Iron Condors – The Comfort Zone (4 of 8)
The True Risk of Popular Trading Strategies
San Jose Options Mentoring presents the "Comfort Zone" when trading the famous Iron Condor.
Most people focus on the probability being so high on this trade, but is it has high as it appears to be? Watch this series of videos and make your own conclusion.
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One, two, over 2 months is going up. Here, we’re coming down and so on. I think we’re starting to establish something here. Number one, we’re establishing that the condor is very directional. We come over here and basically our comfort zone, it’s very directional. The overall trade, again, 83%, but most of that probability is in the danger zone. It’s an uncomfortable place to be. When we talk about comfort, again, it depends on what you’re looking for. It depends on your style. My trading style is comfort. I’m looking for comfort and safety. Some of you may not care, some of you may be so aggressive, you’re willing to take on all kinds of risks, you don’t care about in through day gap or an overnight gap but I do. A lot of you out there do. A lot of you are looking for the same thing that I am, for comfort, to enjoy your life.
By looking at this, we can establish that the condor comfort zone is very small and it’s very directional, it’s sideways. We come over here, we see the market rarely go sideways. In fact, the market goes down and it goes up far more than it goes sideways. Probably three times, maybe four times as much. What does that tell us now? That tells us that we have a better chance of choosing either down or up than we have of choosing sideways.
How many of you can tell me when the market is going to go sideways? Is that easy to predict? If you look at this chart, it’s harder to predict than down or up because number one: it only goes sideways 25% of the time than it goes up or down and not even that. if we consider, let’s say, we have 26 times. Say 3 times out of about 30 moves, it’s only 10%. Actually, over the last year, this market has only gone sideways about 10% of the time. If something only happens 10% of the time, how often are you going to be accurate in predicting a sideways market when it rarely happens. What does that tell me? That tells me that this condor comfort zone is very rare; it’s a low probability trade. Only 10% of the time the market actually goes sideways. This zone, to begin with is very narrow. This trade here, and again we’re talking about comfort and safety; it’s a very low probability trade.
Let’s talk about something else. We were talking about how the market could go down and up a lot more than it can go sideways than it does. This means that we can actually choose a directional trade much better and more consistently and we’ll actually have more trades throughout the year. Throughout the year, we could have 9 times the trade or ten times as many of these trades if we add up the down trades and the up trades when compared to the sideways trades. We’re really starting to establish some things here. Number one, a condor comfort zone is very low. It’s a very small comfort zone. It’s a low probability comfort zone type of trade. It’s a trade that requires a lot of adjustments. Number two, there aren’t too many opportunities to really have this trade go well during the year because the market really doesn’t go sideways, it goes up or down. And number three, we’ve kind of established that we actually have more trades that would be directional throughout the year. If we simply follow supportive resistance, look how many times we could be right. When we hit resistance up here, when we hit support, it usually goes up. When we hit resistance and oftentimes it goes down…