Paul, I looked at the definition and you are right - I was interpreting wrong.
But now I look at the definition, I still think an IC is not a very good example of a market neutral strategy because the risk to reward can be so high.
True an IC has both bullish and bearish sides to it, but it still is a directional position.
While a pairs trade is market neutral because in a market downturn both stocks should go down therefore unaffected by the market turn.
Anyway, Im happy to drop this now - lesson learned..
From Investopedia;.
What Does Market Neutral Mean?
A strategy undertaken by an investor or an investment manager that seeks to profit from both increasing and decreasing prices in a single or numerous markets. Market-neutral strategies are often attained by taking matching long and short positions in different stocks to increase the return from making good stock selections and decreasing the return from broad market movements. Market neutral strategists may also use other tools such as merger arbitrage, shorting sectors, and so on. There is no single accepted method of employing a market-neutral strategy.
--- On Mon, 12/21/09, Paul Seifert <paulseifert@comcast.net> wrote:
From: Paul Seifert <paulseifert@comcast.net>
Subject: Re: [TheOptionClub.com] Re: Iron Condors ...3 fold question....?
To: OptionClub@yahoogroups.com
Date: Monday, December 21, 2009, 12:15 PM
You are not interpreting the term MARKET NEUTRAL correctly. ----- Original Message ----- Sent: Monday, December 21, 2009 10:03 AM Subject: Re: [TheOptionClub.com] Re: Iron Condors ...3 fold question....?
Thinking about this thread, the only thing that bothers me is the idea of an IC as market neutral. MArket neutral means to me that the position is unaffected by market direction..
A short IC is anything BUT market neutral. It is directional and the direction is sideways
if it is put on in the middle. Bullish if it is put on above the market, and bearish below.
If yu want a market neutral, why not choose a ratio for zero credit? That way only one direction of the market out of three, will effect the position.
--- On Sun, 12/20/09, Mary Norfleet <naboba1@yahoo. com> wrote:
From: Mary Norfleet <naboba1@yahoo. com>
Subject: Re: [TheOptionClub. com] Re: Iron Condors ...3 fold question.... ?
To: OptionClub@yahoogro ups.com
Date: Sunday, December 20, 2009, 3:22 PM
Joules, In your recent e-mail to Chris, you stated: "Also it's hard to understand how the vols play on Condors as the credit is achieved as long as the price stays within the breakevens. Based on the volatility now...it says to stay away from Condors? Is my thinking right?" In general, if volatility falls while you are in a condor this helps the trade. In contrast, if it falls while you are in a calendar this hurts the trade. If vols increase while you are in a condor, you will probably have to stay in the trade longer to achieve your profit -- If vols increase while you are in a calendar trade you will be able to achieve your profit faster. Of course vols usually increase when the market goes down and they usually decrease when the market goes up, so this is another part of the total. Currently VIX (a volatility measure) is around 21 or 22 which is relatively low – although that would have been high a few years ago when it was in the 12-15 range. However, it's important to look at the implied volatilities (IV) of the at-the-money (ATM) calls and puts of any particular stock or index you plan to trade – and to look at where they are now relative to the past 6-12 months. If you have Thinkorswim (TOS) as your broker, it is easy to look at these data. I don't know how other brokers present this information. To understand the impact of volatility changes, go to the analyze page in your TOS account and put up an iron condor (on your favorite index) – place the shorts at approximately 12- 15 delta. Set the analyze chart to show 68% (1 standard deviation -- SD) on the expiration day of your condor. Go to the "volatility adjustment" and increase the volatility – the graph will show that as the volatility increases, the standard deviations widen; the opposite will occur as you decrease the volatility. Do the same exercise with an ATM call or put calendar on the same index. You will see that as the vols rise, the area covered by the calendar increases – and as they fall, that area shrinks. To get back to your original question on condors -- the credit is achieved as long as the price stays within the breakevens (BEs) – that is correct; however if the vols increase while you are already in a condor, the SD is increasing so you then have a higher probability of having the market price run through your BEs and leaving you with a loss. If you have watched Dan Sheridan's free webinars on CBOE.com over the past few years, he has given many examples of trading (and adjusting) condors in various market conditions. Mary Ann
From: jouless360 <jouless360@yahoo. com>
To: OptionClub@yahoogro ups.com
Sent: Sat, December 19, 2009 6:20:48 PM
Subject: [TheOptionClub. com] Re: Iron Condors ...3 fold question.... ?
