Iron Condors and Stupidity

Discussion in 'Options' started by jwcapital, Mar 14, 2009.

  1. Wanted to express some thoughts on the stupidest thing I have ever done in my trading career. This week, I reestablished my IC by replacing most of the bear call spreads with new ones. This move totally goes against everything the IC stands for.

    1. By reestablishing the IC, I actually take a directional view of the market--this goes against my philosophy of IC's, but I didn't thoroughly think this out.

    2. I subscribe to mean reversion theory--basically the market moves to extremes and either bounces or pull back to within the body of the IC. Actually, the March period was the perfect set-up. I was able to exit all of my bear call spreads, keeping 80-90% of the premium. Once the market bounced, I would also be able to keep 80-90% of the premium generated by the bull put spreads. By reestablishing the IC, I discount the possibility of a bounce. Once the bounce occurs, the bear call spreads begin to lose money. Keeping 80-90% of the total premium received when establishing the IC is an excellent return on equity. For me that would have meant and 8% return on equity for the March period. Instead, now, I am looking at a 3% return or a break-even.

    3. The profit from the original bear call spreads will always act a hedge to the short puts, for it is locked in. For Example, I want to walk through the March trade:

    Long Put: 2.50 premium
    Short Put: 6.50
    Short Call: 2.50
    Long Call: .50 Total premium received=6.00. Incidentally, the short call basically pays for the insurance demonstrated by the long put. So, instead of looking at this IC, I look at the bear call spread and bull put spread independently.

    Now, the market has moved downward, the picture looks like this:
    Long Put: 5.00
    Short Put: 13.50
    Short Call: .40
    Long Call: .20
    At this point I am down 2.70 points. Now I exit the bear call spreads. My profit for the bear calls is 1.80, my loss for the bull puts is 4.50. Now the market bounces and the trade looks like this:

    Long put: .25
    Short put: .50

    My profit from the bull put spreads is 3.75. If I left the bear calls in place, they would have lost their profits, and by placing new bear calls, they eat into the profits big time. So, total profit by not adding the new bear calls is 5.55 out of a possible 6. My past trades have basically worked like this, although the underlying never really came close to the edge of the body. I lost faith in the March cycle, and I was punished.

    Bottom line: IC's are speculative; they are not delta or market neutral, for the greeks are dynamic and one cannot "make the adjustments;" don't adjust at all, just manage or exit when your comfort zone is breached; never hold these to expiration--get out by the Monday before or earlier; have faith in your placement of the body and wings--if they are constantly touched and that puts the trade out of your comfort zone, consider moving the body. Lastly, it is best to enter your IC legs all at once, but think of the trades as bear call spreads and bull put spreads and manage them appropriately. Just wanted to air out my stupidity so others do not make the same mistake.
  2. JW,

    You are being a bit harsh on yourself. A trade that results in a loss is not stupid.

    It's easy to get caught up in the emotions of the market. I also hate reestablishing iron condors once I have covered one side, but sometimes you just feel so bearish (or bullish) that it's difficult to resist.

    We all learn to have greater discipline when a trade 'we should not have made' loses money. But, too often those trades result in additional profits and it's difficult to maintain that discipline.

    The good news is that you know that you understand how to handle IC trades and even if you didn't stick to your trading plan this time, you will in the future.

    I agree with your basic trading ideas on how to handle these positions. Especially the part about not holding to the end.

  3. The movement in the market in worked very well. You were able to close the bear call spread for very little. If you held, you could also have closed the puts for very little.

    What I don’t understand from your post is did you after closing the calls, then write another call spread?

    In your post you say “don’t adjust at all” Then later in that paragraph, you say if the trade moves outside your comfort zone “consider moving the body” Are those not contradictory statements?

    I read an interesting article in the last couple of months on Iron Condors. I threw the magazine with the article out but I will go online to see if I can find it.

    I am interested in writing iron condors. I would certainly appreciate it if you would help me get started. If you are agreeable, please email me.
  4. MTE


    jwcapital, just out of curiousity, what was the width of the spread (body strike to wing strike, that is) that netted a 6-point credit?
  5. rluser


    I am going to hazard that the temptation to do this is stronger in a falling market. In the situation I mentioned in your prior thread (threatened bear spread), the IV collapse helped ensure no new spread of the same expiration looked particularly attractive.
  6. I do not want to be negative, jwcapital but while browsing the internet, I came across an article at

    that reminded me, rightly or wrongly, why I decided not to pursue IC’s. They have a high probability of success but a poor risk/reward ratio. So there may be several months of small gains and then a couple of months that wipe out the gains.

    I would be interested in your comments regarding whether you have been able to manage the risk.
  7. Dagnyt – I notice that you wrote an article on Iron Condors for the December, 2008 edition of SFO Magazine. That was the article that I referred to in my first post. on this subject. I will order a copy of that article. I am impressed.
  8. That's not a fair conclusion. You can establish any risk reward ratio that appeals to you.

    Just because the author of that web page likes the idea of collecting $1 for an iron condor does not mean you should do so. For example, my ideal price for a 10-point IC is $3.00 to $3.50 for a 90-day position.

  9. Thanks.

    You should not have to 'order' (as in pay for) a copy. Here's the free article:

    #10     Mar 14, 2009