11/24/2019 Iron Condor vs Steady Condor | How We Trade Options

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By Jesse
Performance based on real
June 17, 2016 iron condor steady condors
fills

Iron Condor is a very popular strategy used by many options traders. It

can perform very well many months, but the real question is: how TRY IT FREE
much will you lose when the market volatility explodes? Many condor
traders give back all of their profits during the 2-3 losing months each Non-directional Options
Strategies
year when the markets make large moves because they lack a
detailed plan for risk management. 10-15 trade Ideas Per Month

Targets 5-7% Monthly Net

Why Steady Condors is different? Return

Visit our Education Center

Can you make 10% per month with Iron Condors? Yes, you can - but
this is a wrong question to ask. The right question is how much you
Recent Articles
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11/24/2019 Iron Condor vs Steady Condor | How We Trade Options

lose when the market goes against you?

Using ORATS in Anchor
Steady Condors at its core is managed by the Greeks but mostly Testing
resembles a variation of iron condors. Anyone who has traded more Calculating the Probability of
than a handful of non-directional iron condors knows they can be Option Payoff
extremely challenging in a trending market potentially causing a lot of
Realistic Expectations: Using
stress, large drawdowns, and significant losses. History as A Guide

CAPM As an Alternative
Our manage by the Greeks philosophy is designed to take advantage
Option Pricing Model
of the volatility skew that naturally exists in index options like RUT and
SPX and to deal with the inherent flaws this creates for traditional Option Payoff Probability
condors. We all know that the market “takes the stairs up and the The Minimum Effective Dose
elevator down” and this is built into index options pricing. For condors (MED) For Cash Flow
this means that you will be able to sell much farther OTM puts than Planning
calls for the equivalent premium. This causes a traditional iron condor Are You Breaking Even? Or
to naturally set up short Delta (bearish). If the market makes a move Losing?
up after trade launch you will start to lose money immediately even
Buy When You Have the
with declining implied volatility typically helping your short Vega Money, Sell When You Need
position. the Money

Strategy Selection vs. Risk

August 2011 Case Study Management

Blending Anchor Strategy

We certainly saw plenty of upside in the recent years. But as we all
know, the market tends to take the stairs up and the elevator down.
Steady Condors is short Vega, and I thought it would be a good
example to show the backtested example of the Steady Condors trade
during the August 2011 correction/crash.

The trade began like normal on July 6, 2011. 44 DTE. Note that RUT
was at 844.

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No adjustments were necessary until 8 days into the trade when RUT
was at 832. Interesting though was RUT had first moved up to nearly
860 before starting its descent. The short leg of the put debit spread
was rolled down 20 points. Business as usual.

On July 18, 32 DTE and 12 DIT, another debit spread was added (one
other had also been added a few days prior) and the call credit spreads
were taken off for 20 cents. RUT at 816, down about 1 standard
deviation since entering the trade. Being down 1 standard deviation in
12 days isn't necessarily concerning, but RUT has declined over 40

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points from it's high. PnL is in good shape, up about 1%.

On July 27, 21 DIT, RUT is at 806 and another debit spread is added
(rolling down the 800 short to 780). At this point the move down is
still reasonable (around 1 standard deviation after 21 days). PnL is in
good shape up about 2% at this point. The debit spread adjustments
are causing the trade to look more like a bearish butterfly than a
condor. No additional long puts have been necessary yet at this point.

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Skipping ahead to Aug 2, 27 DIT and 17 DTE, RUT is now at 783. A

few more debit spreads have been added at this point. The idea is to
simply keep managing position delta as RUT moves further down. PnL
is in great shape, closing in on target profit, up close to 4%. In
situations like this I will consider going for more profit because it's
possible to make significantly higher returns when the trade finishes
under the "wing". One or two months per year we can usually get 5%+
out of the MIC.

Later in the day on Aug 2 position delta reached the adjustment target
again so at this point a long put was added. Rational for the long put
(compared to yet another debit spread) was as follows...1. There is
more than enough potential profit and theta in the trade 2. This was
the second adjustment in the same day with the daily move over 1.5 SD
3. RUT has moved down 66 points since trade launch and 82 points
since the high. 4. The short leg of the put credit spreads are now
carrying a delta of 30 increasing the short gamma of the position.

