SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Can You Really Make 10%/Month With Iron Condors?


Iron Condor is a combination of bull put credit spread with a bear call credit spread. When used correctly, Iron Condor can be a very profitable strategy resulting healthy monthly returns. realistically speaking, how much can you really make trading the Iron Condor strategy?

A lot of option trading websites promise you to make 10% per month with Iron Condors. Is this true? Well, it is actually not that hard to make 10% per month with iron condors. The problem is, in order to make 10% on your entire account, you would need to place ALL capital into Iron Condors. If you do that, it's only matter of time till your account is toast. So yes, if it's too good to be true, it usually is.

 

Many of them actually recommend placing 70-80% of your account into those trades (and keep the rest in cash). They claim that since they have 3-4 trades (usually on the broad market indexes like RUT, SPX or NDX), it provides them the necessary diversification. What they fail to mention is the fact that those indexes are 90% correlated and tend to move in tandem. To me, this is not diversification.

 

To add insult on injury, many of them recommend placing 80% of your account into weekly trades. To me, this is a financial suicide.

 

I love Iron Condors!

 

I love Iron Condors and I trade them regularly when the conditions are right.

 

In the long run, those trades can produce a steady 8-10% gain per month. Depending on the deltas of the sold options, they usually have pretty high winning ratio. You can expect to win in 8-9 months per year.

 

The trick is not to lose much in the losing months. Of course this is easier said than done. With proper risk management, most of the time this goal is achievable. However, once in a while, despite all the good efforts, the Iron Condor trade can lose 40-50% and there is nothing you can do about it.

 

To reduce the possibility of a big loss, I have few strict rules for Iron Condors:

  • Open the trade 6-8 weeks before expiration.
  • To reduce the gamma risk, never hold till expiration week.
  • Close about 2-3 weeks before expiration or when sufficient profit has been achieved.
  • Never let the average loss to be much higher than the average gain. For example, if your average winner is around 15%, don't allow the average loser to be more than 25-30%.
  • Iron condors are a short Vega trade. So it makes sense to trade them when volatility is high and expected to go down. I would not trade them (or at least significantly reduce the allocation) when VIX is around 12-15.

So what is the problem?

 

As long as you follow those rules and don't allocate big portions of your account to those trades, you should be able to survive few occasional losses. Here are some mistakes that people do when trading Iron Condors and/or credit spreads:

  • Opening the trade too close to expiration. There is nothing wrong with trading weekly Iron Condors - as long as you understand the risks and handle those trades as semi-speculative trades with very small allocation.
  • Holding the trade till expiration. The gamma risk is just too high.
  • Allocating too much capital to Iron Condors.
  • Trying to leg in to the trade by timing the market. It might work for some time, but if the market goes against you, the loss can be brutal and there is no another side of the condor to offset the loss.
  • Trading every single month, regardless of the market conditions. To me, it doesn't make sense to place an Iron Condor trade when VIX is at 12. You are not getting enough credit for the risk and you have to choose the strikes too close to the underlying.

Unfortunately, some options "gurus" make those mistakes on a consistent basis.

 

What can go wrong - a case study

 

To demonstrate what could go wrong with this approach, let's go back few weeks, to Friday April 12. RUT has been on a steady climb, and you decide to place a bull credit spread using weekly options expiring the next Friday. With RUT at $943, you decide to sell the 920/910 put spread for $0.67. If RUT stays above 920 by next Friday, that's a potential 7.1% gain in one week. Not bad. If you can do it week after week, you are going to be very rich.

 

Fast forward to Monday April 15. RUT is down to $906 and your spread is worth $7.00. That's 68% loss. Ouch. But wait - maybe we can give it few days to recover? Fast forward to Thursday April 18. RUT is at $901 and the spread is worth $9.40, a 93% loss.

 

fills.PNG

 

The big loss was caused by 2 factors. The first one of course is a sharp and quick move. The second one is a sharp increase in the IV (Implied Volatility) of the options due to the sharp move. Iron Condor is a vega negative trade, and any spike in IV has a negative impact on the trade, multiplying the loss.

 

The easy excuse - blame the market

 

Market conditions play a big role in the success of this strategy. The recent market strength has been tough for credit spread traders. Implied Volatility has been on a steady decline, and options premiums simply do not justify the risk. In order to get a decent credit, you had to go closer and closer to the current price every cycle. And when IV spikes, the trade can be a big loser.

