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Steady Condor 2015 Half Year Report: 31.6% Return
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By Kim
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:
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%. Selling options and iron condors can add value and diversification to your portfolio. They aren't the holy grail. Just like everything else. 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."
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.
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By Kim
Performance Dissected
Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance, and exclude commissions, so your actual results will be lower, depending on the broker and number of trades. Please read 2022 Year End Performance by Trade Type for full analysis of our 2021 performance. We have extensive discussions about brokers and commissions on the Forum (like this one) and help members to select the best broker. Please refer to How We Calculate Returns? for more details.
The 90% annual return was below our long term average, but note that we didn’t use calendar trades this year due to the volatile market climate – and calendars have historically always been our highest average gain per trade. Going with mostly lower risk, short-term long straddles and tight long strangles kept us away from trades with bigger losses, but also kept us away from trades with larger gains. While the markets were down 20-30%+ (their worst year since 2008), we consider a 90% return pretty good.
After 11 years in business, SteadyOptions maintains its position as the most stable and consistent options trading service, with 123.2% Compounded Annual Growth Rate. We proved again that we can make money in any market. As one of our members mentioned:
"I would rate the 3% profit for March 2020 as even MORE successful than the 25% profits for Jan/Feb. If someone can make a profit in a month when there was total carnage in the markets, then that shows resilience and security in the trading strategies. It shows that even during a black swan event, the system works, and the account will not be blown."
Our strategies
SteadyOptions uses a mix of non-directional strategies: earnings plays, Long Straddle, Long Strangle, Calendar Spread, Bitterly, Iron Condor, etc. We constantly adding new strategies to our arsenal, based on different market conditions. SO model portfolio is not designed for speculative trades although we might do some in the speculative forum. SO is not a get-rich-quick-without-efforts kind of newsletter. I'm a big fan of the "slow and steady" approach. We aim for many singles instead of a few homeruns. My first goal is capital preservation instead of doubling your account. Think about the risk first. If you take care of the risk, the profits will come.
What makes SO different?
We use a total portfolio approach for performance reporting. This approach reflects the growth of the entire account, not just what was at risk. We balance the portfolio in terms of options Greeks. SteadyOptions provides a complete portfolio solution. We trade a variety of non-directional strategies balancing each other. You can allocate 60-70% of your options account to our strategies and still sleep well at night. In 2022 we use around 30% of our capital on average, with the rest in cash. 90% return that we reported was on the whole portfolio - if we reported return on invested capital (like other services do), we would be reporting over 300% return.
Our performance is based on real fills. Each trade alert comes with a screenshot of our broker fills. We put our money where our mouth is. Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage.
It is not a coincidence that SteadyOptions is ranked #1 out of 723 Newsletters on Investimonials, a financial product review site. The reviewers especially mention our honesty and transparency, and also tremendous value of our trading community.
We place a lot of emphasis on options education. There is a dedicated forum where every trade is discussed before the trade is placed. We discuss different strategies and potential trades. Unlike most other services that just send the trade alerts, our members understand the rationale behind the trades and not just blindly follow the alerts. SO actually helps members to become better traders.
Other services
In addition to SteadyOptions, we offer the following services:
Anchor Trades - Stocks/ETFs hedged with options for conservative long term investors.
Steady PutWrite - puts writing on equity indexes and ETF’s.
Simple Spreads - simple spread strategies like diagonals and verticals.
SteadyVol - Volatility based trades. We offer all services bundle at $2,495 per year. This represents up to 63% discount compared to individual services rates and you will be grandfathered at this rate as long as you keep your subscription active. Details on the subscription page. More bundles are available - click here for details.
Subscribing to all services provides excellent diversification since those services have low correlation, and you also get the ONE software for free for 12 months with the yearly bundle.
We also offer Managed Accounts for Anchor Trades and Steady PutWrite.
Summary
2022 was another excellent year for our members. We are very pleased with our performance.
SteadyOptions is now 11 years old. We’ve come a long way since we started. We are now recognized as:
#1 Ranked Newsletter on Investimonials Top Rated Newsletter on Stockgumshoe Top 10 Option Trading Blogs by Options Trading IQ Top 4 Options Newsletters by Benzinga Top 40 Options Trading Blogs by Feedspot Top 15 Trading Forums by Feedspot Top 20 Trading Forums by Robust Trader Best Options Trading Blogs by Expertido Top Traders and People in Finance to Follow on Twitter Top Trading Blogs To Follow by Eztoolset Top Twitter Accounts to Follow by Options Trading IQ I see the community as the best part of our service. I believe we have the best and most engaged options trading community in the world. We now have members from over 50 counties. Our members posted over 125,000 posts in the last 9 years. Those facts show you the tremendous added value of our trading community.
