Up Down Or….? (by Dave)

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All quants please stop reading
now. This is a base primer on iron condors with myriads of detail to be joyfully
omitted. Options are funny that way, they can preoccupy the mathematically
inept (
moi`) and PhDs alike. And though in the hands of wrong intentions they quickly become weapons of mass account destruction, options were actually invented
control risk and protect assets.

Popular mantra goes something
like; “iron condors have a high probability of making a little profit”. To that
I would say please quantify a “little”.
I find 30% profit on amount risked to be frequently obtainable. That’s
typically a 60 day or so trade which annualizes at a piddling 180% give or take… Well
maybe I’ve set my sights too low but that works for me. Likely you’ll also hear
about the bothersome maintenance of adjustments, but the only “adjustment” I
ever make is to simply close the position.

Market neutral trading means
avoiding sharp or prolonged surprises and trading indices helps me accomplish
that.  I sell RUT iron condors 90 to
120 days out and buy them back before they become front month. To explain why necessitates an intro to a couple “Greeks” so here’s the shortest
most over-simplified one you’ll ever get:

Theta (time value you sell then
collect) is your friend.

Gamma (the condor’s sensitivity to RUT price fluctuations)
is the enemy.

The closer to expiration the condor spread gets the more daily theta is
collected but the higher gamma risk becomes. Eventually the reward isn’t worth
the risk so I close and move on to the next trade. I want at least $3.00 premium to write a
$10.00 RUT spread and I'm looking for approximately that ratio on any iron condor I sell. As mentioned I never adjust my spreads but merely close
the entire trade if things get unruly. I use both broker software and good old
fashion TA to place then manage my positions and once opened I manage
only for risk never for profit.

Here's what an iron condor looks like on a chart


…and on a risk graph


Spread trading is as much art
as science. It can fill in a lot of gaps– from softening the sting of a
directional guess gone wrong to quietly generating income in the background without eating up excessive buying power. Nobody should write an iron condor based on what little information
I’ve provided but hopefully some will be nudged into further exploration.

Tired of the old up or down? Venture beyond directional guessing and you’ll find an excitingly profitable
world that isn’t nearly as complicated as you might fear. Quants may now