A lot of people think that Iron Condors are, all the same, there is no big difference but the reality is there is a huge difference.
Most people when they set up Iron Condors they don’t consider the duration which is very important because if you don’t have duration you will not know what’s going to be a bigger problem or risk.
In this episode, we’re going to cover different setups of Iron Condor.
Let’s use the Shop because it’s a bigger stock which allows me to manipulate the strikes a little bit easier compared to cheaper stocks.
So if we set up 10 contract Iron Condor and got the 1380s and the 1100s on the put side I’m going to receive 1.50 credit.
This is a 10-day duration, Iron Condor.
I want you to pay close attention to delta, gamma, theta, and vega with emphasis on theta and vega.
When you look at something like the theta versus the vega if you have a vega problem which is your biggest greek because this is your money maker and also the risks.
So if you have a vega problem let’s say it’s one or two points it only takes you a day even half a day to make up a vega issue.
So in here, vega is not a big concern and price if you look at your delta you got almost a three.
You don’t care about price moving around because it’s pretty much right in the middle. That’s your white line it’s kind of heat moving around right there but theta right here is 200 you’re making 200 a day but if you’ve got a volatility problem that theta is just way stronger.
Let’s look at another condor from June 18th, theta and vega are getting a little bit closer.
Now I have a 151 versus a 201. The vega is much bigger.
I have a 150 to 200 so they’re almost even but it will take a day to make up a volatility problem.
Let’s say I’ve got a three-point volatility problem so three times 200 so that’s 600. How many days does it take to make it up with a 150?
We are looking at 3 or 4 days.
It is like a ratio of 150 to 200.
Another one is 52 days out.
Now we’re going into more of a traditional thing and here what you’ll notice is this line is a bit flatter so I’ve got a 214 vega.
It is still the biggest greek and the delta is nearly zero and then I’ve got a theta of about 82. How many days does it take to make that up?
It will be about two to three times because that would be 240.
But if I’ve got a three-point volatility problem that’ll be about 640 or so and then how long does it take to make that up?
As we go further and further the theta to vega is 27 to 156. it takes me more days ratio-wise.
How many days does it take to make up a one-point volatility problem?
It will be about five to six days so you can see the ratio is a big difference.
The biggest difference is when you go further duration you become more vega sensitive.
If I go to July 16th I’ve got an 82 to 215 and if I go closer June 18th I’ve got a 151 to 201 so it’s almost a one-to-one ratio.
And if I go very short duration my theta is almost twice as big. My theta is 218 versus 123 and that is 24 days out.
Maybe a 20 day out would almost be identical.
When I go to July 16th which is 52 days out
You can see it takes about two to three days to make up the vega problem because it is 80 to 215.
As you go further theta will be weaker from 26-30 to 150 so it takes about five days to make up.
The further I go let’s say January 2022. l have 12 theta to 120 vega so it takes me 10 whole days to make up a one-point volatility problem.
The biggest difference is as you’re going into the 40-day Iron Condor or longer you have to take into account the vega risk.
The volatility risk most people think is it’s the same as a 10 day versus why don’t I get the fast tetha. If you get the fast theta you have more price risk so here’s kind of the big pro and con.
You get theta you get more price risk but if you want less price risk you have vega risk.
These are the big trade-offs.
The more you go in duration you’ve got a bigger risk but less price range risk because your curve is much nicer, it’s smoother, it’s flatter.
But if you go shorter duration you make faster theta or time but you increase price risk.
