Yeah, it seems like we are on the same page. But you say that "In a low vol month, you don't make as much". I've thought the same thing, but that would mean that there is a point when vol is so low, or underpriced that a gamma neutral condor will be negative expectation.
There is nothing wrong with Iron Condors. They are an option strategy. The problem is that they are often used by inexperienced option traders incorrectly or are touted by websites/newsletter authors who know even less as a low risk easy way to make monthly income. It seems like they should work out fine because every strategy should work out when the right conditions exist. You say it should be fine as long as you manage your gamma, but you leave out volatility as well on severe moves. Gamma is not easy to control when the market is dropping 30-50 points (SPX) or it is moving higher in a slow bleed and you simply sit and watch your premiums inflate against you. It is easy if you have the experience and skill to manage your risk, portfolio allocation and have no problem bailing immediately or quickly. Most beginner option traders follow the set and forget mentality and step in when it is too late. So nothing wrong with the strategy as with any strategy, it is how you execute that makes the difference.
The problem with Iron Condors is the same as the problem with every other option strategy out there. They are all negative expectancy. The common rebuttal to this statement is that for every option spread there is an opposing and offsetting spread. So if one has a negative expectancy, then the other would have a positive expectancy, right?! Wrong!!! All possible combinations of options carry an inherent negative expectancy that is exactly equal to the sum of commissions and slippage. As much as people will try, this statement is pretty much beyond debate at this point. Anyone trying to disprove that statement is either ignorant regarding the realities of derivatives, or they are willingly spending their time trying to disprove countless other statisticians, much like the physicist who devotes his life to disproving Einstein's relativity. Consequently, iron condors having four legs, carry a negative expectancy that is roughly 4X larger than a single leg trade in the same underlying. So the trader who embraces ICs as a main strategy is profitable for one of two reasons. He just happens to have fallen above the mean on the probability curve. He has developed a skill at recognizing situation in which future realized volatility will be lower than current implied volatility. In either case, the default position is still negative expectancy.
Please explain how this is not true. You are basically saying that if playing blackjack is negative expectancy, dealing must be as well.
While commissions are a drag, this statement only holds true if you believe in efficient markets. But there are mispricings that create positive expected value despite transaction costs. Of course, most trades are probably a expected value zero and then when you add comissions they are negative. But that is true of all transactions in the public (and probably private) markets.
The blackjack example is a flawed analogy, as there is no slippage. A better gambling analogy would be a two-man poker game at a casino, where both players are equal in skill level. Sometimes player A will be positive, and sometimes it will be Player B. In the end though, the game is still net negative for both of them in the exact amount of the cumulative house rake. So it is with trading derivatives. It is zero sum to the participants, but the house takes a bite out of every transaction. Your broker charges commissions, the exchange charges fees, and the MM's extract the b/a spread. Add those three things up, and that is the exact amount of negative expectancy in the derivatives market.
Nope, it holds even if markets are inefficient. You are simply adding an element of skill which I already acknowledged. Even if there are inefficiencies, for every buyer there is a seller. Still doesn't change the fact that the entire system has a negative expectancy by the amount of gross transaction costs. My statement assumes random entry. If the entries are not random, AND the trader possesses some skill, then it is possible for an individual to overcome the negative expectancy inherent to the position. But it is not possible for even 1/2 of all participants to overcome it. And no, it is not true of all markets. Only derivative markets are zero sum. Random long entry in the equity markets has a net positive expectancy over time. The question is can you then beat inflation. But the statistical fact still remains that ICs carry a significant negative expectancy and it is only the skill of the trader that can overcome it.
Why, the number of savants on this forum is exceeding my expectations! I would kiss this guys hand for just meeting him, considering that In any case, there is an economic explanation for why vols are structurally rich. Any seller of convexity will demand compensation for (a) increased dispersion in his returns and (b) for negative correlation of his returns with the general state of the world. You could use fancy math and utility functions to prove it, but the intution behind it is pretty simple. The test I always suggest (and you can do it yourself in 10 min) is to check fair variance realization for S&P. Simply download VIX and S&X index data for the past 20-30 years. For each day calculate 20 day forward looking variance for S&P (from that day 20 days forward, sum squares of returns and divide it by 20) and subtract it from from the square of the VIX index for that day. If you want to "go back many-many years" as this guy did, you, of course, will not find data on implied vols, but you will find data on other convex instruments. First thing that comes to my head is the difference in yield for consoles and regular long-term bonds in the UKK, you can get the data for the past 250 years (i think the data originally is weekly). See how much lower the consol yield is and how much consol holders pay for the additional convexity premium.