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One day later on Aug 3 another long put was needed. It would
certainly be reasonable to take profits at this point, the key is to keep
the t+0 line as flat as possible while maintaining as much theta as
possible. Note how flat the t+0 line is, and also how it curves up if a
serious crash would occur. Translation: minimal fear of additional
downside.

One day later on Aug 4 with RUT at 752 the trade was taken
off for target profit of 5% and because RUT touched the short put
strike, and theta was now negative. IV had increased 56% in the 29 DIT

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and the total move represented over 2 standard deviations. Max

margin at the beginning of the trade was just over $26,000, and by the
end of the trade margin was down to less than $17,000.

Just to show the power of risk management, the next picture is the
original trade with no adjustments. Although the setup is important,
it's the adjustments that make the difference. Without them, the trade
would have been down 22% at the point it was taken off for target
profit.

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One last interesting point...On Monday Aug 8 RUT closed down 64

points at 650. If you wouldn't have taken the trade off on the 4th the
trade would actually have been up 67% at the end of the day on the 8th.

Frankly I'm not familiar with another variation of Iron Condor that can
actually make a gain after the index declines by 11%+.

Note: our current setup is slightly different, but the general principle is
very similar.

Related articles:

Steady Condors 2015 Report: 46.7% Return

Should You Leg Into Iron Condor?
Exiting An Iron Condor Trade
Iron Condor Adjustments: How And When
Iron Condor Adjustment: Can I "Roll" It Forever?
Why Iron Condors Are NOT An ATM Machine
Can You Really Make 10% Per Month With Iron Condors?
Is Your Iron Condor Really Protected?

Want to learn more?

 
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5 Comments

Guest Jay 
Posted June 25, 2017

I am an experienced option trader FWIW.. I went through the Iron Condor 2011 case study with
the PNL at the end showing -2700 while you talk of a 5% return. Can you explain?

greenspan76  219 
Posted June 25, 2017

 On 6/25/2017 at 7:49 AM, Guest Jay said: 

I am an experienced option trader FWIW.. I went through the Iron Condor 2011 case study
with the PNL at the end showing -2700 while you talk of a 5% return. Can you explain?

This one threw me for a loop when I first saw it, too. The full details of the trade are not
explained. The graphs are showing the realized losses, but not the unrealized gains, so you can't
tell what the actual cumulative gain is until the end when the author explains that they hit their 5%
profit target on $26k margin. So, there was obviously a $4k unrealized gain just before they
closed, which when added to the $2,700 realized loss, became an overall gain of $1,300 (5% of
$26k).

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greenspan76  219 
Posted June 25, 2017

 On 6/25/2017 at 1:59 PM, Kim said: 

Actually ONE software shows total P/L, realized and unrealized. The case study was done
by @Jesse , I asked him to comment. But making adjustments at different time of the day
when the market is moving fast can make a big difference.

Ah, well I guess I'm still thrown for a loop then. Thanks for the info.

Jesse  260 
Posted June 26, 2017

@greenspan76 , The last image you are referring to is showing -2700 of realized PnL at that
point, but +17,608 of total PnL if the trade were completely closed at that point. The total trade
PnL is the important number.

The reason a positive trade PnL like this can happen is simply from being net long puts (meaning
larger total quantity of long puts than shot puts). If you simulate a trade like this, you'll see the
upward sloping smile on the left side of the graph in the event of a large move down and increase
in IV. Those very small puts bought as a cheap hedge at launch and at adjustment points start to
significantly expand in premium, flattening out the risk of the trade.

Kim  4,171 
Posted June 26, 2017

Thank you @Jesse

I just realized the source of the confusion.

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The -2700 number on the left upper corner shows realized P/L. But the number on the central
column on the bottom shows $1,377 which is the total P/L (realized and unrealized), and this the
final P/L number after the trade is closed.

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