why is iron condor ever a good idea?

Discussion in 'Options' started by 1a2b3cppp, Sep 2, 2018.

  1. guru


    First, options theory and options pricing are based on stock's volatility (implied/expected and historical), which reflect the chance of a stock staying within specific range. And it works pretty well probabilistically, meaning that you can set your iron condor width or probability of winning 70% of the time, and that's what happens 70% of the time. The other 30% of the time the stock indeed may move outside of your range, so there is no guarantee that it won't.

    Second, the benefit of trading iron condors is that you can play both sides. Let's say that using basic options/spread you can bet on a stock going up and pay 30 cents to make one dollar, or if you wanted to bet in opposite direction you could bet 30 cents to make one dollar when the stock goes down. But what if you don't know which direction the stock will move and wanted to bet in both directions? Well, then you'd spend 60 cents to make $1 (30 cents each direction), which would be quite expensive and you'd risk losing the whole 60 cents if the stock doesn't make a big move.
    But when you trade iron condors then you become the dealer and you sell one $1 spread for 30 cents to one guy who bets up, and another $1 spread to another guy who bets down, also for 30 cents. This way you'll collect 60 cents and let the other guys sweat over whether their 30 cent bets will work out. If one of them wins then you give the winner his 30 cents back, plus 30 cents you collected from the other guy, plus 40 cents of your own money. So you've lost only 40 cents, not much more than the other guy who lost 30 cents betting on the wrong direction. But whenever you win, you win 60 cents (30 cents from each loser), and if you manage to do this just 50% of the time then you own the casino (in this example). You can adjust the bets you're collecting from both sides, while probabilities of you or them winning will also change. But at least you have some control of your choices, while the rest is basic math.
    Last edited: Sep 2, 2018
    #11     Sep 2, 2018
    MACD, Hideyoshi, zion and 1 other person like this.
  2. If you fail to understand the duality of the convexity on the lateral sides of the position then the risk graph will look obtuse. Rookie mistkae of course. Modelling the range bound gamma will let you move towards edge based strike selection for more accurate empathy.
    #12     Sep 2, 2018
    destriero likes this.
  3. Your other posts aren't written like that.
    #13     Sep 2, 2018
  4. Now, does the trick lay in factoring how options traders calculate volatility? Might this be used to determine stock market volatility and know whether to trend trade or short range limits?
    #14     Sep 2, 2018
  5. Just was posting similar gibberish as your comment. Your questioning why do vertical spreads versus owning stocks or what is the benefit of the IC.

    I think the questions infers that you are quite unwilling to put in any effort to determine an answer due to lack of knowledge of options and how they work. So I think everyone who answered your question was just wasting their time and my gibberish is as helpful as their intelligent answers because your mind is as closed as an Amish's woman's legs on prom night.
    #15     Sep 2, 2018
    Sig and tommcginnis like this.
  6. guru


    Options probably don't do that outright, meaning they may not give you an edge, except for implied/expected volatility being higher than historical, which I think Pekelo was referring to.
    Basically you could try selling options/ic's when they're overpriced due to expected volatility that may not materialize (like after Musk's and Trump's tweets). Otherwise if you believe/use trends then you can try using technical analysis as with stocks, maybe also including put/call ratio, recent option trades, etc.
    Pekelo also mentioned that you can use time to your advantage. While a stock won't make you money when it doesn't move, ICs become profitable and you can get out at any time with some/smaller profit. You can also wait for a stock to swing back and forth, and liquidate your IC when the stock is back near the middle of your range.
    #16     Sep 2, 2018
    tommcginnis likes this.
  7. JSOP


    When you buy the stock, the downside loss is potentially to be zero whereas in a bull-put credit spread, the downside loss is capped by the long put. Yes the upside potential has also been limited by the short put but you earn it in a known amount of time via theta whereas in a stock, you have unknown amount of time to earn that potentially unlimited profit. So it's a "would you rather" question:

    Would you rather potentially wait unknown amount of time and potentially not able to at all to earn an unlimited amount of profit or earn a limited and known amount of profit in a known amount of time?
    #17     Sep 2, 2018
    tommcginnis likes this.
  8. destriero


    Think of vol as synthetic time. XYZ is at 20-vol and the 85/95/105/115 iron condor is at (3.00). In a week at static price and vol the condor has to drop in price due to decay; or the vol will have to rise to maintain the 3.00 premium.

    Obv that works with any short-gamma position. Invert for long gamma.
    #18     Sep 2, 2018
  9. tommcginnis


    Risk-wise, you just described a condor.
    If you buy the bottom, your risk is below you.
    If you sell the top, your risk is above you.

    Options are not stocks -- they are insurance policies, which you are able to buy and to sell, for risk of price rises and price declines. Insurance. You are selling and buying *risk*.
    Last edited: Sep 3, 2018
    #19     Sep 3, 2018
  10. That is the magic part. Choosing a position with expectancy of future lower vols which acts as shortening time while time actually passes. Event trading make it more certain of vol decrease but also adds the risk of movement outside profit zone. That part is more art than science.
    #20     Sep 3, 2018