I want to thank each of you who’ve joined us and supported us. We continue to strive to be the best community of options traders and continuously improve and enhance our services.
Let me finish with my favorite quote from Michael Covel:
"Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between."
If you are not a member and interested to join, you can click here to join our winning team. When you join SteadyOptions, we will share with you all we know about options. We will never try to sell you any additional "proprietary systems", training, webinars etc. All our "secrets" are included in your monthly fee.
Happy Trading from SO team!
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By Kim
Performance Dissected
Check out the Performance page to see the full results. Please note that those results are based on real fills, not hypothetical performance, and exclude commissions, so your actual results will be lower, depending on the broker and number of trades. Please read 2021 Year End Performance by Trade Type for full analysis of our 2021 performance. We have extensive discussions about brokers and commissions on the Forum (like this one) and help members to select the best broker. Please refer to How We Calculate Returns? for more details.
After 10 years in business, SteadyOptions maintains its position as the most stable and consistent options trading service, with 126.6% Compounded Annual Growth Rate. We proved again that we can make money in any market. As one of our members mentioned:
"I would rate the 3% profit for March 2020 as even MORE successful than the 25% profits for Jan/Feb. If someone can make a profit in a month when there was total carnage in the markets, then that shows resilience and security in the trading strategies. It shows that even during a black swan event, the system works, and the account will not be blown."
Our strategies
SteadyOptions uses a mix of non-directional strategies: earnings plays, Straddles, Calendar Spreads, Butterflies, Iron Condors, etc. We constantly adding new strategies to our arsenal, based on different market conditions. SO model portfolio is not designed for speculative trades although we might do some in the speculative forum. SO is not a get-rich-quick-without-efforts kind of newsletter. I'm a big fan of the "slow and steady" approach. I aim for many singles instead of few homeruns. My first goal is capital preservation instead of doubling your account. Think about the risk first. If you take care of the risk, the profits will come.
What's New?
We added a new contributor to our official trades. We introduced few opportunistic trades using a variation of a diagonal spread. We introduced directional butterflies and verticals strategies. We also introduced a new service Simple Spreads to our offerings. What makes SO different?
We use a total portfolio approach for performance reporting. This approach reflects the growth of the entire account, not just what was at risk. We balance the portfolio in terms of options Greeks. SteadyOptions provides a complete portfolio solution. We trade a variety of non-directional strategies balancing each other. You can allocate 60-70% of your options account to our strategies and still sleep well at night.
Our performance is based on real fills. Each trade alert comes with screenshot of our broker fills. We put our money where our mouth is. Our performance reporting is completely transparent. All trades are listed on the performance page, with the exact entry/exit dates and P/L percentage.
It is not a coincidence that SteadyOptions is ranked #1 out of 723 Newsletters on Investimonials, a financial product review site. The reviewers especially mention our honesty and transparency, and also tremendous value of our trading community.
We place a lot of emphasis on options education. There is a dedicated forum where every trade is discussed before the trade is placed. We discuss different strategies and potential trades. Unlike most other services that just send the trade alerts, our members understand the rationale behind the trades and not just blindly follow the alerts. SO actually helps members to become better traders.
Other services
In addition to SteadyOptions, we offer the following services:
Anchor Trades - Stocks/ETFs hedged with options for conservative long term investors. Anchor Trades produced 35.9% gain in 2021, beating its benchmark by 9.0%.
Steady PutWrite - puts writing on equity indexes and ETF’s. Steady PutWrite produced 14.2% gain in 2021.
NEW: Simple Spreads - simple spread strategies like diagonals and verticals. Simple Spreads produced 0.4% return in 2021.
Steady Futures - a systematic trendfollowing strategy utilizing futures options. Steady Futures produced 21.0 gain in 2021. We offer a 5 products bundle (SteadyOptions, Steady Momentum PutWrite, Anchor Trades and Steady Futures) for $745 per quarter or $2,495 per year. This represents up to 57% discount compared to individual services rates and you will be grandfathered at this rate as long as you keep your subscription active. Details on the subscription page. More bundles are available - click here for details.
