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?
If you had built up your investment fund to a million dollars would you boldly risk it on a trade of the Iron Condor variety? Yes? Maybe? The cold fact of the matter is that anyone who knows even the basics of options well, would never put a million dollars on a 30-day condor.
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.
Let's take a typical condor and look at the probability for a given month. Starting out, we often have the illusion of a trade with an extremely high probability of profit, let's say it's almost 80%. So you could easily think, why not make this trade with a lot of money? Why not put a million dollars on a trade like this to have an 80% probability of gain?
How could you possibly lose?
Yet how about if there's another flash crash and the market suddenly has a sharp drop of, say, 10%? And what if you have a 25 point rise in volatility in just a day or two? Now how safe and secure do you feel about risking your investing nest egg on this type of trade? If your investment at this point is even $17,000, you could already be down more than $7000. Now where do you stand? Let say you've lost $7200.
Well, this is exactly why this type of trade is not scalable. 7200 divided by 17 gives us a 42% draw down. This means that at any point you're in this trade you can lose 42%. And that's if the sudden drop happens on the first day.
If you're a week and a half into this trade and then you have a 10% crash, you could easily be down $12,000. If you experience this type of drop on the last couple of days of the trade you could lose 100%. This is why I say this style of trading is not scalable. This is also why lots of option traders repeatedly experience catastrophic losses - over and over again.
Here's the bottom line, really. For as long as you're in the trade, moment by moment by moment, 40% of your total investment is at risk. You can't build up an account very large with this type of strategy. The more gains you accumulate, the more you have to lose - the bigger that 40% gets. The odds are that if you stick with this approach long enough you'll lose all your previous gains in sudden market shifts. After accumulating gains for years, you can easily wind up right back where you started after years of hard work with nothing to show for it.
So now let's consider our question again. Are you willing to put a million dollars on an Iron Condor knowing your ongoing risk is $420,000 (42%) every single day? This is about half of your million dollar stake. Some people take a lifetime, or even two lifetimes, to build up this much capital. Are you going to be comfortable risking it in a single day to market conditions over which you have no control?
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.
If you had built up your investment fund to a million dollars would you boldly risk it on a trade of the Iron Condor variety? Yes? Maybe? The cold fact of the matter is that anyone who knows even the basics of options well, would never put a million dollars on a 30-day condor.
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.
Let's take a typical condor and look at the probability for a given month. Starting out, we often have the illusion of a trade with an extremely high probability of profit, let's say it's almost 80%. So you could easily think, why not make this trade with a lot of money? Why not put a million dollars on a trade like this to have an 80% probability of gain?
How could you possibly lose?
Yet how about if there's another flash crash and the market suddenly has a sharp drop of, say, 10%? And what if you have a 25 point rise in volatility in just a day or two? Now how safe and secure do you feel about risking your investing nest egg on this type of trade? If your investment at this point is even $17,000, you could already be down more than $7000. Now where do you stand? Let say you've lost $7200.
Well, this is exactly why this type of trade is not scalable. 7200 divided by 17 gives us a 42% draw down. This means that at any point you're in this trade you can lose 42%. And that's if the sudden drop happens on the first day.
If you're a week and a half into this trade and then you have a 10% crash, you could easily be down $12,000. If you experience this type of drop on the last couple of days of the trade you could lose 100%. This is why I say this style of trading is not scalable. This is also why lots of option traders repeatedly experience catastrophic losses - over and over again.
Here's the bottom line, really. For as long as you're in the trade, moment by moment by moment, 40% of your total investment is at risk. You can't build up an account very large with this type of strategy. The more gains you accumulate, the more you have to lose - the bigger that 40% gets. The odds are that if you stick with this approach long enough you'll lose all your previous gains in sudden market shifts. After accumulating gains for years, you can easily wind up right back where you started after years of hard work with nothing to show for it.
So now let's consider our question again. Are you willing to put a million dollars on an Iron Condor knowing your ongoing risk is $420,000 (42%) every single day? This is about half of your million dollar stake. Some people take a lifetime, or even two lifetimes, to build up this much capital. Are you going to be comfortable risking it in a single day to market conditions over which you have no control?
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:
San Jose Options is different! We only teach you techniques that we use ourselves. You get to look over our shoulder as we make live Option Trades every day.
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