We are pleased to introduce an addition to SteadyOptions - the "Steady Condors" monthly income strategies. Steady Condors is a combination of low maintenance and market neutral options income strategies with a strong emphasis on risk management and proper position sizing, as well as minimizing drawdowns. In addition to providing trades and education on the forum, we are offering the Steady Condors portfolio as a separate service. We intend to autotrade it in 2014 with Global Auto Trading and potentially more brokers.
We would encourage everyone to read the Steady Condors Frequently Asked Questions and the Steady Condors Strategy (members only) topics. Those two topics should provide answers to the majority of your questions, as well a detailed discussion on what the Steady Condors is all about.
What is Steady Condors?
The Steady Condors income generating strategies at their core are managed by the Greeks but mostly resemble variations of iron condors. But anyone who has traded more than a handful of traditional iron condors knows they can be extremely challenging in a trending market causing a lot of stress, large drawdowns, and significant losses. They aren't the Holy Grail (nothing is). It's normally relatively easy to make money with high probability condors 9 or 10 months per year…But many condor traders give back most or all of their profits during the typical 2 or 3 losing months each year because they don't know how to manage risk through their position Greeks. Commonly heard is something like "I would have had a great year if it wasn't for one or two months". If you trade condors without a written plan on how to manage your deltas you will eventually experience large losses. We are yet to find an exception. The risk managed nature of the Steady Condors portfolio was designed to deal with this problem. Our average losing month has been -1.9% and we normally have around 2 losing months per year. It's quite rare for us to have a realized or even unrealized portfolio drawdown of more than 5%. Not only do we hate losing money, but we hate being down money. Our focus in a losing month is to avoid giving back more than one month's income. Since our monthly win rate has historically been greater than 80% this ensures our strategies have positive expectancy over the course of a full year. And when it comes down to it, profitable trading is nothing more than a numbers game.
Why is Steady Condors different?
Our manage by the greeks philosophy is designed to take advantage of the volatility skew naturally inherent in index options like RUT and SPX and to deal with the inherent flaws this creates for traditional condors. We all know that the market "takes the stairs up and the elevator down" and this is built into index options pricing. For condors this means that you will be able to sell much farther OTM puts than calls for the equivalent premium. This also means that if you were to sell a call the same distance OTM as a put you would get much less premium for your call. This causes a traditional iron condor to naturally set up short delta (bearish). If the market makes a move up after trade launch you will start to lose money immediately even with implied volatility typically helping your short vega position. From our live experience as well as several years of backtesting this causes the upside to be a headache in condors the high majority of the time. Therefore we only use enough call credit spreads to balance our setup and we remove them completely at predetermined adjustment points in an uptrending market. We primarily make our money from selling put spreads. Needless to say this has served us well in 2013 allowing us to have a nicely profitable year while many condor traders continue to fight the relentless bull market.
Of course, we don't know anybody who lies awake at night worrying about the market crashing up, so we need to tell you how we deal with the downside risk of a condor as well. The answer is that we also use risk reducing adjustments on the downside. If you've ever traded a condor with "rolling" adjustments you have realized that this isn't an immediate risk reducing adjustment if the market continues to fall. Rolling really only helps you at expiration. We normally don't hold our trades into expiration week anyway so we couldn't care less about expiration. We care about managing our live PnL because that is reality...Period. Rolling works fine the majority of the time but when things get ugly (i.e. 4th quarter 2008, Aug' 2011) you need adjustments that have some punch behind them to significantly cut your position delta, gamma, and vega. To do this we use long puts and debit spreads at trade setup and as adjustments. And we adjust early to keep ourselves from getting into a hole too deep to dig out of. This is what keeps our drawdowns and loses very small. We don't worry about getting the "perfect" fill when the market is dropping like a rock but would instead rather give the market maker an extra nickel, dime, or quarter in order to know we've cut our risk. All of these techniques come from experience (learning from losing trades) to continually improve at our job of being "risk management specialists".
The live trading of the Steady Condors strategies started in September 2012 after being extensively backtested with intra-day pricing data going back to 2006.Results presented below are net of commissions, are on the whole account, and are non-compounded. Approximately 10-20% of the account is left in cash at all times.
Everything prior to Sep'12 is backtesting using the ONE software with live pricing on a 5 minute basis that gives you a historical risk graph and all of your options Greeks. We've found ONE to be the most realistic backtesting application available. Some slippage was also accounted for each month. When pre determined adjustment points were reached in backtesting, the planned adjustments were made without exception and with particular care to avoid knowing "what was coming next". We present backtesting to give members a general idea of what historical results may have closely resembled. It's not intended to replace live trading, but we feel it does provide value and shows us how our strategies may have held up under different market conditions, especially 2008. Without backtesting, you are essentially "winging it", and we definitely don't do that. We've spent countless hours (thousands) live trading, backtesting, and fine tuning our strategies primarily for the purpose of attaining consistent performance in our own personal trading accounts to generate monthly income.
The portfolio will normally include two monthly income trades making up a 40k portfolio:
Modified Iron Condor
This is a modified version of a classic Iron Condor with the following modifications:
- Add a put debit spread near the money plus some far OTM puts for black swan event protection. This helps reduce the Vega and reduces Gamma so as price moves down and volatility moves up, the Put debit spread is flattening your T+0 curve and reducing the negative effect of Vega. Additional debit spreads or long puts are added at pre-defined adjustment points as the underlying (normally RUT) continues down.
- To flatten the T+0 curve on the up side, sell less call credit spreads. This makes the upside risk minimal from the beginning of the trade and it's easy to manage. Normally there is about one call spread for every three put spreads.
- If the market is moving up, the typical defense is to take the calls off at pre-defined adjustment points. Because there are so few calls, taking the calls off doesn't hurt the profit potential of the trade very much. It also eliminates all risk to the upside and our short puts will now be far OTM normally carrying a delta under 3. At times where more credit is needed up to half of the put spreads may be rolled up for additional credit, and we may also remove the original put debit spread late in the trade.
This trade will use a 30k block and typically uses around 90% of the capital. It is expected to have 2-4 adjustments each month. This trade is extremely resilient and it is rare for it to be down more than 3-4%. On average it makes us around 3% per month. If you have a portfolio margin account returns are normally 15%+ on a monthly basis, although PM accounts are only suitable for the most experience traders.
No touch Iron Condor
This is a more classic version of an Iron Condor but will also have some of the setup characteristics as the modified version. "No touch" means no adjustments. It is closed when one of three things happens:
- Profit target is hit. (normally 12-15%)
- Max loss is hit. (normally 17-20%)
- One week before expiration.
This trade will normally use about 5k of margin. The philosophy of this trade is based on win rate, probability, and positive expectancy. This trade will normally make more money than the MIC (it is up 70% on margin year to date with live trading) but will have losses a couple times per year that could be as much as 20% (2.5% of a 40k portfolio). This is where proper position sizing comes in (5k of a 40k portfolio).
Implementing both trades will require 40k of capital, with 10-20% kept in cash at all times. The returns are a combination of these two trades.
Please note that the minimum capital required to trade the Steady Condors strategy is $30,000.