Iron Condor – The Comfort Zone (6 of 8)
San Jose Options presents Iron Condors - The Comfort Zone
The Iron Condor is a very popular options strategy today. It's known for its high probability, but everyone knows that the risk to reward on this trade is highly unfavorable.
One thing that is not pointed out is that although this trade appears to have a high probability, it is also coupled with extreme risk and high stress.
When we look at the "Comfort Zone" and safety range, we see that this only covers about 35 to 40% of the probability range.
We also take a look at Butterfly Spreads and Calendars. All three of these popular income strategies share a similar "Comfort Zone."
Although the Traditional Iron Condor appears to be a high probability trade with low risk, we believe it's not the trade it appears to be. In today's fast-paced market, it's a very risky trade that exposes your portfolio to great risk.
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…that would be something like this. But now that I’m a trader levels beyond this, why would I do this? I would never go back to this type of trade. There’s no reason for it, not right now. Again, if something happens to the market and it becomes steady, slow, they change the loss that the market can’t gap, for example, or they don’t allow in through day gaps, like that flash crash of May 6th. If those losses are changed, then these traditional strategies, these at the money, low prob trades, you know, they’ll probably work again. But right now, people using these are losing a lot. Not only a lot of money but they’re losing their life ‘cause they don’t have that comfort zone. They can’t live in the comfort zone. I’m going to finish this with a story; a very true story. I’m not going to put in any names and I’m going to leave out some details but let me tell you this story.
On May 5th, this trader calls me up and he was investing 2 million dollars. Guess what kind of trade he had one: one of these. He had one of these trades on that he learned from a place I’m not even going to mention. Two million dollars, so that would be, let’s see, this one here’s 18,000, so you probably have to do what cost to like a thousand of these, that’s somewhere near that trade actually was a little bit more. It was probably ‘cause the vega position on his trade was actually higher. Something like this. This is very similar. This is a true story, it’s crazy. This trader calls up and he quickly tells me that he has this 2 million dollar position on a trade and it was a condor which he learned in a place I’m not even going to mention. And this was May 5th. Somebody responded to one of the previous videos that I have put up and they were saying, “Oh, you can enter into condors. It’s a safe trade. All you have to do is enter them when you have a volatility spike and then when the vols drop, you make money and it’s so easy and all this.” But that’s exactly why there’s people out there doing this crazy, risky trade: because there’s too many people out there on the internet promoting it saying you just have to watch your vega, your delta, your gamma, all this. But the thing is, when there’s an in through day gap, when there’s an overnight gap, if you don’t have this thought out and you don’t have any type of plan, protection, hedge, when you have this crazy, risky trade here with the 30% comfort zone, you have problems; serious problems. I was talking to this potential student and it got so high ‘til they change something. 40,000. In his vega position was -40,000 and I told him, I said, “You have an extremely unbalanced vega position.” I looked at his trade. I said he has -40,000. So I said, “If the volatility rises, then this trade is going to lose a lot of money.” At that time, volatility was down by support. There is a [MattDy] divergence forming, vols weren’t dropping any more. So there was a good chance volatility could rise. In fact, in March, I told all the students, I said…