You don't need a dictionary to define risk you only need the knowledge in this segment which should convince you that defining your risk can be the difference in keeping a trader with a smaller account in the game and ultimately provide the opportunity to be profitable. Traders of all types can benefit from the information here.
Options traders have the advantage of being able to define risk. Traders with smaller accounts can benefit from defining risk which should minimize account drawdowns.
A study was conducted selling 1 standard deviation (SD) iron condors closest to 45 days to expiration (DTE) in the SPY (S&P 500 ETF) from 2005 to present. The iron condors used spreads with widths at 2.5% of the underlying price of the SPY.
Since our short strikes are at 1 standard deviation this gives us a similar POP to a short strangle (with slightly tighter breakevens). Option’s theory tells us we should be right 68% of the time. A table of the short SPY iron condors with short strikes at a 1 SD was displayed. The table included the percentage of profitability at expiration, average P/L per trade, average P/L win and average P/L loss of the short iron condors.
A graph of the percentage returns on selling short iron condors from February 2005 to present was displayed. This strategy performed well over the years including the drawdowns of 2008. By using this strategy a $2500 account in 2005 would be worth $4500.
A second table using only the top 50% of occurrences by volatility (high VIX) of short SPY iron condors with short strikes at a 1 SD was displayed. The table included the percentage of profitability at expiration, average P/L per trade, average P/L win and average P/L loss of the short iron condors. The table showed that with higher implied volatility (IV) we saw smaller losses and higher average P/L.
Watch this segment of “tasty BITES” with Tom Sosnoff and Tony Battista for the takeaways and the impressive results of mechanically selling iron condors (a defined risk strategy) over the last 10 years in the markets using both low and high implied volatility.
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