Iron Condor Explained by San Jose Options
Iron Condor Explained
In this excerpt from our options mentoring course, Morris gives us some insight on understanding the risk of the Iron Condor.
Morris is the founder of San Jose Options.
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...daily PNL kind of tracks to the downside and to the upside. This is your immediate risk graph where the picture in the back here is your expiration curve. The trade gravitates towards the expiration, which could give me maybe 10% if everything goes well over the month. But as we already discussed, as the market comes this way, the trade can have some drawdown and as it goes this way as well. It’s kind of this struggle to stay within this narrow parameter which is about 40% wide, which we talked about. We want to stay within this narrow zone for as long as we can and hopefully not make any adjustments and not lower the bar and lock in the loss.
However, we have to acknowledge that the trade does have that directional risk. With the narrow condor, the low prob one is going to have the same type of problem. One reason why some people may try to gravitate, I’ll draw a little picture over here, to the more narrow style is ‘cause you can get more credit. Let’s say you’ll bring in 20 or 30%, just say 25, instead of the 10. But now you have a more narrow body and you still have similar problem.
But another potential pro to this style over here is maybe it’ll have a little bit less sensitivity to the vega because your strikes aren’t so far out of the money where you’re going to have a little bit of a stronger concentration of the negative vega on this right side, on the high prob one, where this one, the vega could be a little bit more stable. You’re making the trade extremely narrow on this one. I mean, there’s pros and cons to both of these type of trades but they both have the same type of frown which is caused by the negative gamma in the trade.
Let’s bring in a real one so we can look instead of looking at my silly drawings. We were looking at this one earlier and then here’s the picture of it. As we go this direction, again, you can see and this is just with what, 10 contracts. Like, if I get here I’m down $1,100. You could see that both in the middle row on this side, as you follow the mouse around, you can watch here or you can actually watch in the left, whatever color you like better, I suppose. If I get…