90% probability iron condors

[Jesse 315]

What do you all think about 90% iron condors? I've had success with this strategy but the risk is always a fast moving market. This is part of the reason why I like Kim's trades so much is they can diversify a strategy like this.

Edited July 23, 2012 by Jesse

[Marco 221]

It's a great strategy 90% of the time, question is how you can manage you losses the 10% of the time it doesnt work. Risk management and allocation are key. The problem is that you only get a relatively small premium so if things go wrong you lose quickly and you haven't much premium to adjust strikes (but arguably if you do low delta IC's you don't intend to adjust in the 1st place)

[jay 1]

I agree hero. One bad bad trade wipes out alot of gains. No offense to anyone, but I don't really like the promotion of other services. Although it's no skin off my back if folks desert SO and go elsewhere. I just find it distracting.

[Jesse 315]

There are plenty of adjustment strategies, and yes, rarely are adjustments needed. Part of the idea is to have reserve cash available to manage a newly trending and fast moving market that moves against your position(s). Also, legging into to your condors (placing bull put spreads and bear call spreads separtely) and doing your best to enter trades after the market has already made most of its directional move helps reduces risk. If you always place a bull put spread on a strong down day and a bear call spread on a strong up day it increases your credit and helps to manage risk.

But yes, of course, 10% of the time it doesn't work. An increase in IV and a fast moving market are the enemy of high probability IC's but the friend of the earnings play we do here. Kim, I'm looking forward to hearing your thoughts on this subject.

Edited July 23, 2012 by Jesse

[Kim 7,439]

I have no problem discussing different strategies, however, I prefer not to comment on performance on other services (unless I know for sure this is a bad service and I need to warn people). Discussing other services simply puts me in impossible situation: I don't want to say anything bad so it sounds like I'm trashing a competitor. On the other hand, I don't think that other services would promote SO, so I have no intention to do the same for them.

Discussing the strategy however, is very important, I will post my comments later.

[jay 1]

I agree, let's discuss the strategies and leave the names of services out.

[Kelly Park 10]

Personally, I don't see good services, with differing trading strategies as competitive. No matter how successful SO gets, it will still only be for a portion of a portfolio. Unless SO grows into a more diverse role of overall portfolio diversification, we all need additional investment strategies that are complementary to SO. I feel fortunate to have found an honest service like SO and would join others of similar quality if I knew about them. That said, it is Kim's site, so his call. (Optional pun intended.)

[Kim 7,439]

You are absolutely right Kelly, and even if SO grows to be more diversified, you still should not rely on one service.

[Kim 7,439]

Okay, so before reading any further, I recommend that you read the following:

http://steadyoptions...e-iron-condors/

http://seekingalpha....-risk-vs-reward

http://seekingalpha....ons-risk-master

Now (assuming that you read those three master pieces ), I will tell you why I don't like the 90% probability ICs.

The main reason is that when you get a credit which is so low, you really cannot afford to close early. You need to hold till the last day, and if the market makes a big move, your gamma risk becomes too high.

The second reason is that despite all the good efforts, about once a year the trade will get into trouble and is likely to experience a 25-30% loss. To cover that loss, you need at least 3-4 months of 8-10% gains.

What some services do is legging in to the IC, trying to get higher credit. This might work for a while if you have very good directional skills. But once it goes against you, you don't have the other side to partially offset the loss. Technically, this is not an Iron Condor trade. Those are two credit spreads using the same margin. Again, I'm not saying it cannot work, but this is a different game.

It is true that theoretically, 90% ICs will require less maintenance than 70% ICs, and 70% ICs less maintenance than 50% ICs (50% ICs is what we are doing here - selling ~25 delta for 4.50-5.00 credit). However, they will also limit your gain too much (in my opinion). It is true that a tradeoff of bad risk/reward is higher probability of success, but 1:9 risk/reward of 90% probability ICs is too high. Again, this is my opinion, it doesn't mean it cannot work.

I was doing 70% ICs for a long time before switching to 50% ICs - I explained the reasons in the first link.

It reminds me an old discussion what is better - single calendar or double calendar. Both can work. Dan Sheridan prefers single. He says "let the stock prove it can move. If it will, I will open the second one, converting it to double". Same thing here. I start with tighter strikes and ask the stock to prove it can move. If it does, I adjust. If I start with 25 deltas (50% probability) and adjust, I'm basically back to 15 deltas (70% probability). But once in a while when the stock doesn't move, the gains can be spectacular. In January IC I made 70% - http://seekingalpha.com/article/317818-take-flight-with-an-iron-condor-for-significant-profits.

Let me know if you have any questions.