# Iron Condor Strategies



## Tradesurfer (20 March 2010)

Wanted to start a discussion around the Iron Condor. Some points I'd like to have discussed is what vehicles (generally index options preferred), how far away from current price, what probability is allowable for the position, how many days to expiration when initiated, and how people like to handle a position gone bad- if price is about to touch one of the sides, roll out, roll up, out and up, buy current month ATM calls?

Lots of intricacies but just some structure to get things going. Repairing the position has a lot of different possibilities.


----------



## Grinder (22 March 2010)

Hey TS,

There are alot of different ways to trade an iron condor, really depends on the individual. I have no hard and fast rules but do like to slap on high prob ICs 40-60 days out on indexes. However, depending on view of vol I could go further out or closer in, it really depends on how Im seeing things. 

As far handling an IC gone bad there are just too many determining variables to get specific here. Sometimes I add some vega or get neutral with delta using other strategies to offset my short delta, other times I'll cut and run.


----------



## mazzatelli (23 March 2010)

Though it would benefit from a drop in vol, its not the best structure to take advantage of vol


----------



## Grinder (23 March 2010)

your not wrong mazza, especially in this low IV environment. 

btw: really miss your old avatar


----------



## mazzatelli (26 March 2010)

I've become a bit conservative of late 

Consider the following: 





Does it look attractive to take the call + put Euro binary? (cheaper than vanilla counterpart)


----------



## mazzatelli (27 March 2010)

The idea is to replicate a portfolio using other asset classes than stocks and ETO vanilla options - then decide whether one would still take the position

Analogous to Cottle's synthetic analysis


----------



## cutz (28 March 2010)

mazzatelli said:


> The idea is to replicate a portfolio using other asset classes than stocks and ETO vanilla options - then decide whether one would still take the position
> 
> Analogous to Cottle's synthetic analysis




Hi mazza,

I like your thinking but i'm having a little trouble following, what's your latest game plan ? 

Without revealling too much.


----------



## mazzatelli (28 March 2010)

It's an alternative view of the Iron Condor, though not perfect replication.

Thought I'd through it out there. Once the position is understood, then hedges can be approached rather than the normal "add calendars, roll up/down" discussion - iow, is the condor the most effective & efficient position in the first place


----------



## Grinder (29 March 2010)

Alittle too sophisticated for me Mazza, and that goes for your avatar also  Can you throw me a bone with a bit more meat on it?


----------



## mazzatelli (31 March 2010)

Nothing mind blowing, just an alternate view






Looks like a condor, without ramp payoff - i.e. pays 0 if wrong, or _x_ if correct
Its Euro cash-or-nothing = payoff is discontinuous, path independent
It's delta = gamma of a vanilla, gamma = Dgamma/Dspot of a vanilla

Would neutralising deltas and adding vega still be applicable/efficient, after all vanilla call+put spreads can be used to replicate this position?


----------



## sails (1 April 2010)

Mazza,  I do envy the knowledge you have gained professionally - way above what us mere retail traders are dished up...  
The strategy is something I would love to understand - have some Qs on the terminology below:



mazzatelli said:


> Nothing mind blowing, just an alternate view
> 
> 
> 
> ...



This I definitely get and like what I see... LOL



> Its Euro cash-or-nothing = payoff is discontinuous, path independent
> It's delta = gamma of a vanilla, gamma = Dgamma/Dspot of a vanilla



The gamma of a vanilla I understand is to mean the same gamma as a normal put or call.  Is that correct?
Now Dgamma/Dspot - I think I used to know what that was when reading posts over at ET - have forgotten.  Currently googling but no simple answers - do you mind refreshing my memory?  LOL I think it's got a bit rusty... 



> Would neutralising deltas and adding vega still be applicable/efficient, after all vanilla call+put spreads can be used to replicate this position?



While I get some of this question, I'm still trying to get my head around the full context...    

Will this work on any market or is this something on a specific Euro market?

Hope you are doing well - are you back to stay in Oz now?


----------



## mazzatelli (2 April 2010)

lol@mere retail...since when did math nerds elevate to a higher status :



sails said:


> The gamma of a vanilla I understand is to mean the same gamma as a normal put or call.  Is that correct?



 Yes, sorry just accustomed to local lingo



> Now Dgamma/Dspot..Currently googling but no simple answers - do you mind refreshing my memory?



Third derivative - measuring leverage of gamma to spot, basically speed of gamma curvature
Considering this would make one think twice about shorting the strangle in a condor 



> While I get some of this question, I'm still trying to get my head around the full context...
> Will this work on any market or is this something on a specific Euro market?




The context is theoretical, any market, vanilla durations can be matches to OTC
I mentioned these, due to 1) all or nothing nature - when spot converges to strike, delta becomes explosive [contingent on expiration] and 2) synthetics don't apply

Would people still apply the same adjustments? e.g. Neutralize delta with calendars/calls/puts, purchase initial protection, adding vega [efficient hedge?]

