This site makes extensive use of JavaScript.
Please enable JavaScript in your browser.
Live
PTR
10.2.7
PTR
10.2.6
Beta
Why wouldn't someone investing constantly use iron condors?
Post Reply
Return to board index
Post by
TheMediator
So, I'm in a derivatives class, and we're learning about some strategies, and I put some strategies together to form what is IMO an "uber" strategy... and it already exists and is well known in the form of the "iron condor". My question is, why don't people constantly use this strategy? Is it just because people like gambling? It seems like a legitimate strategy to make a fairly consistent profit on your money while immunizing yourself against potentially heavy losses when there are huge shocks to the market.
Anyone knowledge about the stock market know why? Or am I better off just going to my professor sometime this week and talking to him about strategies?
Post by
variable303
A quick google search yielded the following:
Disadvantages
1. Two Ways to Lose Instead of One. Because you're betting that a stock won't breach a specific trading level in either direction, you have essentially doubled the ways in which you can lose money.
2. Big Potential Losses. While your maximum potential gains on a ROI basis can be very lucrative, your maximum potential losses on a ROI basis can be much larger. If the stock makes a large, unexpected move in either direction, you will most likely sustain significant losses of the capital at risk.
3. Invites Over Leveraging. Because the required capital to set up a single iron condor is so little (the difference between the strike prices within either the bull put or bear call spread multiplied by 100 less the net premium received), and because that number won't change throughout the holding period, it's very easy to set up more iron condor positions than may be prudent.
Conclusion:
Iron condors can produce some tremendous rates of return. But they are definitely not without risk. Investors are advised to conduct additional and thorough research and consider all the risks involved before employing this strategy.
Post by
TheMediator
Two ways to lose instead of one is really just semantics. What is more relevant is the probability of such an outcome.
The other two are essentially the same issue, because it is such a good strategy you would want to go all in, and SOMETIMES you can lose your money in that position and if you went all in you're SOL.
Anyways, I intend to use some simulations before putting real money down on this situation.
Post by
Squishalot
Hey Mediator, just saw the topic and thought I'd drop in, in case you're still reading.
The problem with the 'iron condor', aka 'butterfly spread', aka <insert other name here> is that you're betting on a stock having low volatility. That's not always a wise choice. If anything, I would rather take half of that by selling a collar instead, giving me low volatility profits but leaving open high downside volatility profit as well. (It's a fairly well-established fact that across the market, companies have greater downside volatility than upside volatility).
The main reason why it's not an uber-trading strategy is the fact that high volatility events occur with reasonable frequency. You can extend out the breakeven points to enhance your protection, but in doing so, you'll cut so much profit out of your trade that it's just a waste of time.
The other reason is that while they work in theory, there often aren't precisely the right derivatives available in the market to trade for stock X. Assuming that you're using European options (i.e. call on maturity), you need to hope that you can find the appropriate types with fairly similar maturity dates. If you're using American options, it'll be too expensive to set up.
Post by
TheMediator
Yeah, I used stocktrak to run this strategy, and you're right that high volatility is way too common. The strategy ended making money in the simulation, but it was too stressful sitting in class thinking about whether or not the stock price would change, even if it was just play money. Also, you're right about downside volatility being more common than upside volatility I noticed. It seems like once the price starts dropping, people get scared and start selling, causing greater losses than should otherwise occur. I blame instant computerized transactions. Ah well, that's why I tried it out first.
Post by
Squishalot
Good on you for trying it out first. I know exactly what you mean about it being stressful thinking about play money, lol.
It's not really a case that computerised transactions create downside volatility. Although stop-loss has a part to deal with it, the primary reason is that bad news is generally unexpected, whereas good news is more commonly anticipated. As a result, good news (e.g. profit growth of x%) will already be priced into the stock value, whereas bad news is more likely to be a shock to the market.
That, and across the market, companies grow steadily, but they suddenly implode.
Did you want to try to set up the collar trading strategy in stocktrak instead? It should be pretty easy to keep tracking.
Post by
Hyperspacerebel
Wow, a thread that went completely the !@#$ over my head. That's a first, I think.
Post by
Squishalot
Wow, a thread that went completely the !@#$ over my head. That's a first, I think.
That's got to be worth at least a Silver Achievement.....
Edit: It does explain why only three people replied to Mediator though - with the only other person resorting to reporting on Google search results....
Post by
148723
This post was from a user who has deleted their account.
Post by
Hyperspacerebel
I read part of the title as "iron condoms" and thought immediately that it was some type of Elaus thread.
Don't mention condoms to Squishy with me around =D
Post by
148723
This post was from a user who has deleted their account.
Post by
TheMediator
Did you want to try to set up the collar trading strategy in stocktrak instead? It should be pretty easy to keep tracking.
I might end up trying that out. Been studying the last couple of days for the FM and passed it today (yay!) so I should have some more time to mess around with stocktrak again.
Post by
Squishalot
Sounds like a plan. And congrats! (though I'm not sure what the FM is...)
Post by
TheMediator
It is an actuarial science exam. Never mind.
Post by
Squishalot
Ah, financial mathematics? I remember doing that, and wondering why straight finance grads didn't understand half the stuff we were taught.
Post Reply
You are not logged in. Please
log in
to post a reply or
register
if you don't already have an account.