When we analyze the trading strategy called the Iron Condor, we can see how scalable this strategy actually is. In the end, does it work well for large amounts of capital? This is an important question because if you can't use it safely with big dollar amounts, then you have to ask yourself how much value it provides to master this type of trade in the first place. What's the point?
So ask yourself this question. Would you put a million dollars on an Iron Condor? Would you feel reasonably safe and comfortable doing it? If you answered yes, then you must read the rest of this article because I want to open your eyes to a couple of things that you'll happy to find out. Those who know a lot about options trading would not put a million dollars on a 30-day condor. The same can be said, by the way, for a 30-day credit spread.
Major league investors who trade $1,000,000 to $25,000,000 would not put their money on a traditional trade like this. They couldn't do it safely using this type of strategy. They simply wouldn't do it and here's why.
Typical iron condors can often look very attractive when you're starting out. They could present "the illusion" of an extremely high probability of profit for a given month. You can typically start off an Iron Condor with a probability of profit of about 80%. So then... why not put a million dollars on a trade with an 80% probability of profit? Why in the world wouldn't you make this trade with a lot of money?
How could you possibly lose?
Well, where does this type of trade leave you if the market shifts? What happens if volatility rises 25 points in two days? What happens if you have a flash crash and the market suddenly moves down 10%? You could easily be down about $7200 on your $17,000 investment. Now how do feel about having a lot of capital on the trade?
Well, this is exactly the type of thing that happens to many options traders. That's why this type of trading doesn't scale up well. Let's see, 7200 divided by 17 gives us a draw down of 42%. So during any point in this trade, this means can lose 42% fast, in one day. And this is not the worst case scenario. You can lose $7200 if the drop happens on day one of the trade.
What happens if you have a 10% crash after you've already been in the trade for a week or two already? Now you might easily be down $12,000. Worse, if the drop happens on the last couple of days of the trade you stand to lose everything - all of it - 100%. With these kinds of wild risks this whole style of trading is not scalable. It's because of the way these trades are structured that you hear so many frightening stories about option traders having catastrophic losses again and again.
The bottom line is that you are risking 40% at any given moment, for as long as you're in the trade. It would be extremely hard to grow an account very large with this strategy. The more you have, the more you can lose, so eventually... the odds are that you'll lose it all back. You'll wind up getting nowhere after potentially years of hard work.
Are you going to put a million dollars on an Iron Condor and risk $420,000 (42%) in one day? That's half of your million dollars. For some people it takes a lifetime, or two lifetimes, to build up a million dollars. Are you really going to risk it in one day?
If you want to learn more about our unique, proprietary options strategies simply come to our free webinars. Learn something new that's meant for today, not something as out of date as the condor, credit spread, butterfly and calendar spread. These are all very dated strategies. We'll show you why. We'll make you a better option trader.
So ask yourself this question. Would you put a million dollars on an Iron Condor? Would you feel reasonably safe and comfortable doing it? If you answered yes, then you must read the rest of this article because I want to open your eyes to a couple of things that you'll happy to find out. Those who know a lot about options trading would not put a million dollars on a 30-day condor. The same can be said, by the way, for a 30-day credit spread.
Major league investors who trade $1,000,000 to $25,000,000 would not put their money on a traditional trade like this. They couldn't do it safely using this type of strategy. They simply wouldn't do it and here's why.
Typical iron condors can often look very attractive when you're starting out. They could present "the illusion" of an extremely high probability of profit for a given month. You can typically start off an Iron Condor with a probability of profit of about 80%. So then... why not put a million dollars on a trade with an 80% probability of profit? Why in the world wouldn't you make this trade with a lot of money?
How could you possibly lose?
Well, where does this type of trade leave you if the market shifts? What happens if volatility rises 25 points in two days? What happens if you have a flash crash and the market suddenly moves down 10%? You could easily be down about $7200 on your $17,000 investment. Now how do feel about having a lot of capital on the trade?
Well, this is exactly the type of thing that happens to many options traders. That's why this type of trading doesn't scale up well. Let's see, 7200 divided by 17 gives us a draw down of 42%. So during any point in this trade, this means can lose 42% fast, in one day. And this is not the worst case scenario. You can lose $7200 if the drop happens on day one of the trade.
What happens if you have a 10% crash after you've already been in the trade for a week or two already? Now you might easily be down $12,000. Worse, if the drop happens on the last couple of days of the trade you stand to lose everything - all of it - 100%. With these kinds of wild risks this whole style of trading is not scalable. It's because of the way these trades are structured that you hear so many frightening stories about option traders having catastrophic losses again and again.
The bottom line is that you are risking 40% at any given moment, for as long as you're in the trade. It would be extremely hard to grow an account very large with this strategy. The more you have, the more you can lose, so eventually... the odds are that you'll lose it all back. You'll wind up getting nowhere after potentially years of hard work.
Are you going to put a million dollars on an Iron Condor and risk $420,000 (42%) in one day? That's half of your million dollars. For some people it takes a lifetime, or two lifetimes, to build up a million dollars. Are you really going to risk it in one day?
If you want to learn more about our unique, proprietary options strategies simply come to our free webinars. Learn something new that's meant for today, not something as out of date as the condor, credit spread, butterfly and calendar spread. These are all very dated strategies. We'll show you why. We'll make you a better option trader.
About the Author:
Live discussions explain and clarify the patent-pending option trading strategies we developed and teach exclusively at San Jose Options Mentoring.