Subscribing to all services provides excellent diversification since those services have low correlation, and you also get the ONE software for free for 12 months with the yearly bundle.
We also offer Managed Accounts for Anchor Trades and Steady PutWrite.
Summary
2021 was another excellent year for our members. We are very pleased with our performance.
SteadyOptions is now 10 years old. We’ve come a long way since we started. We are now recognized as:
#1 Ranked Newsletter on Investimonials Top Rated Newsletter on Stockgumshoe Top 10 Option Trading Blogs by Options Trading IQ Top 4 Options Newsletters by Benzinga Top 40 Options Trading Blogs by Feedspot Top 15 Trading Forums by Feedspot Top 20 Trading Forums by Robust Trader Best Options Trading Blogs by Expertido Top Traders and People in Finance to Follow on Twitter Top Trading Blogs To Follow by Eztoolset Top Twitter Accounts to Follow by Options Trading IQ I see the community as the best part of our service. I believe we have the best and most engaged options trading community in the world. We now have members from over 50 counties. Our members posted over 125,000 posts in the last 9 years. Those facts show you the tremendous added value of our trading community.
I want to thank each of you who’ve joined us and supported us. We continue to strive to be the best community of options traders and continuously improve and enhance our services.
Let me finish with my favorite quote from Michael Covel:
"Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between."
If you are not a member and interested to join, you can click here to join our winning team. When you join SteadyOptions, we will share with you all we know about options. We will never try to sell you any additional "proprietary systems", training, webinars etc. All our "secrets" are included in your monthly fee.
Happy Trading from SO team!
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By branch
Happy to join this cool forum! I’m fairly new to options. My account is with Interactive Brokers, and I've played around with their options trading interface on their main portal (account portal).
Do I need to subscribe to their trading platform, or can I use the simpler interface?
I’m also trying to sort out in my head two parts of the SteadyOptions experience:
the strong advice here to get involved in my trading and monitor my positions throughout the day, and the published historical performance data, which I understand is a reflection of all of the past trade notifications.
If I were to try to strictly abide by the trade notifications when they arrive in my inbox, am I correct that the challenge in “duplicating” the trade notifications has to do with possible glitches (partial fills, price movement, other execution issues) which require my attention? Or is there more to this?
And once a trade is filled, do I still need to monitor it closely? I’ve got a pretty busy life and there will be times when I can’t monitor my email, or my trades.
Thanks
Branch
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By Kim
Well, every trade should be put in context. Before evaluating a trade (or an options strategy), the following questions should be asked and answered:
What is the holding period of the strategy? What is the maximum risk? What is the profit potential? What is the average return? What is the winning ratio? Why holding period is important? Well, making 5% in one week is not the same as making 5% in six months. In the first case we are talking about 250% annualized return. In the second case, 10%. See the difference.
Maximum risk is important because it doesn't make sense to aim for 5% gain if your strategy can lose 50-100%. For example, when you are trading a directional strategy, and the stock gaps against you, the losses can be catastrophic. Since the risk is high, you should aim for higher return to compensate for the risk.
However, if your maximum risk is limited, you can aim for lower return and still get excellent overall performance.
Lets examine our pre-earnings straddles as an example.
As a reminder, a long straddle option strategy is vega positive, gamma positive and theta negative trade. It works based on the premise that both call and put options have unlimited profit potential but limited loss.
Straddles are a good strategy to pursue if you believe that a stock's price will move significantly, but unsure as to which direction. Another case is if you believe that Implied Volatility of the options will increase - for example, before a significant event like earnings. I explained the latter strategy in my Seeking Alpha article Exploiting Earnings Associated Rising Volatility. IV usually increases sharply a few days before earnings, and the increase should compensate for the negative theta. If the stock moves before earnings, the position can be sold for a profit or rolled to new strikes. This is one of my favorite strategies that we use in our SteadyOptions model portfolio.
This is how the P/L chart looks like:
How We Trade Straddle Option Strategy provides a full explanation of the strategy.
Lets take a look at 2022 statistics for this strategy:
Number of trades: 148 Number of winners: 103 Number of losers: 40 Winning ratio: 72.5% Average return per trade: 4.9% Average return per winning trade: 8.7% Average return per losing trade: -10.2% Average holding period: 7.2 days Lets do a quick math. If you can do 10 trades per month, each trade producing 5% gain on average and 10% allocation per trade, your monthly return is 5% on the whole portfolio. That's 60% non compounded annual return, with minimal risk.
