Monday, 8 February 2016

THOUGHTS ON TRADING IRON CONDORS

"BUY DLF 85 PUT @ .90 TGT 1.65/2.2"
The iron condor is an option strategy usually adopted by traders with some option trading experience. That is as it should be because managing these positions requires an understanding of how money is made and lost -- something that most novice traders are unaware that they have not yet learned.
Below are some of my thoughts about trading iron condors.
Is trading iron condors the same as gambling in the stock market?
·         If you open a randomly chosen iron condor, you are gambling. When choosing a specific iron condor, it is important to pay attention to the underlying asset, the premium collected (i.e., the maximum possible profit), the money at risk (position size and worst possible loss), and your willingness to own a market-neutral position
·         If you open an iron condor, but have an edge -- perhaps the implied volatility is very high, or there is a good reason to believe that the underlying asset will not be too volatile during the lifetime of the options -- then you are not gambling. However, because you must pay commissions to own the investment, you need a significant edge to place the trade.
·         If you open an iron condor based on a stock market prediction -- bullish, bearish, or neutral -- then you are gambling if your proven track record of predicting direction is poor. You are not gambling when you truly have a proven, successful, track record of predicting market direction. A 60/40 profit/loss record -- after commissions -- meets that need.
·         If you open an iron condor because you like to trade iron condors; if you are comfortable when owning such positions; if you have a proven track record of demonstrating the discipline to take action -- when good  risk management requires taking that action -- rather than simply holding the position until the options expire; then you are not gambling.
·         When you refuse to lock in a loss (when necessary to reduce risk), then you are gambling. I urge gamblers not to own iron condor positions, but if you cannot resist, then your only reasonable way to avoid blowing up a trading account is to be very disciplined and trade small position size to limit risk.
·         If you always wait for the options to expire worthless, then you are taking more risk (i.e., gambling) than necessary.
When your goal is to make money as time passes (and that is the proper mindset for iron condor traders) then it is best to enter the trade when you have an edge. For example, when Implied Volatility is high. Better yet, when IV is high and has already started to decline because it is better to miss the IV top than to get in too early
Or when the market has truly been non-volatile and the option premium is high enough to provide an acceptable reward for the risk involved.
The largest edge comes from never having to PANIC. Thus, always assume the worst when initiating the trade. In other words, if the worst happens overnight when there is no opportunity to adjust risk, be certain that you can afford the resulting loss. When an unlucky event occurs, you must never be in a situation where you are too frightened of losing more money because that is when irrational decisions are made. ​

To clarify: You want two things to be true before placing any trade: You have some edge and your potential loss is acceptable. When both of those items are present, then go ahead with the trade.
If there is no edge, there is no point in playing the game. The vast majority of people buy stock because the long-term direction of the market has been up. That is their edge. As a premium-selling option trader, we have to find a different edge.

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