selling the condor or buying the iron condor. Confession: I always thought it was 'sell' also and got it wrong in my book. Something to be corrected in the future! Mark
Condor and iron condor are constructed in totally different ways. http://www.theoptionsguide.com/neutral-trading-strategies.aspx
mark, i am not understanding some of the point you made about iron condor. If i understand correctly your basic idea is to have a risk:reward ratio close to 2:1 on the IC and load up the wings with a higher ratio than the gut so in case the price gaps in either direction your loss will not be as large (also limits your profit if the price do stay in the gut range). The part i dont understand is you are saying to close out the IC 2 weeks or even earlier before expiration, i thought the whole point of IC (by itself) is to collect the theta while price stays within range. If you are closing out your IC 2-3 weeks before expiration where theta decay is the heaviest, are you just collecting a small amount of premium for the earlier theta? I dont see how a 2:1 risk/reward can be achieved. thanks
Hi Mark, Thx for your sharing here, it's very helpful to me. BTW, i have read some of your word : "I've been a professional options trader since 1977, with more than 20 years as a CBOE market maker." I just curious, what market maker do then ? and what is really definition of market maker ? what makes person to be a market maker ? I appreciate your sharing of this, as it's important for me to build my trading journey to make money from here. Also, regarding IC. I just want to summarize, your opinion it's better to have IC with 1. around 30%-40% credit premium, 2. open it 3 months, close it 2 weeks before expiration 3. targeting around half of the credit premium we receive, 4. risk around 2 times of our reward (2:1) to make IC still alive while market is rebounding 5. Buy some straddle OTM (but i still confuse, do you mean strangle ? because straddle cannot OTM, all straddle ITM) is it correct ? if so, how is your probability ratio then, out of 10 trades how many you loss based on your experience ? And, based on your opinion are IC is the best consistent and market neutral strategy ? or is there any other strategy that you reccomend for market neutral, especially time like this ? Also, actually I have a concept (about to try it in paper money) to unite directional and market neutral strategy in one portfolio. Because i consider this : 1. Market neutral have small R3 and big probability (more consistent with little money, Directional have big R3 (Risk reward ratio) but not consistent 2. The nice things is, they are always contrary, based on my experience - if there's volatility - that means there's strong trending no matter north or south. and it's make directional most of the time win big, and market neutral loss, this way we can balance our portfolio 3. If the market is ranging, the market neutral strategy win, but we can keep directional on long term or at least take little profit or small loss I want to try this combining options and future let's say we have IC RUT (you already know mostly how's stop loss, risk reward, right ? so i don't need to explain), and we can combine buy directional future (long/short), risk no more than 2% our capital, targeting minimum 5x times our risk (if we risk $1, we target $5), from what i learn from the book that teach more of technical analysis and how to being directional, we still always make money eventhough we loss 7 times and win 3 times, and targeting 5x times reward is not hard job even in ranging market. So the goal of this combination is to still make money at market neutral and directional - and to still make money when the market is not good how is it guys ? or is there anybody have ever practice that ? pls share it too. I plan to start again with this combination though
This sentence: That's the whole key to being successful with IC's. I've learned some of this the hard way. And that "little better than average" means you have a plan for how you are going to trade your IC, and when you're going to get out. And you have to stick to those rules. It's painful watching your money disappear, but you cannot be right all the time. If you have a plan for how you are going to trade, and you know it's successful, and you're not going to deviate -- you will come out ahead in the long run. This month was very, very hard. I took a -13% loss and decided I am happy it did not get further out of hand. I was 100% in cash by the end of the trading day last Monday and a week later I don't have a nickel invested for October. I'm a relatively new trader, and I got spooked hard by the market volatility this month. You can also "win" sometimes by stepping back from the market and not feeling like your money HAS to be in there. My "win" for OCT options is watching my TOS screen go wild red, red, green, green, red and my blood pressure down 50 points as I wait until the market shows me a sign of stabilizing before I get back in there. It costs me nothing to read the news, follow the market and wait.
That you have the discipline to sit it out - especially after taking a loss - bodes well for your future. Discipline, risk management, willingness to accept losses. All are requirements for success. Best of luck with your option trading career. Mark
How is average defined? I assume that the majority of option contracts are put on by professional traders who are very good at what they do.
Good question. An average option trader will have a long-term return equivalent to broad index he/she is trading against LESS spread and commissions (hence negative expectation). It's the closest I can come to define average. This statement is also slightly illogical: "The majority of option contracts are put on by professional traders who are very good at what they do" is equivalent to saying "most of the students in the class have an IQ higher than the class avg" Anecdotally, most "professionally" managed equity mutual funds (~80%) do not reach the performance of the index they are measured against (seemingly the financial planner industry's dirty little secret). With the tremendous access to information, I don't think a professional has an inherent large advantage. And if all option traders are doing it long-term for the money, then by definition we are all professionals. (Many contracts are also put on by computers judging whether an option is cheap or expensive in relation to option pricing models). On the other hand, an above-average options trader will only be deemed as such based on a long-term positive track record in comparison to a broad equity index.