To answer the original question: for a strategy that has 70%+ winning ratio and loses on average 10% on losing trades, with average holding period of one week, 5% is an EXCELLENT return. In fact, I would consider it as Close to the Holy Grail as You Can Get.
Related Articles:
How We Trade Straddle Option Strategy Buying Premium Prior to Earnings Can We Profit From Volatility Expansion into Earnings Long Straddle: A Guaranteed Win? Why We Sell Our Straddles Before Earnings
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By Kim
AGGREGATE vs. ROI
When you start looking at the different ways in which trading results are analysed, you’ll notice that they fall into two broad categories, Aggregate Analysis and Return on Investment analysis. Most investment services use versions of Aggregate Analysis which is a slippery slope into results that are at best misleading, at worst, deceptive.
Let’s say, for example, that a service did one trade in the month. They make 10% on that trade. According to Aggregate Analysis, they would then claim that they had made 10% for the month. But did they?
In another instance a service does 4 trades for the month, averaging 10%. They claim, according to Aggregate Analysis, that they made 10% for the month. Really?
And probably the most common example is when they’re calculating yearly returns. Say they did 20 trades for the year and the sum of all those trades (that is, the return for each trade added together) was 100%. Their claim, according to Aggregate Analysis, was that they made 100% return for the year.
How most services report returns
So all Aggregate Analysis does (and this is where its name comes from) is add the results of the individual trades together. And you can understand why a service would do that – it’s not only simple but, most importantly, it shows off their performance in the best possible light. Hey, if you could do one trade and make 10% a month, why wouldn't you subscribe?
Because you haven’t actually made 10%, that’s why. Not in the way that most people would think about trading or investment returns. 10% return assumes that you allocated your whole account to that single trade - which of course is insane.
Let’s assume you have a bank of $10,000 and you’re risking 5% per trade because you’re trading options and options are risky. So that’s $500 maximum per trade. The trade makes 10% which is $50, so you’re out for $550.
What return did you make for the month?
$50 / $10,000 = 0.5%
No, you did not make $1,000, as the 10% return suggested you would. You only made 0.5% because, normally, returns are calculated based on the total investment. And your total investment wasn't just the $500 you put at stake for that particular trade, it was the entire $10,000 you have in your trading account, because while it’s sitting there in your trading account it isn't doing anything else. You can’t have it invested elsewhere earning money for you – it has to be in your trading account so you can practice proper money management and risk allocation.
How SteadyOptions reports returns?
We will always report our returns based on the whole account. The performance of the model portfolio reflects the growth of the entire account including the cash balance. Some services consider a $500 gain on a $1,000 investment to be a 50% return when the whole account is worth $10,000. We consider this to be a 5% return — and that is the honest way of doing the calculations.
We also always report performance based on the same allocation. Imagine a service making 3 trades per month and making 10% per trade. They would report 10% return. That means allocating 33% per trade. But wait - what if you need to adjust the trade? You absolutely need to keep at least 20% in cash for adjustments, so your real return is 8.0%. To add insult to injury, if they make only 2 trades in a certain month, they would still report 10% return. That means allocating 50% per trade. But how could you do that if you usually make 3 trades?
Our Model portfolio is based on starting value of $10,000, compounded monthly and reset every year.
We start with $10,000 each year and compound as the year progresses. Initial full position is $1,000 (10% of the portfolio) and half position is $500 (5% of the portfolio). The allocation for each individual trade is based on 10% of the current value of the performance tracking portfolio (5% for half allocation trades). This means that a 10% allocation when the portfolio is at 10K is smaller than a 10% allocation as the portfolio value increases. For example, a trade closed at the end of 2018 when the portfolio was around 20K had a 10% allocation of around $2000. This is simply following the standard for the performance reporting.
Therefore, the dollar gain/loss for each trade in the performance tracking will likely be different from the dollar gain/loss of the official trade. This is because of both the 10% allocation size for the performance tracking changing as the portfolio value increases and also because option trades cannot be allocated at an exact dollar amount.
For example: FB trade on 12/28/17 (last trade of 2017) produced 40% gain. If we make 40% on $500 it is $200. But we base the positions on the new portfolio value at the end of each month (23,551 at the end of November 2017) so full position is $2,355 and half position is $1,177. 40% of $1,177=$471, so the portfolio increased from 26,014 to 26,485. This is what compounding means.
