“Trading With Iron Condors”

In the course of my study this morning I came across an interesting article on Iron Condors. For those new to this strategy, the general idea is that you’re selling OTM call and put strikes above and below the current price and using a portion of that premium to purchase options just farther OTM. The idea is to set the trade up so that you captialize if the stock stays in a defined range. In an article I found on ezines the author attempts to outline some rules for trading iron’s. In the figure below you’ll see a P/L graph of an iron condor.

Generic Profit/loss graph for a Condor

Image via Wikipedia

http://ezinearticles.com/?Trading-With-Iron-Condor-Options&id=3975725<br%20/%20rel=

Here are a couple points that I wanted to address:

  1. Volatility is below 40%–I don’t understand this concept. For one thing, iron condors benefit by declining implied volatlity. If you perceive that volatility is high, why not attempt to capitalize on the extreme range you can set for your iron condor. On November 20, 2008 the VIX was at over 80% and a Dec 57/58/90/91 Iron condor could have been sold for a $0.35 credit with only $0.65 of risk and approximately a 65% probability of success. This seems like a good bet with implied volatility likely unable to maitain that level. There shouldn’t be anything wrong with trying to capitalize on high volatility if your outlook is for it to fall. In recent months iron condors have struggled more with volatility around 20% and an uptrending market.
  2. Credit of $0.50 or greater ($0.70 would be ideal)--What does this really mean? Just so you know, iron condors credits are all based on the potential for the options sold to move ITM at expiration and the potential for max loss based on the strikes purchased. A $0.70 credit on a $1 spread iron condor spread would approximate a 30% probability of making money. A $0.70 credit on a $5 spread iron condor would imply approximately an 86% probability of success. If you’re trading a stock like SPY you can select how much premium you want to collect and the resulting probability. There isn’t anything magical about a stock yielding a certain size credit. Given  a suffuciently large strike price offering you can pick your credit at any volatility level at any time.

I’m not sure why the author would publish an article like this. Either he’s trying to cofuse people into buying his product or knows very little about iron condor trading. I’ll let you be the judge.

Reblog this post [with Zemanta]