The position either makes fixed payoff or $0 +/- net gains/losses on hedges


----------



## sails (3 April 2010)

Thanks Mazza for the refresh on Dgamma/Dspot. 

Just googled binary options so the lights have come on and now making sense... lol.  
Found this article useful: http://www.optiontradingpedia.com/binary_options.htm

Do you know of any reputable brokers that offer them?


----------



## mazzatelli (3 April 2010)

sails said:


> Do you know of any reputable brokers that offer them?




Yeah M, I'm back in Oz - but don't know for how long . I need to blame someone for not warning me of the insomnia festival that is int. equities and fx.
Hope all is well with you...I remember you have been moving, away from that lovely view!!!

In terms of retail exotics, you can check out Societe Generale's: http://www.clickoptions.com
There's also http://www.betonmarket.com

btw, Happy Easter to fellow ops forumites


----------



## Grinder (4 April 2010)

My interest has been peaked on exotics now, but need to play catch up. Thanks to your discussions with Sails it's allowed me to delve into a whole new area. Keep it up guys.


----------



## RazzaDazzla (5 April 2010)

IMO, these exotics such as binaries seem like 'things' created that sound good to the punter but are really just there to assist the broker.

I'm assuming the brokers hedge there position by buying/selling normal options. So when your stock rallies 50% and you only get a fixed profit, the broker is making the huge profit off the vanilla option?


----------



## mazzatelli (5 April 2010)

RazzaDazzla said:


> IMO, these exotics such as binaries seem like 'things' created that sound good to the punter but are really just there to assist the broker.
> 
> I'm assuming the brokers hedge there position by buying/selling normal options. So when your stock rallies 50% and you only get a fixed profit, the broker is making the huge profit off the vanilla option?




Since when didn't the sell-side profit from providing services for instruments?
Exotics are usually traded by institutional and HF traders, mainly because of the notional's involved, liquidity and complexity - so isn't geared towards retail.

Your assumption would be incorrect.
They're exotic, because perfect replication using vanillas can't be achieved. The Euro digital, is one of the simpler ones, where a vanilla call spread is the proxy. 
You're analogy would be similar to saying when the stock rallies 50%,  you only get a fixed profit from the call spread, while the broker is  making a huge profit off the vanilla option

It is the reason I brought this imperfect analogy up, to prompt people to view their short strikes in a condor as simple bets, and see whether their view of adjustments that they usually undertake would change.

But I'll let it go soon otherwise the OP won't be happy with the derailment


----------



## sails (6 April 2010)

mazzatelli said:


> Yeah M, I'm back in Oz - but don't know for how long . I need to blame someone for not warning me of the insomnia festival that is int. equities and fx.
> Hope all is well with you...I remember you have been moving, away from that lovely view!!!
> 
> In terms of retail exotics, you can check out Societe Generale's: http://www.clickoptions.com
> ...




Yes, the insomnia is not nice.  It's the main reason I decided to quit int. trading.  And yes, we have moved - a couple of times now in the last few months as we rented in between our own places.  Have a nice but different view now.  The last view was very special and will keep it in the avatar for now...

Anyway, back on topic.  Have been looking into these binary options further.  I see that CBOE have them on the VIX and SPX.  BSZ is the code for SPX and BVX for the vix. They expire monthly and coincide with option expiration with $100 max pay out if conditions are met.  It appears that one can trade out of the position prior to expiry but they cannot be exercised until expiry.
More info found in the following links:
http://www.cboe.com/micro/binaries/introduction.aspx
http://www.cboe.com/products/indexopts/bsz_spec.aspx

TOS have the CBOE binaries available for trading so I assume they would be readily available with any US options broker.  Although on the TOS order confirmation window it states that max profit is unlimited where the contract specs clearly state that the max profit is capped at $100.  Anyway, that's as I understand it.  Liquidity isn't great at this stage, but perhaps it will improve with time.

IG markets also offer binaries, but seems that only daily and intra day (eg hourly) are available for the ASX200.

I have been playing around with BSZ as a means to hedge iron condors or butterflies.  Will put in some demo trades on TOS to see how they pan out and to see where any potential catches are. Without becoming too hopeful just yet, it might be a way of doing some US trading again without having to sit up too much at night... 

Mazza, thanks for the heads up on these products as I hadn't heard of them before.  Very much appreciated. I think it is reasonably relevant in this thread, but if necessary, we can move the conversation to another thread.


----------



## mazzatelli (6 April 2010)

Yeah, I can only see the Euro digitals for long gamma, otherwise rubbish for neutral bets => my disdain for iron condors. 

Personally prefer the OTC market, where you can determine the contract terms [expiration, barrier etc] - but edge loss is to be expected. If i remember correctly, betsonmarkets have quotes for pricing on the ASX, Nikkei, Singapore(?) and HK markets.

They also have American bets [path dependent] which are much more useful/versatile


----------