There might be a slight difference in reported performance and actual performance for the 10k portfolio due to the fact that we cannot buy partial contracts. For example, if we make 10% on a trade, we will always report $100 gain (10% on $1,000 trade), adjusted for compounding. For trades requiring $800 margin the actual gain on $10k portfolio is $80, and for trades requiring $1,200 margin the actual gain is $120, but we will always report $100 gain. There are a lot of other dirty tricks that some services use to push up their numbers. It might include reporting based on "maximum profit potential", calculating gains based on cash and not on margin etc. You can read my article Performance Reporting - The Myths And The Reality for full details.
Still skeptical? Why not to join us and see by yourself how we are different from other services. Please refer to Frequently Asked Questions for more details about us.
If you liked this article, visit our Options Trading Blog for more educational articles about options trading.
Related Articles:
Why Retail Investors Lose Money In The Stock Market How To Calculate ROI On Credit Spreads Are You Ready For The Learning Curve? Can you double your account every six months? Performance Reporting: The Myths and The Reality Are You EMOTIONALLY Ready To Lose? Subscribe to SteadyOptions now and experience the full power of options trading at your fingertips. Click the button below to get started!
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By Jesse
Why Steady Condors is different?
Can you make 10% per month with Iron Condors? Yes, you can - but this is a wrong question to ask. The right question is how much you lose when the market goes against you?
Steady Condors at its core is managed by the Greeks but mostly resembles a variation of iron condors. Anyone who has traded more than a handful of non-directional iron condors knows they can be extremely challenging in a trending market potentially causing a lot of stress, large drawdowns, and significant losses.
Our manage by the Greeks philosophy is designed to take advantage of the volatility skew that naturally exists in index options like RUT and SPX and to deal with the inherent flaws this creates for traditional condors. We all know that the market “takes the stairs up and the elevator down” and this is built into index options pricing. For condors this means that you will be able to sell much farther OTM puts than calls for the equivalent premium. This causes a traditional iron condor to naturally set up short Delta (bearish). If the market makes a move up after trade launch you will start to lose money immediately even with declining implied volatility typically helping your short Vega position.
August 2011 Case Study
We certainly saw plenty of upside in the recent years. But as we all know, the market tends to take the stairs up and the elevator down. Steady Condors is short Vega, and I thought it would be a good example to show the backtested example of the Steady Condors trade during the August 2011 correction/crash.
The trade began like normal on July 6, 2011. 44 DTE. Note that RUT was at 844.
No adjustments were necessary until 8 days into the trade when RUT was at 832. Interesting though was RUT had first moved up to nearly 860 before starting its descent. The short leg of the put debit spread was rolled down 20 points. Business as usual.
On July 18, 32 DTE and 12 DIT, another debit spread was added (one other had also been added a few days prior) and the call credit spreads were taken off for 20 cents. RUT at 816, down about 1 standard deviation since entering the trade. Being down 1 standard deviation in 12 days isn't necessarily concerning, but RUT has declined over 40 points from its high. PnL is in good shape, up about 1%.
On July 27, 21 DIT, RUT is at 806 and another debit spread is added (rolling down the 800 short to 780). At this point the move down is still reasonable (around 1 standard deviation after 21 days). PnL is in good shape up about 2% at this point. The debit spread adjustments are causing the trade to look more like a bearish butterfly than a condor. No additional long puts have been necessary yet at this point.
Skipping ahead to Aug 2, 27 DIT and 17 DTE, RUT is now at 783. A few more debit spreads have been added at this point. The idea is to simply keep managing position delta as RUT moves further down. PnL is in great shape, closing in on target profit, up close to 4%. In situations like this I will consider going for more profit because it's possible to make significantly higher returns when the trade finishes under the "wing". One or two months per year we can usually get 5%+ out of the MIC.
Later in the day on Aug 2 position delta reached the adjustment target again so at this point a long put was added. Rational for the long put (compared to yet another debit spread) was as follows...1. There is more than enough potential profit and theta in the trade 2. This was the second adjustment in the same day with the daily move over 1.5 SD 3. RUT has moved down 66 points since trade launch and 82 points since the high. 4. The short leg of the put credit spreads are now carrying a delta of 30 increasing the short gamma of the position.
