Iron Condors – The Comfort Zone (2 of 8)

San Jose Options presents Iron Condors - The Comfort Zone
What happens to your "Comfort Zone" when trading the famous Iron Condor. Most people focus on the probability being so high on this trade, but is it as high as it appears to be? Watch this series of videos and make your own conclusion.

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Iron Condors   The Comfort Zone 2 of 8

Video Transcript

This controller is up here. We can change this to 2. Notice how 2 goes way beyond this trade. Even though this shows an 83% probability, look what a 2-standard deviation trade move does to this trade. If it expired here, you would lose 12,000. If it expired over here, you would lose your full investment. I consider it to be a 100%. You lose a 100% on that trade.

Some people would say, “No, it’s only 95% or so because you’re bringing in 10.” But the truth is, your full investment is lost, so to me it’s 100% loss. If you move 2 standard deviations, forget about 3. If you have a month where you move 3 standard deviations, you’re losing 100% either direction. Over here you would expire down here. Over here you would expire over here. Even though one standard deviation looks alright, how often does the market just stay within one standard deviation? So that’s whole another discussion and back test and you’d really have to just go and look at the price charts and take a look yourself.

I know from my experience that the market oftentimes moves 10%, 20% in a month. Let’s reset these slices. Ten percent brings you here, 20% brings you again 100% loss; ten percent here, 20%, again 100% loss on this trade. We’re not talking about doing any adjustments; we’re just talking about the risk in the trade from the beginning because to me, this is what option comes down to. It’s your initial trade; it’s not all the adjustments. You’ll try for years to figure out how to adjust this trade and make it a winner every time but I’m telling you now, the secret is not your adjustments. The secret’s to get this adjusted before you put it on. In other words, don’t do this trade: that’s the secret.

Let’s continue. Let’s consider something else, this 83%, what’s included in this? Eighty-three percent probability, what’s included? You know what you’re including in this? You’re including this whole area, which is extremely high risk. Once you’re here, let’s move the price there, 730. Look, once you’re in this zone, basically, you’re looking at 50% probability that you’ll lose everything or 50% probability that you make 10%. Over here, you have 100% loss; over here, you can make 10%. That’s what’s included in that original probability. You have this 83% probability but a huge part of that probability is being in a zone with tremendous risk, same with this side.

When I look at these trades, and when I look at any trade, I don’t just look at this number. What I look at is the comfort zone. What is the comfort zone on this? Probably, somewhere around here. If I’m in this zone on this trade, then I feel pretty comfortable. However, once I get over here, this becomes uncomfortable because if the market gaps, if the Russell gaps 20 points from there, now I’m in unhappy land. I start to take on too much risk on this trade. This is even starting to get uncomfortable. If we look at this trade and we really consider the comfort zone, look at the probability. There’s only about a 30-40% probability that you’d be comfortable on this trade and this is one thing, I think, most option traders miss or they don’t care. Like in the previous video, I was saying that you need to decide what kind of option trader you want to be. If you want to be the high risk type that has to stare at your computer screen every day, then that’s one style. But if you want to be…