Why don’t I hear about this more often? He says “pros” use it all the time. Most people here seem to be doing set-it-and-forget-it kind of strategies (like butterflies). My guess is these guys find some mis-pricing due to skew or whatever and just lock that in. Anyone can comment on concept of morphing?
Yeah; it's more plausible-sounding nonsense from the "Retiree Ripoff" canon of the "Make Money Fast" school. The IC (and in this case, its synthetics as well) is one of the flagship "look, it's so easy - anyone can do it, even you!" methods of rooking in the suckers. There are two key premises in this video: one, that you can choose one of the three types - call/put/iron condors - based on your prediction of where the market might go; and two, that you can just magically "morph" (adjust) whatever you put on into something that makes money no matter what. Ta-daa! Options are soooo simple, ha-hah! Reality: 1) If you could predict which way the market is going to go, or is even likely to go, you wouldn't need anything complicated, or any special strategy; you'd be a billionaire in no time at all. Just demonstrate that predictive capability to some money people, and they'll throw great big stacks of cash at you while you lay about on the beach covered in suntan lotion and blondes. 2) Adjustments always increase your risk and/or cost you money. If they didn't, that's what everyone would do - and we'd all be rich. I sell you an option, you buy it from me; price goes against one of us, but we just "morph" out of it and both make money. Yay! Um, no. Example based on the above video: price goes toward the top strike, so you "just" buy back the short on that side. Simple, right?... except the price you initially sold that short for - let's say it was a 16D/30d call on a $100 stock - was about $0.30, and now that it's 50D, it'll cost you over $3.00 to get out of it. In fact, that's going to wipe out all the premium you got for the entire condor - so now you're essentially holding a long call, one with a kink in its PnL, but generally close to the usual graph of one. Also: what he shows is the graph at expiration - which is essentially meaningless. The max return on that condor is zero at entry - yeah, you got a credit for it, but you got an equal liability against your account at the same time (otherwise you'd be able to cash out for a profit immediately.) The real graph at the current time, T(0), would show the truth: that you're a couple of hundred bucks in the hole once you do that "morph" (initial premium minus $300), and you're hoping and praying for the price to go up - because without that, you're going to be out by that much. Might as well have just bought a call - see point #1 again - instead of wrestling with all that "morphing". TANSTAAFL, as they say. If there ever was any easy money in the market, it got gobbled up about a hundredth of a second after the first day's open... but the sizzle has been sold to the suckers every single day since then. TL;DR: If the bait looks really tasty, there's always a hook in it.
This is not how I understood the video. Never does he say anything about easy money. I think his point was that you might have chosen iron condor because you believed that stock would stay range bound. However, while your initial premise proved to be correct, something has changed your mind and you want to morph your existing position to make it more directional. It’s morphing in anticipation, not after the fact. For example, let’s say you have iron condor with short legs 50 and 70 with stock at 60. You are watching the stock and collecting premium but you are noticing it is acting in a bullish manner (whatever that means to you). You decide to close the short 70 call but keep the rest in place. So you are left with bull put spread and long OTM call. You went from neutral to very bullish. What’s wrong with that?