One day later on Aug 3 another long put was needed. It would certainly be reasonable to take profits at this point, the key is to keep the t+0 line as flat as possible while maintaining as much theta as possible. Note how flat the t+0 line is, and also how it curves up if a serious crash would occur. Translation: minimal fear of additional downside.
One day later on Aug 4 with RUT at 752 the trade was taken off for target profit of 5% and because RUT touched the short put strike, and theta was now negative. IV had increased 56% in the 29 DIT and the total move represented over 2 standard deviations. Max margin at the beginning of the trade was just over $26,000, and by the end of the trade margin was down to less than $17,000.
Just to show the power of risk management, the next picture is the original trade with no adjustments. Although the setup is important, it's the adjustments that make the difference. Without them, the trade would have been down 22% at the point it was taken off for target profit.
One last interesting point...On Monday Aug 8 RUT closed down 64 points at 650. If you wouldn't have taken the trade off on the 4th the trade would actually have been up 67% at the end of the day on the 8th.
Frankly I'm not familiar with another variation of Iron Condor that can actually make a gain after the index declines by 11%+.
Note: our current setup is slightly different, but the general principle is very similar.
Related articles:
Steady Condors 2015 Report: 46.7% Return 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? Why Iron Condors Are NOT An ATM Machine Can You Really Make 10% Per Month With Iron Condors? Is Your Iron Condor Really Protected?
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By Kim
The graph below highlights the fact that while less than 2% of assets were negative in 2017, 90% of assets are negative YTD in 2018 -- they highest percentage since... ever.
2018 was a unique year in many areas. For example, 2018 was the only positive year for VXX since inception. On Monday, February 5, the Dow Jones Industrial Average declined by 1,175 points — its largest point drop in one day ever. VIX more than doubled in a single day — for the first time ever. The VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV), a product issued by Credit Suisse, and the ProShares Short VIX Short-Term Futures exchange-traded fund (SVXY), both plunged by 80 percent in the hours after the VIX’s spike.
Those unprecedented events caused many funds to blow up their clients accounts. We covered the The Spectacular Fall Of LJM Preservation And Growth and James Cordier: Another Options Selling Firm Goes Bust, among others.
Many investors also learned in 2018 that “Blue Chip” is a marketing term. Owning these stocks will not shield you from losses. For example, IBM’s share price finished 25.6% lower in 2018, and it is one of many blue chip stocks that were punished by the market in 2018.
Some of the previous market darlings have been also punished hard in 2018. Facebook ended the year 25 percent down for 2018, and Apple was down 7 percent.
There was virtually no place to hide in 2018.
As Charlie Bilello mentions, in 2018, more than any year in recent history, the overwhelming majority of asset classes are down. In the table below of 15 asset classes ranging from stocks to bonds to REITs to Gold and Commodities, only one is higher: Cash.
If you maintain a globally diversified portfolio, this has likely been the worst year for you since 2008, with a 60/40 portfolio (AOR ETF) down just over 6%.
During periods like 2018, many traders started to realize that incorporating options strategies into their portfolios might be not a bad idea. Here is how our strategies performed in 2018:
Steady Options: This is our flagship service, trading variety of non directional strategies like Straddles, Iron Condors, Calendar Spreads, Butterflies, etc. The service produced 129.5% gain in 2018, proving once again that those strategies can make money in any market if implemented correctly. The model portfolio produced 17.3% return in December 2018 while most major indexes were down double digits.
Anchor Trades: An Anchor trades goal is to protect long portfolios and to prevent loss of capital while still generating a positive return in all market conditions. It produced 5.4% loss in 2018, slightly outperforming the S&P 500. If the correction continues, the outperformance should continue, and the hedge should start to kick in. We will be implementing more changes in 2019 to improve the strategy performance in all market conditions.
Steady Condors: This is a variation of Steady Condor strategy managed by the Greeks. It produced 12.9% loss in 2018, mainly driven by two huge corrections in February and October. While it is not pleasant to lose money, it is near impossible to make money with gamma negative vega negative strategy when the indexes move 3-4 SD in a matter of days and volatility doubles. Considering the market conditions, the strategy managed to keep the overall loss under control.
Creating Alpha: The service has two model portfolios, trading mostly VXX and TLT. The strategy produced 13.0% gain in 2018. Considering that it was short volatility during a year when VXX almost doubled and some short volatility fund blew up their accounts, we consider it a remarkable result. The Incredible Winning Trade In SVXY provides some insights on how we trade the strategy. When volatility stabilizes, the strategy should produce much better results.
