Iron Condors are hearty and can survive most environments. But mix in low volatility at trade entry with a deathly 12% nosedive and, well, prep the coffin because your bird’s going into the ground. For those that just began deploying monthly condors and were greeted with a loser right off the bat, my condolences. Chalk it up to bad luck and whatever you do, don’t let it deter your enthusiasm. The system is still sound and long-term profits assured. If you sized properly and exited in a timely manner, the losses should not have been life-threatening.
Now, a select few – hopefully many – may have escaped with profits in tow, despite the adverse environment. The secret sauce to their wizardry was undoubtedly a well-executed hedge. I plan to review this in-depth during our next MasterMind Group Meeting (Oct 24th @ 7:30 PM EST). But I’ll offer a taste today.
The diligent Condor caretaker has two paths available: passive or active. The former approach involves entering the Condor and pre-setting your exits at the short strikes. And then chilling. The latter method entails quick hedging when support or resistance levels give way. The lion’s share of the time the passive approach delivers, but during months like this, the active route reigns supreme. Just ask anyone who scooped up long puts, bear puts, or bear calls sometime during the downturn. They either loss less than their passive counterparts or even eked out a profit while the set it and forget it type got punched in the face.
Now, that’s not to say these active acrobats always win the day. Sometimes they suffer whipsaw as breakouts morph to fakeouts. As with all things in trading, you pick your poison. The goal of the mentor is to provide the key details for informed decision-making. To lay out the pros and cons and relevant tradeoffs. Your job then is to pick the path that speaks to you. Here’s a quick rundown of the pros and cons off the top of my head. Holler if I missed any major ones.
Passive Pros: Hands-off, requires little to no micro-management, should work in the long run if options remain perpetually overpriced.
Passive Cons: Losing months or, worse yet, consecutive losing months can wipe out multiple months of gains resulting in long stretches of no net gain. Your drawdowns will be larger than the active approach.
Active Pros: Losing months are less painful resulting in smaller drawdowns. This could make it easier to stay the course.
Active Cons: Hands-on, requires more micro-management, swift decision-making and overall skill. It opens you up to whipsaw as breakouts quickly reverse and deliver losses to your hedge.
If you were curious as to when it would have been appropriate to consider hedging your November RUT Condor, here are the four support zones that were breached this month. Which level you used is ultimately a matter of personal preference. But adding an, let’s be honest, adding anything bearish on a break of any one of them would have resulted in better results than the passive method this go around.
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2 Replies to “Tales of a Technician: Hedging Naughty Condors”
Thanks Tyler!
I’m glad I didn’t get stuck in a RUT. My Gold Condor caught a big up-draft into the stratosphere, so I had to fold one of my wings and dive to make a safe landing on my bull put leg, and then road that to one into the sunset.
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