Reverse Iron Condors

Is it a much higher probability of success? My impression of tail options have been that you aren't compensated well for the higher order effects of convexity. But the likelihood of those higher level convexities happening are low. If you are buying straddles you are betting that those higher level convexities are more likely to happen. So why sell something that caps that?

 

But deeper OTM options won't be the same size, the risk of failure would increase. That's an important trade-off.

Going deeper OTM would increase the risk to a point approaching the same as the Strangle and/or Straddle so then you wouldn't want to cap the gain with the RIC.

The goal is to increase the number of winning trades at the cost of lower returns.

 

What? Convexity?
If trade 'A' is successful if the price moves $10 and trade 'B' is succesful if the price moves $20. Trade 'A' will be successful more often than trade 'B'. What does "convexity" have to do with that?

 

Convexity is a big word, makes people look smart by using big words.

 

I reckon so.

 

stock moves 0, A loses 3, B loses 3
stock moves 10, A makes $1, B loses 2
stock moves 20, A makes $2, B makes 1
stock moves 30, A makes $2, B makes $10

That's convexity.

Options are all about trading convexity: buying it or selling it.

 

you have been here too long you are started to sound like Atticus...

 

And btw, if you think convexity is a "big word" then logically you should have been against it in 2007, 2008. Those who understood convexity, gained. Those who didn't- failed. And among those who failed, some managed to get your taxpayer dollars and go right back into ignoring it.

Now THAT is a conspiracy.

If you have the slightest idea how options are priced, convexity should always be on your mind.

As for reverse ICs, you're long convexity which allows a ton of profit but then you go ahead and cut its heads off.

When you win- you won't win as much. When you lose- you lose you lose almost the same amount because that short option won't gain the same amount as the long call loses- theta is higher for strikes closes to the underlying

 

So would you be willing to trade 'A' instead of 'B' if it succeeded more often even though it paid less?

 

I think all three of these strategies, when used around earnings should be in and out of quickly. So if the stock doesn't move significantly after earnings then take the loss and bail. And yes they probably will all three lose about the same amount.

I take no one is interested in the Reverse Iron Condor. So do you prefer Straddles or Strangles?