2018 was a wake-up call for a whole new generation of investors who entered the stock market after 2009 and watched their long portfolios going up year after year. As we have seen, the markets can go down as well. And when they do, you are better to be prepared. This might be just the beginning.
Related articles:
SteadyOptions 2018 - Year In Review The Spectacular Fall Of LJM Preservation And Growth James Cordier: Another Options Selling Firm Goes Bust The Astonishing Story Behind XIV Debacle The Lessons From The XIV Collapse The Incredible Winning Trade In SVXY -
By Kim
I would like to share some of the thoughts expressed in the article and add my own perspective.
Honesty and Transparency Above All
Dan writes:
"As we wrapped up the month of April, the sample account took another loss. Once again, due to RUT. When you take two monthly losses in a row with a high probability trading system, it stings a bit. My goal is always to accurately represent what I’m doing and not pretend to be some guru with a 100% win rate or who conveniently fails to disclose trading results. I firmly believe in honesty and transparency rather than deception or what you’re hoping to hear."
SteadyOptions took three monthly losses in a row, also with a high probability trading system. Yes, it stings. But do you really believe that anyone is able to trade without losses? Whoever claims to not having any losses simply fails to accurately report his performance. Our results are fully documented, every single trade is on the performance page, winners and losers. Similar to Dan, I believe in full transparency. For a trading strategy that produced triple digit returns 5 years in a row, 3 losing months in a row is statistically expected at some point.
Dan continues:
"Armchair traders will say that we should change our strategy or not have been trading the strategy, but changing strategies every time we lose means we effectively have no strategy. Additionally, knowing when a strategy will work or won’t work is 100% impossible unless you’re Goldman Sachs, the Fed (arguably the same as GS), or a high frequency trading firm.
Wise words.
Probability Is Not Certainty
One of the reasons to our performance this year was a new strategy (RIC - Reverse Iron Condor) we introduced and described in Lessons From Q1 2016 Earnings Season article. It was those 4-5 losers that contributed the most to the negative performance. We discussed why this happened in the article and in more details on the forum. This is a high probability strategy - however, probability doesn't mean certainty. Sometimes even high probability strategies produce few losers in a row.
The RIC strategy bets on big post-earnings moves which happen 90% of the time for some stocks. To put things in perspective, NFLX, GOOG and LNKD produced some of the smallest post-earnings moves in history. What are the odds?
Dan mentions that the start of 2016 has been challenging for many, if not most or all, non-directional options traders. We experienced it with our butterfly strategy. After booking 7 winners in a row, our last two trades became big losers due to wild market moves in February-March. Again, those are strategies that we have been using with great success, but no strategy wins 100% of the time. Those two big losers along with few big RIC losers impacted the most our 2016 performance. Rest of the strategies actually performed pretty well.
How could the Fidelity Magellan fund make 29% per year from 1977-1990 while the average investor in the fund lost money? It's because investors always visualize the path to look like "your plan" and when it's not, the powerful impulse of fear and greed wins out (causing inflows around tops and outflows around bottoms).
After a string of losses, what's next?
SteadyOptions produced outstanding returns in the previous 4+ years. To put things in perspective, consider this: if you started investing in the stock market in 2007 based on historical returns of ~10%/year, then watched your money losing half of its value, would you quit? Some people would. Those who didn't, watched their money triple in the following 7 years. If you quit each time few losing months happen, you will just become part of DALBAR statistics. Losses are part of the game, and if you can not endure losses, you should not be trading.
I would strongly advise not to think in terms of "how and when to recover". Just continue executing your trading plan if you believe it still has an edge, and the results will come. This is exactly what we intend to do. Focus on following your trading plan not the short term results of it. Robust strategies are profitable in the long term time frame.
“It is critical to understand human nature if you want to succeed at investing. I’ve seen this time and time again. I’ve had investors who have been with me for years, getting great performance, and then suddenly we have a bad year or a bad couple of years, which we’ve told them about ahead of time, right, because we can always show them that nothing works all the time, and they still bail. Basing their decisions on short-term results is in fact the biggest mistake investors make.” - Jim O’Shaughnessy
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By GavinMcMaster
I was speaking to one trader the other day who had a $20,000 win with his first trade. I explained that this was almost the worst thing that could happen, because he started thinking “this is easy” and “if I can make this much when I don’t know anything, imagine what I can do when I get some more experience.”
