The Lingo Berries

Let’s briefly analyze the monster we call the Iron Condor and see if this is a strategy that’s scalable. In other words, will it work with a lot of capital? After all, if you can’t use it with a lot of capital then where can this type of trade ultimately take you?

Would you feel comfortable putting a million dollars on this type of trade? If you say yes to that, then I’m sorry but in my opinion you don’t know a lot about options. Anyone who knows even a little about options would never put a million dollars on a 30-day condor, or a 30-day credit spread.

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.

Take a typical iron condor and the probability for any given month may start out looking great. You often start off with the illusion of a trade that has an exceptionally good probability of profit. Let’s say that at the beginning of the trade your probability of profit is about 80%. At this point you might well be thinking that there’s no good reason not to make this trade with a big chunk of capital. With an 80% probability of positive earnings, why not put a million dollars on this trade?

With only a 20% probability of loss how could you lose?

Well, where does this type of trade leave you if the market shifts? What happens if volatility rises 25 points in two days? What happens if you have a flash crash and the market suddenly moves down 10%? You could easily be down about $7200 on your $17,000 investment. Now how do feel about having a lot of capital on the trade?

Well, this is exactly the type of thing that happens to many options traders. That’s why this type of trading doesn’t scale up well. Let’s see, 7200 divided by 17 gives us a draw down of 42%. So during any point in this trade, this means can lose 42% fast, in one day. And this is not the worst case scenario. You can lose $7200 if the drop happens on day one of the trade.

What happens if you have a 10% crash after you’ve already been in the trade for a week or two already? Now you might easily be down $12,000. Worse, if the drop happens on the last couple of days of the trade you stand to lose everything – all of it – 100%. With these kinds of wild risks this whole style of trading is not scalable. It’s because of the way these trades are structured that you hear so many frightening stories about option traders having catastrophic losses again and again.

The bottom line is that you are risking 40% at any given moment, for as long as you’re in the trade. It would be extremely hard to grow an account very large with this strategy. The more you have, the more you can lose, so eventually… the odds are that you’ll lose it all back. You’ll wind up getting nowhere after potentially years of hard work.

For some people it takes a lifetime or two to accumulate a million dollars. So now let’s consider the question one more time. Are you going to put your million dollars on an Iron Condor and risk nearly half of it (42%) in a single day? I thought not.

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.

Many students notice improvement in just weeks with our Options Mentoring Course – some in only days! It all depends on where you’re having trouble when you start with your Options Trading.