Chicken Iron Condors For Smaller Accounts

chicken iron condors this is a tasty bite segment these are four accounts sizes between 2,500 and 25,000 correct IRA type accounts also and yeah and it's just a little bit smaller inside of the pattern day trading rules that's kind of our definition by the way the pattern day trading rules basically say that if your accounts are less than $25,000 you have restrictions on trading in and out of the same underlyings over the course of every every week every four consecutive days I'm sorry five consecutive days but four trades in the same underlines in five consecutive really so one of the things we one of the things that were focused on is just looking at some potential trades so you can kind of keep them trades small but you have to get out of them in the same day and just so you know like the whole concept of pattern day trading is something we are so I think it's the worst rule in the history of sports of course that's right that way in the in all my foot there too I guess it doesn't matter why I put here if you make a stupid rule don't don't defend why it was I got why it's in place okay okay so so it's a dumbass rule it should have been removed and and repealed long time ago it hasn't been and because it's still out there we just try to find workarounds the problem in the industry is nobody has the guts to step up to that rule and that's it and and God knows we tried we really did it's just we kept getting shut down at the door and you know it's really easy to shut you down with the door would you like to be audited no thank you so you shut down the door let's go to the next site would you like to be tied up in you for years yes kind of business kind of part of business I hate new traders and those with smaller accounts typically choose to stick to risk to find strategies because you have to because of one the amount of capital you have into again we're and we're focusing a lot of this the limitations of pattern day trading rules and we'll get into a lot more of that later on and why it's such a stupid rule and wide so it's it's actually not genuine on any level but whatever that being said a smaller account is more susceptible to large draw downs because it's harder to recover with limited capital period smaller accounts bigger percentage of cap bigger percentage of capital work even if you're staying small and that puts you susceptible to one way markets larger moves and much harder to recover obviously because not only because you have limited capital but because you can't employ a higher probability trade to get yourself out of the mess okay so typically I mean limited right I mean that's because industry typically a tasty bite account should avoid trading stocks with joy trading bigger stocks with five dollar wide strikes due to such draw downs and again has nothing to do with has nothing to do with liquidity it has nothing to do with not wanting to trade an expensive stock it just has to do with hey how much money can I make back if I'm wrong or how do I make the money back if I can't improve my probability success so there are other ways to reduce exposure to drawdown risk while potentially increasing return on capital so let's talk about this because we have so many quote tasty bite type listeners we know from our studies that we know from our studies we know from trading the iron condors are can be six elections say they are successful it can be successful neutral trades we found and this is something that we validated on numerous numerous through numerous studies is that iron condors perform better when capitalizing on high Ivy percentile high IV rank looking to trip looking to take in volatility contraction in addition to time decay one of the biggest improvements to our trading over the last over the last couple of years or less couple of decades is we now focus on where IV lies within its kind of within its historical range as opposed to just saying hey this is high IV for this month for this month for this day whatever it is one way to reduce draw downs and a spread is to collect a higher percentage of the width of the strikes at the risk of lower probability of profit okay the relationship between probability of profit and the amount of money that you collect obviously they have a they have an inverse or or there's a correlation between the two where you have a lower probability profit with the more capital the more creditors you take in you have a higher probability of profit with less capital as you take it makes whole sense we decided to explore the concept of coupling an iron Condor collecting a higher percentage of the strike with with the higher IV rank so this would be how do we say this would be a trade that does not set up very often but this would be but this would be injury this market in this market but this market environment can change in 30 seconds we can go we can go within a week from low IV to hi IV so it's important just to have this discussion kind of it's a pre-emptive discussion we typically look for an IV rank of 50 or higher to sell premium however to justify collecting a higher with a higher percent width of the strikes we look to an IV rank of 80 now again how many times does that happen in different ETFs with no earnings it doesn't happen very often I would say in the last year I'm just guessing but probably three or four times this year so this is a trade that may set up three or four times a year and again not very often not very often all of these underlyings have $1 wide strikes e/m ewz GLD IWM xle those are five different by the way that's emerging markets that's Brazil that's gold that's the Russell 2000 and that's the energy sector xle they all have one dollar wide strikes we did this with an IV rank of eighty because you know what we want to put people in a position to we want to put you in a position when something sets up you know what to do when something sets up and you say hey I remember I saw this market measure I saw this tasty bites episode when IV rank was over eighty and I want to see what the odds are let's take a look yeah now you know it's going to be good because otherwise you know that's why we set this whole thing up plus eighty we looked last five years we didn't we didn't take any earnings into play so we looked at entry points for the IV rank over eighty for the last five years then we simulated collecting selling to selling to iron condors one collecting 33 percent of the width strikes and the other collecting 45 to 50 percent of the with the strikes all the iron condors had $2 wide wings both were sold closest to 45 days and held to expiration now I'm gonna tell you the funny thing about