Chris:
Thanks for the response. My feeling on legging in is based on the ebb and flo of the markets from my futures trading days. You get a 200 point up day ...then a 150 point down day. Why not take advantage of that to leg in on the up and down days. The credits are higher and the breakevens are wider. Of course, we need to look at the daily chart to see if we are in an uptrend, neutral or in a downtrend.
Based on the VIX...I think I should be doing Calendars at this time and not Condors? am I on the right track?
Also its hard to understand how the vols play on Condors as the credit is achieved as long as the price stays within the breakevens. Based on the volatility now...it says to stay away from Condors? Is my thinking right?
by the way....I just got bombarded with another SJoptions email message:
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Let's say you want to trade an Iron Condor, but you want to do this with insurance to the upside and to the downside. Well, 99.9% of all option traders only know how to design a trade where the insurance will eat up most of the profits if the Iron Condor is profitable.
With our newly designed Insurance Risk-Free method, we can trade the Iron Condor with surrounding insurance plays which do not take away from the Condor profits. In fact, many of our insurance plays will also make money while simultaneously adding insurance to the position.
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If it was $199 deal, I think more of us would buy to satisfy our curiousity. However, at $2995....I just can't do it.
Joules
--- In OptionClub@yahoogro ups.com, "TheOptionClub" <chris@...> wrote:
>
> Joules,
>
> 1. The wider expiration break evens you find with a 3 month iron condor
> reflect the fact that those options were sold three months prior to
> expiration instead of, say, 30 days away. While the spread is wider,
> you must also stay in it longer to achieve the potential of the
> expiration risk graph. There is always a trade-off between risk and
> reward, so don't fool yourself about the notion you can sell 3 month
> condors and have better probabilities than selling 1 month condors.
> Having said that, also understand that selling 30 days condors is not
> "better" than selling 3 month condors. Whether you make money over the
> long term has much more to do with your risk management and your
> discipline than it does with the width of a spread.
>
> 2. Legging into an iron condor can be beneficial IF you're able to sell
> the spreads at opportune times. Unless you are comfortable timing the
> market fluctuations, I would not suggest legging into an iron condor.
> In my experience, this tactic works best if you think of yourself as a
> vertical credit spread trader who sometimes finds that they are trading
> both sides of the market. In other words, the goal would not be to
> trade an iron condor but it would simply be a happy coincidence when you
> find yourself in one.
>
> 3. You really should be aware of what is going on with implied
> volatility because it will effect your spread. Not paying attention to
> implied volatility as an option trade is sort of like a pilot who does
> not pay attention to altitude. Probabilities, standard deviation,
> etc., are all dependent upon implied volatility and if vols rise after
> you put your trade on it will diminish your probability of success and
> effect your profitability. Calendar spreads are very sensitive to
> changes in implied volatility.
>
> Christopher Smith
> TheOptionClub. com
>
>
> --- In OptionClub@yahoogro ups.com, "jouless360" <jouless360@ > wrote:
> >
> > Option Club Members:
> >
> > I have a 3 part question on Iron Condors. I am relatively new at this
> and the Condor does have an appeal of safety, even though you have to
> put up more risk capital to get decent returns. Here are a few
> questions:
> >
> > 1. I noticed I can get wider breakevens if I go out 3 months..ie to
> March 10 on the RUT or SPX. I was wondering if I go out that far...can I
> close them in 30 days with the idea that the theta decay will be enough
> to make a decent return. I know the theta kicks in better the last 30
> days but I cant seem to get a decent return with wider breakevens for
> the risk in a 30 day condor.
> >
> > 2. I have seen benefit in legging in to Iron Condors ..by selling the
> Vertical Call portion on a nice upday...and selling the Vertical PUT
> portion on a nice down day. This could bring in a better credits and
> allowing for wider breakevens. Is this a reasonable strategy..or do you
> prefer to sell the entire Iron Condor at the same time?
> >
> > 3. Can I sell Iron Condors without worrying about the volatility
> charts..or is this strategy affected more adversely with the vols as
> opposed to a Calendar trade?
> >
> > I thank all of you in advance for your expertise and thoughts on this
> subject.
> >
> > Happy Holidays!
> > Joules
> >
>
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