Part 3

HFT Masterclass – What’s an Iron Condor?

A mastery of spread trading is essential for successful trading. Learn the finer points of this strategy in this 3-parter

The four spread categories that I have described are only general classifications of option spreads- the number of unique, individual spreads that can be traded is practically infinite. All spreads fall into one or more of these four classifications. Some people seem to spend a lifetime trying to learn all the different individual spreads, one by one. However, given the sheer number of unique spreads that can be created with options, this may not be the best means of spread mastery.

Good option traders fit the trade to the outlook; amateurs fit the outlook to the trade. And that is the difference.

The problem is that often aspiring spreaders, especially in the amateur sphere, focus on the wrong things. They get caught up in the individuality of each spread; the segregation of spreads by name, their at-expiration diagrams, the ‘rules’ of each spread. They focus on the limitations of each individual spread.

Join the iFX EXPO Asia and discover your gateway to the Asian Markets

Having been reared as a trader on the exchange floor, I, like many of my peers, have had a different approach to learning spreads. Floor people tend to focus on spreading as a single technique that is part of a holistic approach to trading, not on a fragmented series of different strategies.

 

After many years of trading professionally, I started working often with retail traders. When I first started on the lecture circuit, the market was somewhat stable, and the trade du jour was the iron condor (a four-legged strategy that profits in low volatility environments). Therefore, I found myself giving presentation after presentation on the iron condor strategy.

 

Around that time, I was talking with a professional trader I knew who worked for a proprietary trading firm that traded volatility arbitrage—high-level stuff. Incidentally, this firm was a major, extremely successful option player in India (in other words, a company filled with really good traders). This trader from that firm asked what I had been up to lately. I told him about how I was off to some city to give a presentation on iron condors.

 

His reply: “What’s an iron condor?”

Suggested articles

How Will Zero-Fee Investment Platforms Impact Traditional Stock Brokers?Go to article >>

 

It wasn’t that this trader was unknowledgeable in options.

Having been reared as a trader on the exchange floor, I, like many of my peers, have had a different approach to learning spreads

On the contrary, he was one of the most successful, and smartest, traders I knew. It’s just that the iron condor isn’t as revered in professional trading circles as it is with retail traders. This trader focused mainly on straddles, synthetics, and creative approaches to risk management. He likely did trade iron condors in his career, probably many times, without knowing the name of the strategy. If so, he probably just piecemealed it together because it happened to have the right risk profile for his situation.

Good option traders fit the trade to the outlook; amateurs fit the outlook to the trade. And that is the difference.

 

Professional traders and clever stay-at-home traders find the absolute risk and incremental risk desired for a particular scenario and create an option position that fits their forecast. They focus on exposures in direction, time, volatility, and perhaps interest rates— that is, the exposures measured by the option greeks—and construct a position to exploit them.

 

Read here part 1.

Read here part 2.

Got a news tip? Let Us Know