kind of whole idea of tasty bite-size iron condors we went on the road officially with thinker SEP in 2001 was our first year the end of 2001 to early 2002 was the first time we went on the road to talk to customers at that point from coming from the floor we thought that forty five to fifty percent of the width of the strikes was the best way to trade an iron Condor we had no idea that there was over time that there was going to be all this validation or IB rancor we thought that hey if you think implied volatilities hi try to collect as close to 50% but don't go over 50% so use it with the strikes we higher probability success than 50/50 so you're just a little bit better than 5050 and and and then you're mitigating your risk by the size of the credibility contracts spread will come in so we're doing everything right without the validation or without kind of the history of trading as a retail customer we would expect to see a higher win rate by collecting one-third the width of strikes but collecting 45 to 50% would yield higher profits per win and smaller draw downs this is the hole we're getting the hole logical approach here and so what we did was we just took a look and lo and behold okay now again remember this is over ativ rank this only sets up in five years it's set up 26 times not a lot not a lot in five years with five underlines it set up 26 times so this is a this is not a classic this this sets up about five times a year okay which is okay yeah sets up about five times a year now take a look at these results again all we're trying to do is to say hey you know gotten so much with we we've gotten so much smarter over the last two years three years I'm doing tastytrade that we've gotten to the point where now we can do Studies on the stuff we want to study we can validate we can validate the research and kind of what our thinking is and everything should play out well the 33 percent iron Condor which should have worked normally it should have worked one-third at the time so you should have winners about 67 percent because the IV rank was over 80 it was 92 percent it's amazing now I'm mad because I spent an entire career do we wing it and how an entire career winging what I thought was a good trade verse ever knowing if I knew I could load up five times a year I'd load up five times a year I really would no doubt about it with a 92% win rate I wouldn't even think about the forty five percent with the forty five percent of the width of the strikes should deliver a win rate of about fifty five percent it delivered eighty five percent it's amazing numbers okay this is this is the the drawdown being small so of course the drawdown well the max drawdown that is the max drawdown one officer both of these draw downs by the way are the max drawdown stony to die white strikes is always two hours these are so there are max draw downs in there so so so the two losers or the fort losers reached max drawdown right I'd forgot that we're going to dollar what we're going to wire them but take a look at the but take a look at the P and LS that's why it's a tasty by trade this is a two dollar widespread but over five years and twenty-six occurrences the P Nels this is for one contract one spread it's $1,700 and thirteen hundred dollars so it actually you can argue both work so easily this is just fascinating validation for tasty bite-sized accounts because we have to put ourselves in a position especially with smaller accounts like next time implied volatility gets to eighty percent anyway sinks what do you think the first thing I tell case are you tell Katie its hey we're going to do as many of these iron condors as we can we're going to diversify among them all but we're gonna we're going to be very aggressive you have to scale up when the when if your comfort level is three contracts let's do four or five well ninety two percent is twenty five ninety two point three is twenty four percent higher than the expected return twenty four percent so these numbers huge numbers eighty four percent is on the fifth forty five percent rank is thirty percent higher you had that's over five years now I understand bull market why blah blah blah you know whatever you have to do it to your you have to be aggressively get into this two hands bleed yeah I mean I know I don't want to make it sound like it's that there's there's not a lot of layups out there but one of the things and let me go back and just say couple things that we've learned one of the things is that tweak'd this stuff so now we have the validation - we know if we do this for the next five years and we do it with I don't know ten lots or 50 lots or whatever 100 Lots depending on count size I mean if your tasty body count you're gonna do one or two Lots if we do this inside so let's let's take one step let's take one step back from them so if you have this set up do you forego some other strategies so that you can do two contracts here instead of one contract what you normally we do no because it doesn't set up enough I don't think you have to forego anything because it doesn't set up that it sets up but that that that one time the next year or the two times this year do you move from one strategy into this one and double up on this one umm you always scale into strengths so when I say skill and strength I mean you scale into a very positive situation this is a positive situation you scale into the strength period yeah so what we've learnt throughout this entire process is I'll go through it just like we said you scale into the strength of strategy you scale you scale to strength of strategy you aggressively put these positions on when it's time when we reach those levels and and again you get you the expectations the expectations for profit I mean it's 92% 84% pretty high it doesn't matter what the underlining is by the way right it doesn't matter which one of those ETFs are used these numbers are just the combination of all of them and again there's only 26 occurrences in five years so it happens again about five times a year but five times a year is is a big number when it comes to return those are big return numbers on one contract oh good okay because remember that the max amount of risk you're taking is that biggest loss down below

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Keywords: tastytrade, tastytrade.com, tasty trade, tastytrade network, tom sosnoff, tony battista, finance, options trading, how to trade options, trading options successfully, tastytrade options, financial investment, stock market, Get Tasted, tasty bites, chicken iron condors, iron condors

Id: PflbtM2K1Zo

Length: 13min 3sec (783 seconds)

Published: Wed Nov 20 2013