As discussed in our last meeting we are going to try and focus on one strategy each month. This month I want to discuss the basics of a market neutral options strategy called the Iron Condor. This option strategy works well when managed well. Before discussing the how of this strategy I would like to discuss the why.
When I first started trading options I was still working full time as a government contractor. What I found was that trying to manage directional trades while working full time during market hours made swing trading kind of tough and made day trading close to impossible. In addition hunting for trade setups was a pain. I was looking for a more laid back strategy that felt a bit like buy and hold but that was a bit more active and of course had higher returns. Market neutral trading seemed to fit the bill.
Fewer Trades per month
- This strategy typically takes 3-4 trades per month. It can be more if you have a larger portfolioNo need to hunt for trades
- You will find that you trade the the same 2-4 products month after month. You will know when you need to adjust or hedge yourself simply by what your greeks tell you or by time based rules- such as closing your trade 10-days from expiration and opening positions 45 days from expiration.
- you should find that most of your trades tend to be profitable 70-80% of time.
- Your trades can earn 30-50% per month. If you weight each trade to be 10% of your portfolio and do three trades per month that average 30% per trade, that will get you a 9% return on your portfolio per month. Granted this is not as high as swing trading or day trading but this is a lot less time intensive and can be a great start to actually making money on the market to supplement and eventually even replace your income at which point you will have enough time to focus on becoming a Swing Trader or Day Trader if that interests you.
I am almost finished writing up the white paper on market neutral trading with Iron Condors which I will post on the Meetup page early next week. In the mean time here are a couple links to understanding Option Greeks which will be pretty key to understanding my market neutral strategy:
Going Beyond Simple Delta: Understanding Position Delta
Getting To Know The "Greeks"
Using the Greeks to Understand Options