I had an intriguing conversation today with an option trader who has been searching for the secret to making consistent returns in option trading for many years. He made many familiar points.
Something that stood out was when he said “Non-directional option trading doesn’t mean we can make money in any direction. It means that we make money if the underlying doesn’t move in any direction. In other words, it’s still a directional trade, sideways.” I couldn’t agree more, and it’s been advertised that it’s easy to make money with options because we can make money on any direction. In some respects this is true, but in others it’s not.
If you’re trading Iron Condors, you know what I am talking about; especially if you are trading the Condors that most courses and books teach. If you are trading this strategy in 2009, you probably aren’t making anything. That’s because the Iron Condor is just as directional as most option trades only that its direction is sideways. It’s just as hard to predict a sideways move as it is up or down, for some.
I’ve gotten several calls over the years from people that ended up losing large chunks of their accounts trading credit spreads and condors. It’s always the same story… “I was doing great for several months, and then all the sudden I lost nearly my whole account in one day.” I have heard it time and time again.
This is exactly why I don’t teach traditional Condors and Credit Spreads. If you are a few days from expiration, and the RUT is right at your short strike, then you are doing it the way most people trade this strategy, and soon you’ll be facing the shame of explaining yourself to the spouse! Go ahead, laugh, but it won’t seem so funny when it happens to you and your life is in tatters because of this mess of stress you made yourself.
In response to this issue, San Jose Options Mentoring has rediscovered Iron Condors and Credit Spreads. We take a different approach that gives the underlying much more wiggle room, a chance to relax a little, and keep us out of troublesome situations. More often than not, the less you have to mess with your condor, the better off you will be.
Along with having a safer way to trade Condors, we’ve also come up techniques to lock-in our profits. Most option traders terminate their trades when they make a profit, while we can lock-in our profits and stay in the trade.
Furthermore, if we ever have a Condor move against us, then we have developed a technique which gives us a free bonus trade! So, even though we may have a rough month every now and then, at least we score a free trade from it while the other guys take a hit and move on.
In the best of days and worst of days, we stand by the techniques we’ve developed in the Iron Condors and other Strategies.