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.
In short, each adjustment you make reduces the maximum profit you can potentially make from the trade. It "lowers the bar". You can easily reach a point where you can't make any money on the trade at all.
The Behavior of the Wild Condor
Traditional strategies like the Iron Condor are designed in such a way that they can't handle a market that seesaws back and forth. These traditional trades are designed to perform best if you just put them on and let them go. To reliably turn a profit, however, they require that the market doesn't move in either direction.
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.
Patterns of Trading Tend to Repeat Themselves
I hear lots of stories very similar to the one I heard just the other day from a trader who explained to me how he worked and worked his trades all month long, doing dozens of adjustments across hundreds of trades. He made repeated necessary adjustments as the market moved back and forth, back and forth. When he added up his P&L at the end of the month he realized he had made a total of $25.
You wind up reducing the maximum amount you can make on these trades every time you make an adjustment. The more adjustments you make the less you stand to gain. Many traders continue making adjustments without realizing the full implications. Because of the way these trades were initially designed, while you may seem to be making essential adjustments, you're still "lowering the bar" on how much you potentially stand to make on the trade.
If you're in a traditional Iron Condor and a few days go by, the Russell could suddenly drop down 20 points. If this happens, then in an instant you're behind on the trade and your Delta is becoming unbalanced. Plus, volatility increases as the Russell continues to drop down.
A common adjustment in this situation would be to start peeling off some of the Put side of the trade, thereby creating an unbalanced Condor. Then volatility increases as the Russell continues to move down. The current cost will often be higher than the original selling price.
So let's say it costs a dollar more. You sold it for one price and you're buying it back for a higher price. You're locking in losses. When you do that, your maximum potential profit starts to go down. In a typical trade it may start at 2640, and after you do a single adjustment the most you can make is 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.
In short, each adjustment you make reduces the maximum profit you can potentially make from the trade. It "lowers the bar". You can easily reach a point where you can't make any money on the trade at all.
The Behavior of the Wild Condor
Traditional strategies like the Iron Condor are designed in such a way that they can't handle a market that seesaws back and forth. These traditional trades are designed to perform best if you just put them on and let them go. To reliably turn a profit, however, they require that the market doesn't move in either direction.
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.
Patterns of Trading Tend to Repeat Themselves
I hear lots of stories very similar to the one I heard just the other day from a trader who explained to me how he worked and worked his trades all month long, doing dozens of adjustments across hundreds of trades. He made repeated necessary adjustments as the market moved back and forth, back and forth. When he added up his P&L at the end of the month he realized he had made a total of $25.
You wind up reducing the maximum amount you can make on these trades every time you make an adjustment. The more adjustments you make the less you stand to gain. Many traders continue making adjustments without realizing the full implications. Because of the way these trades were initially designed, while you may seem to be making essential adjustments, you're still "lowering the bar" on how much you potentially stand to make on the trade.
If you're in a traditional Iron Condor and a few days go by, the Russell could suddenly drop down 20 points. If this happens, then in an instant you're behind on the trade and your Delta is becoming unbalanced. Plus, volatility increases as the Russell continues to drop down.
A common adjustment in this situation would be to start peeling off some of the Put side of the trade, thereby creating an unbalanced Condor. Then volatility increases as the Russell continues to move down. The current cost will often be higher than the original selling price.
So let's say it costs a dollar more. You sold it for one price and you're buying it back for a higher price. You're locking in losses. When you do that, your maximum potential profit starts to go down. In a typical trade it may start at 2640, and after you do a single adjustment the most you can make is 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.
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