 

Many options newsletters that trade exclusively credit spreads have experienced heavy losses. Some of the subscribers have reported losing as much as 80% of their accounts. By the way, if you are not a subscriber, you probably not going to see those losses in the track records. Many newsletters use a trick called "rolling" that allows them to hide the loss almost as long as they wish. In some cases, after heavy losses they simply "reset" the old portfolio and start a new one from scratch.

 

It is very easy to blame the market, Mr. Bernanke, the irrationality of other investors etc. The simple truth is that allocating 80% of the account to credit spreads and presenting it as "safe and conservative strategy" is very misleading. Credit spreads can be very brutal and should be treated with respect.

 

Conclusion

 

At SteadyOptions, we trade credit spreads too. But they are always part of a well diversified options portfolio and never exceed 20% of the account. We also hedge them with gamma and vega positive trades to reduce the risk. This is why we are doing so well and have never experienced a major drawdown. If you are still not a member, we invite you to take the SteadyOptions free trial and see by yourself. Please refer to Frequently Asked Questions for more details.

 

Related articles:

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Calculating the Probability of Option Payoff

    A calculation of “breakeven” as well as maximum profit or loss, sets up a single system for modeling and comparing one option to another. But it might also require traders to adopt an unrealistic assumption about outcomes based on best-case or worst-care scenario.

    By Michael C. Thomsett,

    • 0 comments
    • 55 views
  • Realistic Expectations: Using History as A Guide

    One of the biggest challenges I come across with the typical investor is maintaining realistic expectations and being able to properly understand the tradeoffs between risk and return. We all want high returns with low risk and there’s no limit to the efforts we’ll make to find it.

    By Jesse,

    • 0 comments
    • 167 views
  • CAPM As an Alternative Option Pricing Model

    Options traders endlessly debate the merits of the Black-Scholes pricing model. Some swear by it and others don’t even try to use it. Given the many profound flaws in the model, it is not an accurate tool for developing a sense of where price is likely to move in the future. But there are alternatives.

    By Michael C. Thomsett,

    • 0 comments
    • 353 views
  • Option Payoff Probability

    Options traders must, naturally, be concerned with the likelihood of payoff for a strategy. Ironically, one of the most often cited statistics about profit and loss is simply incorrect. That statistic is captured in the headline of a story posted online “Trading Options: Data Shows That 75% or More of Options Expire Worthless.”

    By Michael C. Thomsett,

    • 0 comments
    • 446 views
  • The Minimum Effective Dose (MED) For Cash Flow Planning

    Financial planners can usually give generic advice that will be appropriate for the majority of Americans, and that’s the goal of this article. If we can get the fundamentals of cash-flow planning right (where to put your money after you earn it and pay your taxes and bills), we’re 80% of the way towards maximizing our financial situation.

    By Jesse,

    • 0 comments
    • 483 views
  • Are You Breaking Even? Or Losing?

    Among the good reasons to trade options is the need to meet or surpass your breakeven yield. This is the yield you need just to preserve your purchasing power; and it higher than most people think. In fact, most people relying on moderate to conservative yields from stocks, mutual funds, real estate and savings accounts might be earning well below this breakeven level.

    By Michael C. Thomsett,

    • 0 comments
    • 574 views
  • Buy When You Have the Money, Sell When You Need the Money

    Money can be quite an emotional topic for many of us. Emotions can enhance our experiences and relationships in many ways, but they can act as mental roadblocks especially when trying to make wise financial decisions. One of the most common emotional roadblocks I come across when working with individuals is an unwillingness to invest idle cash to meet long-term goals.

    By Jesse,

    • 0 comments
    • 1,171 views
  • Strategy Selection vs. Risk Management

    "A billion here, a billion there, and pretty soon you're talking about real money." Everett McKinley Dirksen. Let’s begin with the bottom line: When I talk to anyone about the concept of choosing an option strategy (or two) to adopt for trading, I stress that the strategy should have certain characteristics.

    By Mark Wolfinger,

    • 0 comments
    • 540 views
  • Blending Anchor Strategy

    Anchor and Leveraged Anchor investors frequently ask why the strategy only trades SPY and SPY options rather than individual stocks, other indexes or commodities. We avoid individual stocks because of tracking and divergence issues.

    By cwelsh,

    • 0 comments
    • 662 views
  • Fundamental Volatility and Stock Prices

    Every options trader must wonder whether any connection will be found between the company's fundamentals and stock prices (and in turn, option valuation as well). Because options are derived from stock price behavior, the analysis of stock movement is crucial to selecting options wisely; and that relies on volatility in the reported profit and loss over several years.

    By Michael C. Thomsett,

    • 0 comments
    • 647 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs