Why do a double diagonal at all? Why don’t we simply do an iron condor?
Dear valued subscribers,
You should have heard, we’ve closed up all our February positions and all our trades are profitable. You can see the results here.
Instead of doing a normal market update this week, I’d like to share with you some of the questions that I’m asked again and again. So in case some of you out there are typing the same questions for me, you can have you answers now. lol.
Questions:
Why don’t you just do iron condors every month instead of double diagonals and/or iron condors?
Also why don’t you use SPX (which is European style) to do condors/diagonals
instead of SPY, IWM, etc that are American style which can get assigned any time!
Answers:
Double diagonals normally offer better risk/reward than iron condors. When we roll a double diagonal into an iron condor, the amount of credit we collected is often unachievable if we were to simply do an iron condor. Of course, the trade off is time, a DD is held up for a longer period. One more feature of a DD that I like is the chance to get out of a position clean even if the market moves big-time against our position. We usually paid a small amount to initiate a DD, and when the time comes to roll, we may find that the market has moved too close to our short strikes. When that happens, we can simply close up the trade for a tiny loss or even a profit. A DD has a buffer that allows us a margin of error. An IC is shorter term and offers no buffer.
One more reason why we do a mixture of both here is that IC is short Vega (Greek for IV) while DD is long Vega. The short and long vega from the positions will cancels out each other reducing our exposure to IV risk.
We do trade SPX and RUT almost every month. We use them mainly for condors. However, because SPX and RUT are only trade at the CBOE, they are very difficult to get filled at the right price. To be fair to our subscribers, we only send out an advisory alert after we can get it filled ourselves. By contrast, SPY, IWM and DIA are traded in most exchanges and thus are more liquid and offer better bid/ask price. Again, we want to strike a balance here and therefore, we trade a mixture of all.
I hope you’ve learn something from this entry.
Best regards,
Gary
