The Retail Trader versus the Pro
Iron condors are very popular trades among retail traders. These days one
can hardly go to a cocktail party and mention the word options without
hearing someone tell a story about an iron condor on which he’s made a
bundle of money trading. Strangely, no one ever tells stories about trades in
which he has lost a bundle of money.
Two of the strengths of this strategy that attract retail traders are its
limited risk and high probability of success. Another draw of this type of
strategy is that the iron condor and the other wing spreads offer something
truly unique to the retail trader: a way to profit from stocks that don’t move.
In the stock-trading world, the only thing that can be traded is direction—
that is, delta. The iron condor is an approachable way for a nonprofessional
to dabble in nonlinear trading. The iron condor does a good job in
eliminating delta—unless, of course, the stock moves and gamma kicks in.
It is efficient in helping income-generating retail traders accomplish their
goals. And when a loss occurs, although it can be bigger than the potential
profits, it is finite.
But professional option traders, who have access to lots of capital and
have very low commissions and margin requirements, tend to focus their
efforts in other directions: they tend to trade volatility. Although iron
condors are well equipped for profiting from theta when the stock
cooperates, it is also possible to trade implied volatility with this strategy.
The examples of iron condors, condors, iron butterflies, and butterflies
presented in this chapter so far have for the most part been from the
perspective of the neutral trader: selling the guts and buying the wings. A
trader focusing on vega in any of these strategies may do just the opposite
—buy the guts and sell the wings—depending on whether the trader is
bullish or bearish on volatility.
Say a trader, Joe, had a bullish outlook on volatility in Salesforce.com
(CRM). Joe could sell the following condor 100 times.