Iron Condor – The Comfort Zone (5 of 8)
San Jose Options Presents another way to look at the probability of the Iron Condor. Should we really consider the high probability on this trade? What about the danger zone?
This trade might be riskier than we think.
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One, two, three, four, there’s four successful trader right there; one, two, three, four, four successful bullish trades; another successful bullish trade, another one in here, some more bearish trades and so on. by using supportive resistance and perhaps the McDean Divergence or whatever your favorite indicators are, you can absolutely have more trades that are more directional as well as a higher probability of success.
This is a very interesting topic because this doesn’t just relate to condors. This relates to calendars, at the money, butterflies and so on. You just get a different shape. Let’s bring in butterfly. I’ll go to at the money, here’s a 650. I used a 660, reset everything. Since it’s very narrow let’s spread it out a little bit. Here is an at the money butterfly. We have a similar type of trade where we can lose on this side, we can lose on this side. You can see that the market just moves about 6-7%. Again, we’re not talking about adjustments, we’re just talking about putting the trade on and this initial risk that’s embedded into the trade. We can see, this one here, take a look at our breakevens, is only 25-26% wide. Anywhere between here, cool. This trade, where does it get uncomfortable? Perhaps, somewhere like this. It’s really kind of similar, maybe even wider than the condor actually. Look at it. I can probably in this trade and handle this. That’s a pretty big draw down, the $1,000 on six. That’s a huge draw down. But maybe a 10% draw down. We can accept that. So where would that be? Actually, it’s pretty similar.
Once again, we have another trade with a comfort zone of somewhere around 30%. It’s really not too different than the condor is, as far as the comfort zone goes. This one, you can see the comfort zone is slightly shifted to the downside. Let’s look at a calendar spread. Calendars would be a whole another class but extremely a powerful trade. That’s what a lot of people don’t understand. Let’s just use something like this investment here, it’s 8,000. Let’s use these 10% marks. And even 10%, I hate a 10% loss. I don’t even go there anymore but let’s look at this one here making about 10%. There you go, about the same probability.
All of these traditional option strategies have something in common. Basically, they all have a comfort zone of about 35-36%. What if I told you that I could create a trade with a comfort zone of about 85%? What would you say to that? it would change your life. That’s what we do in our course. All of these traditional strategies, again you’re looking at your comfort zone, your safety zone is really about 35-36% and to me, it’s not worth it. I could never put in any substantial amount of money in this type of trade. As a matter of fact, if I only have $500, I wouldn’t put it into this type of trade, not knowing what I know now. Sure, before when I didn’t know safer strategies, when I didn’t have the comfort zone of like 85%...