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.

Why Iron Condors are NOT an ATM machine


We closed today our Steady Condors March trades for an average gain of 7.5% before commissions, or 5.8% return on the whole account after commissions. We don't promise you some absurd numbers like 10%/month or 5%/week, but we are proud to report performance in the most honest and transparent way possible. I will explain later how our performance reporting is different from other newsletters, but let me start by quoting Jesse Blom's post on the forum.

Steady Condors first goal is to manage risk and to prevent big losses.

 

Nice recovery!

 

"Another nice month for those who have hung in there with Steady Condors. Good job, Kim, and to those of you who are sticking with it. And a good opportunity to share some things about the limitations of a relatively small sample size of live trading and backtesting...

 

A lot of people bailed on Steady Condors last year because of a drawdown and losing year. Think about it this way:

 

What if the only data you had access to on the S&P was since 2009? You'd have returns of 26%, 15%, 2%, 16%, 32%, and 14% (rounded). That would obviously be a very misleading sample to draw conclusions from. The disclaimer of "past performance does not guarantee future results" is not just a legal requirement, but a true statement. Past performance does matter, but it's NOT the limitations of what is possible.

 

I posted this on the LCD forum last week from Ben Graham: "The essence of investment management is the management of risk, not the management of returns."

 

You can't control returns, only manage risk 

 

I really dislike when people make trading sound like if you are really good at it you somehow have control over your returns. The only thing you can do is build a winning strategy (better yet, multiple winning strategies with low correlation) and then manage your risk and position size so that you stay in the game long enough to let your edge work out over the long term. But a lot of people will make ridiculous claims in order to sell a product with no accountability to a regulatory body like I have to deal with as an investment advisor.

 

And you must have realistic expectations and a proper mindset which I believe is:

  1. Selling options and iron condors can be a very good strategy when the risk management is robust. With most of the services out there it's not, and if their track record doesn't have a big loss in it, it probably just hasn't happened yet. Selling OTM options and then rolling losses forward is incredibly misleading to the uninformed. No different than the S&P example above to where if we extended the sample size by one year to 2008 you add in the second worst year in history where many people locked in devastating losses to their portfolio because they never considered it possible for markets to go down that far and fear took over. Those unaware of history are doomed to repeat it. It will happen again, we just don't know when. The S&P has experienced two 50%+ drawdowns since 2000 and a max drawdown of over 80%.
  2. Selling options and iron condors can add value and diversification to your portfolio. They aren't the holy grail. Just like everything else.
  3. Your maximum drawdown is ahead of you, not behind you. We do have a limited sample size with Steady Condors, that's obviously why I brought up the S&P example. The reality is that backtesting complex options strategies is a LOT of work and sufficient option data just really doesn't exist for us to go back much farther than what we have displayed. Many drew too many conclusions about the future of steady condors based on limited past data. Again, have realistic expectations."

a046035fd62494d74c6bc22859102422.jpeg

 

There is a lot of wisdom in Jesse's post.

 

And now I would like to explain how Steady Condors performance reporting is different from most other services.

 

We report returns on the whole portfolio including commissions

 

What does it mean?

 

When you trade Iron Condor (or any other options strategy), you NEVER can allocate 100% of the account to the trades. You always need to leave some cash reserve in case you need to adjust. This cash reserve usually varies from 15% to 30%.

 

Lets assume cash reserve of 20% and see how we would report the performance.

 

Our 20k unit has two trades each month (RUT and SPX). With 20% cash, we allocate ~$8,000 per trade. If both trade made 5%, that means $400 per trade or $800 total for the two trades. In our track record, you will see 800/20,000=4%. Other services will report it as 5% (average of the two trades). In addition, our returns will always include commissions. If you see 5% return in the track record, that means that $100,000 account grew to $105,000. Plain and simple.

 

To see how this method can have dramatic impact on the performance, let's examine a hypothetical service that claims to make 10%/month and have up to 3 trades.

 

With 3 trades, it is reasonable to allocate 25% per trade and leave 25% in cash. If all 3 trades made 10%, they would report 10% return (average of all trades). However, the return on the whole portfolio is 7.5%, not 10%. That's before commissions, which might take another 1-1.5% from the total return. If they have only 2 trades, and both made 10%, they would still report 10%, while a real return is 5% (half), and even less after commissions. There are months where they might have only 1 trade, but if that trade made 10%, they would still report 10%, although the real return was 2.5%.

 

Another point worth mentioning is rolling. If you look at some services, you might see few last months of data missing. That would usually mean that the trades were losing money and have been rolled for few months, to hide losses. In some cases, the unrealized losses can reach 25-50%. You will never see those losses in their track record.

 

It is very important to know how returns are reported, in order to make a real comparison. Always make sure to compare apples to apples.

 

 

Related Articles:
Can you double your account every six months?
Can you really make 10% per month with Iron Condors?

Should You Leg Into Iron Condor?
Exiting An Iron Condor Trade
Iron Condor Adjustments: How And When
Iron Condor Adjustment: Can I "Roll" It Forever?
Is Your Iron Condor Really Protected?

 

Click here to read how Steady Condors is different from "traditional" Iron Condors.

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

  • 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
    • 90 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
    • 301 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
    • 393 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
    • 443 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
    • 523 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
    • 1,029 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
    • 494 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
    • 610 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
    • 608 views
  • Bullish Short Strangles

    A bullish short strangle sounds like a complicated strategy, but it’s really quite simple for those familiar with option terminology. A short put is combined with a short call to where the position starts with some amount of positive delta overall. This distinguishes itself from a delta neutral strangle, where both the short put and short call are sold at the same delta.

    By Jesse,

    • 5 comments
    • 994 views

  Report Article

We want to hear from you!


Thank you for this Kim.  With limited backtesting available, at what point would you stick with a strategy after a period of consecutive drawdowns?  Two recent examples come to mind: the SPY Ratio Diagonal, and the non-directional ES mini strategy.  Both had about 2 or 3 years of backtesting, and both have been discontinued.  Any thoughts?

Share this comment


Link to comment
Share on other sites

Thee are many factors involved here.

The SPY diagonal was discountinued because Chris reached conclusion that the drawdown is too big and it's time to stop the pain. He provided more details on the forum.

The futures strategy was probably not refined enough for market corrections, but overall return was still positive even after two negative months.

When you see that the strategy doesn't work anymore, you stop it. This is not the case with SC. The losses least year were due to special market conditions. A lot of condor services struggled in 2014. In fact, I know at least two who lost 90% of the capital.

Share this comment


Link to comment
Share on other sites

Kim and Jesse,

 

This is what separates you guys from the other disingenuous companies out there.  You are honest and you are building the foundation of a service to last 20+ years, not 3.

 

Thanks.

 

Richard

Share this comment


Link to comment
Share on other sites


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