That's the direct implication of these ostensibly easy solutions. I'm saying that no such thing exists in reality. So... nothing has changed, but you want to adjust your trade anyway? Or, to put it another way, you believe that you have better/earlier information than the rest of the market (I'm assuming there's at least some rational perspective behind the change)... does this sound like a reasonable assumption to you? Granting that you believed in your thesis when you entered the trade, there would have to be some overwhelming reason to change your mind and to assume a new thesis... but what you're suggesting here is that your basis for making the change was so subtle that the rest of the market didn't notice (i.e., the price of the option/underlying didn't change) but yet so strong as to make you abandon your original concept and change it to something radically different. I'm just not visualizing any scenario where that would make sense. But let's say you're Cathy Wood and there are voices in your head that tell you what's coming. Great. Since - as you say - your initial premise proved to be correct, then why wouldn't you just take the small profit that being correct brought you, close the IC, and then put on whatever the appropriate new strategy for the new concept was without the unnecessary complexity of "morphing"? I'm just not seeing any daylight between "things have changed, it makes sense to get out" and "things haven't changed, but it's time to get in differently." How does a stock "act bullish" without increasing the price of that call (i.e., without it costing you more to get out than you got paid to get in?) But OK, let's set that aside and look at it from the finance math perspective. Let's say you're right: the stock is going to go up. Say your short brought in 0.50 and your long was at the 75 strike (assuming 5-point wings) and cost you 0.25, and the prices haven't changed much (i.e., not much time has passed) - so you buy the short back for ~0.50. Here's what you ended up with: a call that's $15 above the current price, at something around 5 delta. I.e., a 2-sigma bet; outside the distribution and ~95% unlikely to end up in the money. A very poor bet, statistically... and remember that just a bit before, you believed that the price would stay range-bound, and now you believe in something not just a little different but cataclysmically different: that instead of being range-bound, the stock is going to move much more than 25%! You'd need that much movement just to touch your strike... but then you also need more movement to overcome the debit you paid, and then even more to start making some money (that, after all, being the point here.) Does any of this sound like reasonable, likely stock movement to you? And if you could predict that violent of a move, why wouldn't you just get out of the original IC for a couple of bucks profit and then put on a ton of spreads and really make some serious money instead of pennies?
I don’t think anyone has a crystal ball. From what I gather reading about famous traders is that they start with a thesis. Then they come up with a trade where, if their thesis is correct, they stand to win multiples of what they stand to loose. In no way am I comparing myself to the great traders, but I do have a long, short, or neutral lean. If I have a long lean, it doesn’t mean I load up on OTM calls, it just means I avoiding being short. And if I have an existing OTM call, I would not sell it for pennies because, although very small, there’s still a chance it may become valuable(as a future hedge for example). I didn’t post this video as a suggestion on how to trade, but rather as a question to those who might use this technique/concept.
True - but also as trite as "buy cheap sell dear", etc. That video, however, blows right by that part; it assumes/implies/takes for granted that you already have a means of defining such a thesis with enough edge to make money (which is ALWAYS false for inexperienced traders), and offers a technique that is supposed to take advantage of that edge. The first part - that false unspoken assumption - is what denotes it as an MMF scam to me, because that's common to all of them; the second part - adjusting condors, under the new and perhaps more marketable and exciting label of "morphing" - is, as I've pointed out, nothing new or special, and does not confer any trading advantage. Options trading offers a number of strategies for taking advantage of pretty much any market conditions; ICs, as you've pointed out, are range-capture plays. For any thesis other than range capture, they're the wrong strategy - and there's really no effective way to convert them to a directional strategy without ending up in a bad position; one much worse than a simple directional strategy would be. That's really all I'm saying here: if you discover (usually through price movement) that your thesis was wrong, take Linda Blair's advice and GET OUT. Those are all reasonable ways to approach trading - I have no quarrel with any of them. Which is exactly how I took it; I didn't think for a moment that this was your personal expression of your deepest-held beliefs about trading. I'm just saying that I see nothing of value in it despite the shiny new wrapper in which it's being presented, and have strong reservations about the motivations of the presenter. Condors, being risk-defined, aren't especially adjustable in the first place. There are some tweaks that can be applied - back when I was trading them, I collected everything I could find on the topic - but in general, the right approach is to just put on a bunch of them at a reasonable risk/reward ratio and let them run. Otherwise, you just might end up getting hurt on both sides... not the most pleasant outcome in the world.
Or better yet, take Hallorann's advice and just STAY OUT of room 237 in the first place, which is what options are. They are room 237.
For you - and please make sure you note the restrictive clause here - there ain't nothin' in room 237. Absolutely nothin'! So you ain't got no business going in there. For those of us who like it warm, it's just fine.
I know Dr J. I met him at the RealTick/Townsend office when I was in undergrad. The dude was a train wreck; didn't understand his business and was a total gunslinger. Mercury almost went debit the day that I met the guy. Smart move to turn off the comments.