Sure enough, this trader blew up his account not long after.
He was taking on too much risk without knowing how to handle it.
For new traders, it is much better to start with a small account size. Even if you have $200,000 available for trading options, just start with $10,000 and get a feel for how things work. Then, when you’ve been trading for a year or so, SLOWLY build your account from there.
You don’t want to jump from $10,000 to $200,000 overnight.
The psychological aspect of trading a $200k account is much different to a $10k account.
All of a sudden a 1% loss has gone from $100 to $2,000.
So, the big question is how much do you need to get started trading options?
I believe there is no real minimum.
You can start trading with $200.
The experience you gain will be with you for a lifetime, so the earlier you get started the better.
That being said, there are certain strategies that will not be available to you with only a small amount of capital.
Iron condors for example will be hard to trade with less than $5,000.
Also, you need to keep in mind that commissions and fees are going to have a much larger impact on a small account.
Ideally, you want to have around $5,000 to $10,000 at a minimum to start trading options.Call Course
HOW TO TRADE OPTIONS FULL-TIME
To become a full-time options trading requires a big commitment both financially and mentally. As the old saying goes, “It’s the hardest way there is to make easy money”.
Trading is hard, there will be good times and bad times. Will you be able to handle the emotional upheaval the bad times can cause?
The first step to figuring out if you can go full-time, is to figure out how much you need to live off.
If you want to make it as a trader, you need to be prepared to live pretty frugally. We’ve all seen the images of hot shot traders driving Ferraris, but that’s not the reality for 99% of traders out there. Most full-time traders I know live very frugally.
First things first, you should audit your spending behaviour and see if there is anywhere you can cut back without sacrificing your lifestyle.
The next step is to build a track record over a few years and figure out what sort of return you can expect on a consistent basis. It would be good to have this track record through a variety of different market conditions. There are a lot of “bull market geniuses” out there right now, but how will they fare during the next bear market?
Let’s say you’re pretty confident that you can achieve 15% per year. If you can live off $50,000, then you need a capital balance of $333,333.33. If your results indicate you can only achieve a 10% return then you need $500,000 but if you can achieve a 20% return then you only need $250,000.
You can see there is a massive variation in the amount of capital needed depending on your returns.
The best bet is to build that track record and figure out what sort of return YOU can achieve. Every trader is different after all.
Also note, that I haven’t met many traders consistently earning over 20% per year (despite what all those internet ads tell you), and I’ve met A LOT of traders in the last 15 years. Your Options Trading
DEALING WITH LOSING MONTHS
Losing months are never fun for any trader, but they are a double whammy for full-time traders. Not only has your account balance gone down, you’ve also had to withdraw funds to live off.
So your account has taken a double hit, and now you need an above average return next month.
Can you handle that kind of stress?
Having a minimum account size that you’re aiming for is a great idea, but it might be worth waiting until your balance is a little higher than you think you need in order to safely handle those losing months.
Some traders will have 12 months’ worth of expenses set aside (outside their trading account) before making the jump to full-time.
Trading is a tough game, and if you’ve got the added pressure of needing to make a certain return to put food on the table only adds to that stress. Having some emergency funds put aside can help you focus on the business of trading.
ADDITIONAL EXPENSES
One thing a lot of people don’t consider is the additional expenses that can be incurred as a trader. Does your current employer cover your health insurance? Do they pay for your smartphone? Do they provide you with a fast computer? A gym membership?
All these things and more will be your responsibility going forward. If your computer breaks and you don’t know how to fix it, you need to pay a computer guy to fix it for you. Previously your employer would take care of all of this. Same goes for your phone etc.
Be prepared for some additional expenses when you work for yourself.
CONCLUSION
Hopefully I haven’t stressed you out too much, but the reality is, you need a significant amount of capital before even thinking about becoming a full-time trader.
Those of you who have $50,000 and think you can go full-time, I’m sorry but it’s just not going to happen. Unless you’re a single guy who can live the backpacker lifestyle in Thailand.
But, trading is one of the most rewarding jobs there is. No boss, work from home, travel, the list goes on.
Stick at it, take it step by step and slowly build your account, and you will get there.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. He launched Options Trading IQ in 2010 to teach people how to trade options and eliminate all the Bullsh*t that’s out there. You can follow Gavin on Twitter.
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