Same trade, different reasons

Here’s a question we received recently from a client, asking about the relationship between the vertical spreads we trade in the ETF Trend Options strategy and the iron condors associated with our core product:

I have been trading these ETF Trend Option spreads for a while now. Some of them wind up as de facto put/call condors. Can you explain the fundamental differences between your regular iron condors and these de facto ETF condors? Except for the fact that the latter are established sequentially? Trying to learn, M.

Just to back up a little bit, here’s an example of the “de facto” condors M. is talking about.

fig. 1. IWM daily closing prices. Source: CSI Data

Most of the time, the price signals that generate trades for the ETF Trend strategy are strong enough that counter-trend or reverse signals don’t occur for the same options expiration cycle. But sometimes, we might sell one vertical spread in the direction of a trend and then get a signal in the other direction shortly thereafter. In the example at fig. 1, we got a signal to sell a bullish vertical put spread on IWM, and then a short time later got a signal to sell a bearish vertical call spread. We executed those trades at different times and managed them separately through the duration, but as M. points out, once the call spread was open, we actually had an iron condor open in IWM.

The key difference is that the iron condors are volatility-based trades that don’t depend on a particular price forecast, while the ETF Trend positions that sometimes morph into condors depend entirely on price-based signals and not any volatility analysis. We also keep the iron condors relatively market-neutral via delta hedging, while the ETF Trend positions will accrue substantial delta exposure.

This is a perfect illustration of the point we made yesterday about the distinction between the execution of a trade and the reason behind it. You might have two identical positions open – in this example, two IWM condors – based on two entirely different rationales. Those different reasons for entering the trades will translate into different exit criteria, holding periods, position sizing parameters, and so on.

At the time of publication, Jared Woodard held positions in IWM.

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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