The traditional Iron Condor strategy contains some major weakness. If you don't know about them they may cost you some significant losses. The structure of the trade has an architecture that makes adjustments costly. If you're familiar with Think or Swim or similar tools then imagine the expiration Profit and Loss graph in the discussion of adjustments that follows.
Keep the idea in mind that every adjustment you make "lowers the bar", the maximum potential gain you can make, until you eventually reach a point where the most money you can possibly make on a given Iron Condor becomes zero.
When Condors Behave like Wild Birds
Today's market tends to seesaw back and forth. Traditional strategies like the Iron Condor were not designed for these recurring market swings. These traditional trades perform best when you just put them on and let them go, preferably without adjusting them at all. They require, however, that the market doesn't move in either direction in order for you to reliably turn a profit.
Once the market starts to move, these traditional strategies require adjustments that actually lock in losses. Most trades that we do throughout the year require adjustments, so these traditional trades are chronically problematic. This type of trade consistently locks in losses as you go through the month.
A Typical Story Illustrates the Pattern
I spoke with a gentleman just the other day who explained with sharp intensity how he worked his behind off all month long, doing hundreds of trades. Back and forth and back and forth he made repeated adjustments. Then at the end of the month he added up his P&L to find that he had made $25.
It's because of the way these trades are designed. Each time you make an adjustment you reduce the maximum amount you can make on the trade. The more adjustments you make the lower the bar gets. The typical trader keeps making adjustments without fully realizing this. You may seem to be adjusting very well but you're still "lowering the bar" on how much you can ultimately make on the trade.
Think about what happens when you're in a typical Iron Condor. When a couple of days go by and the Russell suddenly drops 20 points, you're instantly behind on your trade. And your Delta begins to become unbalanced.
So a common adjustment would be to start peeling off some of the Put side of the trade and now it becomes an unbalanced Condor. As the Russell continues to move down, volatility increases. The original price will often be lower than the current cost which is higher.
If it costs a dollar more than when you sold it then you're buying it back at a higher price. This is what I mean when I say you're locking in losses. The more you do this, naturally, the lower your maximum potential profit becomes. You might start a trade at $2640, for example, and after one adjustment the most you can possibly make might be $2000.
One little adjustment and your maximum profit drops $640 just like that. And the more you keep adjusting, the more the profit line at expiration goes down...
Maybe now you can see how these trades are out of date. They might have worked well in the past in a highly stable market. Today's market, though, moves pretty radically and in these conditions, condors are simply too risky. Remember the flash crash, lots of unpredictable fluctuations up and down, things going on behind the scenes we don't know about, and on and on. The type of trade that's designed to make a profit when the market does not move, is not a trade that you want to be in today.
Come to our free webinars and learn something new, not something that's as out of date as the condor, the credit spread, the butterfly, and the calendar spread. These are all very dated strategies. In the San Jose Options course you learn a completely new way to think about options and how to trade in today's market. You actually learn how to "raise the bar" on all of your trades instead of locking in losses like the ordinary option trader does.
Keep the idea in mind that every adjustment you make "lowers the bar", the maximum potential gain you can make, until you eventually reach a point where the most money you can possibly make on a given Iron Condor becomes zero.
When Condors Behave like Wild Birds
Today's market tends to seesaw back and forth. Traditional strategies like the Iron Condor were not designed for these recurring market swings. These traditional trades perform best when you just put them on and let them go, preferably without adjusting them at all. They require, however, that the market doesn't move in either direction in order for you to reliably turn a profit.
Once the market starts to move, these traditional strategies require adjustments that actually lock in losses. Most trades that we do throughout the year require adjustments, so these traditional trades are chronically problematic. This type of trade consistently locks in losses as you go through the month.
A Typical Story Illustrates the Pattern
I spoke with a gentleman just the other day who explained with sharp intensity how he worked his behind off all month long, doing hundreds of trades. Back and forth and back and forth he made repeated adjustments. Then at the end of the month he added up his P&L to find that he had made $25.
It's because of the way these trades are designed. Each time you make an adjustment you reduce the maximum amount you can make on the trade. The more adjustments you make the lower the bar gets. The typical trader keeps making adjustments without fully realizing this. You may seem to be adjusting very well but you're still "lowering the bar" on how much you can ultimately make on the trade.
Think about what happens when you're in a typical Iron Condor. When a couple of days go by and the Russell suddenly drops 20 points, you're instantly behind on your trade. And your Delta begins to become unbalanced.
So a common adjustment would be to start peeling off some of the Put side of the trade and now it becomes an unbalanced Condor. As the Russell continues to move down, volatility increases. The original price will often be lower than the current cost which is higher.
If it costs a dollar more than when you sold it then you're buying it back at a higher price. This is what I mean when I say you're locking in losses. The more you do this, naturally, the lower your maximum potential profit becomes. You might start a trade at $2640, for example, and after one adjustment the most you can possibly make might be $2000.
One little adjustment and your maximum profit drops $640 just like that. And the more you keep adjusting, the more the profit line at expiration goes down...
Maybe now you can see how these trades are out of date. They might have worked well in the past in a highly stable market. Today's market, though, moves pretty radically and in these conditions, condors are simply too risky. Remember the flash crash, lots of unpredictable fluctuations up and down, things going on behind the scenes we don't know about, and on and on. The type of trade that's designed to make a profit when the market does not move, is not a trade that you want to be in today.
Come to our free webinars and learn something new, not something that's as out of date as the condor, the credit spread, the butterfly, and the calendar spread. These are all very dated strategies. In the San Jose Options course you learn a completely new way to think about options and how to trade in today's market. You actually learn how to "raise the bar" on all of your trades instead of locking in losses like the ordinary option trader does.
About the Author:
San Jose Options has created and effectively delivers the best Options Mentoring Course we know of anywhere in the world. Our customer service, option strategies and support are unmatched.
