Trader Types

What is your Iron Condor trading type?

A survey of books, blogs, tweets, and other sites and people I follow leads me to believe there are essentially four types. I think we can divide traders by two different styles.

First there are those that prefer to trade front month options and hold to expiration, while others prefer to buy options 2-3 months out and close the trade well before expiration. Those holding to expiration are able to capture the largest and fastest accelerating theta decay; but as expiration nears that gamma risk explodes. A sudden price spike in the underlying stock could quickly turn a winning trade to a loosing trade with no time to negotiate. That is why others prefer to stay safely out of reach of the expiration risk. Personally, I like both scenarios depending on the situation. I am happy to hold to expiration if I have sufficient width in my condor, and the short strikes remain at a safe distance, especially if I stay away from known event-risks such as earnings and lawsuit announcements.

Secondly, there are those that prefer Far-Out-Of-The-Money (FOTM) options because they are associated with High Probabilities (and lower returns). Verses those that prefer Close-To-The-Money (CTM) options which have lower probabilities but provide enough premium to allow many adjustments to be made if necessary. The CTM traders cry foul at the FOTM crowd as one bad trade can ruin months of profits; high-probability, but when that loosing trade occurs, it can be a whammy. They also generally don’t like the risk-to-reward of FOTM trades; risking $900-950 just to make $50-100 does not seem like a good trade. Alternatively, the FOTM traders would probably claim that those 100% losses don’t really happen (except possibly for black swans) and they are able to get out of bad trades at 10-40% losses. They also require far less monitoring and management. You are simply in or out of the trade.

IC-trader-types

A trader could be comfortable with one or many of these trading comfort zones depending on the unique situation. For these testing purposes, I want to not only return the all the results ranked according to be risk/reward, but also to highlight the best trades for each of these zones. Some test scenarios may really only apply to certain zones. For example, when testing rolling spreads, low premium trades are probably not applicable.

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