When we analyze the trading strategy called the Iron Condor, we can see how scalable this strategy actually is. In the end, does it work well for large amounts of capital? This is an important question because if you can't use it safely with big dollar amounts, then you have to ask yourself how much value it provides to master this type of trade in the first place. What's the point?
If you had built up your investment fund to a million dollars would you boldly risk it on a trade of the Iron Condor variety? Yes? Maybe? The cold fact of the matter is that anyone who knows even the basics of options well, would never put a million dollars on a 30-day condor.
Real investors that are doing this seriously are not using $500, they're using $100,000, $200,000, $1,000,000, $20,000,000, $25,000,000... and there's no way you can safely use this type of strategy with any significant amount of money.
Typical iron condors can often look very attractive when you're starting out. They could present "the illusion" of an extremely high probability of profit for a given month. You can typically start off an Iron Condor with a probability of profit of about 80%. So then... why not put a million dollars on a trade with an 80% probability of profit? Why in the world wouldn't you make this trade with a lot of money?
The odds are so good and your chances of losing so low, you'd be a fool not to take such a small risk. Right?
Well, where does this type of trade leave you if the market shifts? What happens if volatility rises 25 points in two days? What happens if you have a flash crash and the market suddenly moves down 10%? You could easily be down about $7200 on your $17,000 investment. Now how do feel about having a lot of capital on the trade?
You might find this surprising but when you divide 7200 by 17 you realize this means a whopping 42% draw down. Maybe now you can appreciate why savvy option traders do not consider this type of trade highly scalable. At any point you're in this trade, at any time and without warning, you can lose 42% of your total investment. And keep in mind we're considering the scenario where this sudden drop occurs on the very first day of the trade. Things can get worse.
What happens if you have a 10% crash after you've already been in the trade for a week or two already? Now you might easily be down $12,000. Worse, if the drop happens on the last couple of days of the trade you stand to lose everything - all of it - 100%. With these kinds of wild risks this whole style of trading is not scalable. It's because of the way these trades are structured that you hear so many frightening stories about option traders having catastrophic losses again and again.
The bottom line is that you are risking 40% at any given moment, for as long as you're in the trade. It would be extremely hard to grow an account very large with this strategy. The more you have, the more you can lose, so eventually... the odds are that you'll lose it all back. You'll wind up getting nowhere after potentially years of hard work.
So now let's consider our question again. Are you willing to put a million dollars on an Iron Condor knowing your ongoing risk is $420,000 (42%) every single day? This is about half of your million dollar stake. Some people take a lifetime, or even two lifetimes, to build up this much capital. Are you going to be comfortable risking it in a single day to market conditions over which you have no control?
If you want to learn more about our unique, proprietary options strategies simply come to our free webinars. Learn something new that's meant for today, not something as out of date as the condor, credit spread, butterfly and calendar spread. These are all very dated strategies. We'll show you why. We'll make you a better option trader.
If you had built up your investment fund to a million dollars would you boldly risk it on a trade of the Iron Condor variety? Yes? Maybe? The cold fact of the matter is that anyone who knows even the basics of options well, would never put a million dollars on a 30-day condor.
Real investors that are doing this seriously are not using $500, they're using $100,000, $200,000, $1,000,000, $20,000,000, $25,000,000... and there's no way you can safely use this type of strategy with any significant amount of money.
Typical iron condors can often look very attractive when you're starting out. They could present "the illusion" of an extremely high probability of profit for a given month. You can typically start off an Iron Condor with a probability of profit of about 80%. So then... why not put a million dollars on a trade with an 80% probability of profit? Why in the world wouldn't you make this trade with a lot of money?
The odds are so good and your chances of losing so low, you'd be a fool not to take such a small risk. Right?
Well, where does this type of trade leave you if the market shifts? What happens if volatility rises 25 points in two days? What happens if you have a flash crash and the market suddenly moves down 10%? You could easily be down about $7200 on your $17,000 investment. Now how do feel about having a lot of capital on the trade?
You might find this surprising but when you divide 7200 by 17 you realize this means a whopping 42% draw down. Maybe now you can appreciate why savvy option traders do not consider this type of trade highly scalable. At any point you're in this trade, at any time and without warning, you can lose 42% of your total investment. And keep in mind we're considering the scenario where this sudden drop occurs on the very first day of the trade. Things can get worse.
What happens if you have a 10% crash after you've already been in the trade for a week or two already? Now you might easily be down $12,000. Worse, if the drop happens on the last couple of days of the trade you stand to lose everything - all of it - 100%. With these kinds of wild risks this whole style of trading is not scalable. It's because of the way these trades are structured that you hear so many frightening stories about option traders having catastrophic losses again and again.
The bottom line is that you are risking 40% at any given moment, for as long as you're in the trade. It would be extremely hard to grow an account very large with this strategy. The more you have, the more you can lose, so eventually... the odds are that you'll lose it all back. You'll wind up getting nowhere after potentially years of hard work.
So now let's consider our question again. Are you willing to put a million dollars on an Iron Condor knowing your ongoing risk is $420,000 (42%) every single day? This is about half of your million dollar stake. Some people take a lifetime, or even two lifetimes, to build up this much capital. Are you going to be comfortable risking it in a single day to market conditions over which you have no control?
If you want to learn more about our unique, proprietary options strategies simply come to our free webinars. Learn something new that's meant for today, not something as out of date as the condor, credit spread, butterfly and calendar spread. These are all very dated strategies. We'll show you why. We'll make you a better option trader.
About the Author:
Live discussions explain and clarify the patent-pending option trading strategies we developed and teach exclusively at San Jose Options Mentoring.
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