Iron Condors vs Strangles: Which Loses Value Faster?
Summary
TLDRThe video script discusses the speed of decay in iron condor options trading strategies compared to strangles. It reveals that iron condors, which involve more risk, tend to decay slower. The research explores different short deltas in iron condors and finds that smaller delta condors reach 50% of their max profit faster, with larger delta condors decaying slower. The study also suggests managing trades early if they reach near 50% profit within 21 days, highlighting the importance of timing and volatility in choosing the right delta for an iron condor strategy.
Takeaways
- 📉 Iron Condors tend to lose value more slowly than strangles due to the additional purchase of long options.
- 🔍 A study was conducted to understand why Iron Condors decay slower than strangles and the disadvantages of using them.
- 📈 The research found that the smaller the short Delta in an Iron Condor, the higher the probability of reaching 50% of the max profit.
- 🎯 Iron Condors with a smaller Delta (20 Delta) have a higher win rate and reach the 50% profit target more quickly.
- 💰 Larger Delta Iron Condors collect more premium but decay slower, requiring more time to reach the same profit target.
- ⏳ It takes approximately five additional calendar days for every 10 short Deltas to reach 50% of the max profit for Iron Condors.
- 📊 The study analyzed 45 days of SPY Iron Condor data, comparing 40, 30, and 20 Delta strangles with five-dollar wide wings.
- 🚀 The 40 Delta Iron Condor collects twice as much premium as the 20 Delta Iron Condor, but it doesn't necessarily reach 50% winners twice as fast.
- 📉 All Iron Condors reach 50% winners slightly slower than strangles, with a wider discrepancy for larger Delta strangles.
- 🤔 Traders should consider managing their trades early if they haven't reached near 50% profit within 21 days, especially with trades initiated 45 days before expiration.
- 🛠️ The findings suggest that the choice of Delta in an Iron Condor strategy can significantly impact the speed of profit realization and premium decay.
Q & A
What is the main focus of the discussion in the transcript?
-The main focus is on the speed of decay in iron condors compared to strangles and the factors affecting this speed.
Why do iron condors tend to lose value more slowly than strangles?
-Iron condors tend to lose value more slowly due to the extra purchase of long options, which defines the risk and slows down the decay process.
What is one disadvantage of using an iron condor over a further out-of-the-money naked option?
-The primary disadvantage is that iron condors are slower movers in terms of reaching profit targets compared to naked options.
How does the delta of an iron condor affect the speed of reaching 50% of the max profit?
-Iron condors with smaller deltas (e.g., 20 delta) tend to reach 50% of their max profit faster than those with larger deltas (e.g., 40 delta).
What is the relationship between the delta of an iron condor and its win rate?
-A smaller delta iron condor has a higher win rate because the short strike is further out of the money, leading to a higher probability of reaching the profit target.
How does the premium collected differ between 40 delta and 20 delta iron condors?
-A 40 delta iron condor collects approximately twice as much premium as a 20 delta iron condor.
What did the study find about the decay speed of larger delta iron condors?
-The study found that larger delta iron condors decay slower than their smaller delta counterparts, with approximately five additional calendar days needed for every 10 short deltas to reach 50% of the max profit.
What is the suggested management strategy for iron condors based on the study findings?
-The study suggests managing iron condors early if they reach near 50% of the profit target within the first 21 days of a 45-day trade.
How does the discrepancy in decay speed between iron condors and strangles vary with delta size?
-The discrepancy is wider for larger delta strangles because iron condors, being risk-defined, decay slower in comparison.
What is the general takeaway regarding delta size and profit target timing for iron condors?
-Iron condors with larger short deltas generate greater theta decay but take longer to reach 50% of their max profit. For each 10 deltas added to the short delta, it takes roughly five more days to reach the same profit target percentage.
Outlines
📉 Iron Condor Profit Decay Analysis
This paragraph discusses the speed of decay in Iron Condor strategies compared to strangles, addressing why Iron Condors are slower. The research team conducted a study to determine the time it takes for Iron Condors with different short Deltas to reach 50% of their maximum profit. The study found that smaller Delta Iron Condors, which have a higher win rate, reach the 50% profit target more quickly. The larger the Delta, the slower the decay, with an additional five days needed for every 10 short Deltas to reach the profit target. The trade-off between risk and reward is highlighted, with larger Deltas offering greater premium but slower decay.
📈 Iron Condor Deltas and Profitability
The second paragraph delves into the relationship between the size of the short Deltas in Iron Condors and their profitability. It is revealed that larger Delta Iron Condors generate more Theta Decay but take longer to reach the 50% profit target compared to smaller Deltas. The summary of the research data shows that Iron Condors with 40 Deltas collect twice as much premium as those with 20 Deltas. However, the time to decay to 50% of the maximum profit is significantly slower for larger Deltas. The paragraph concludes with practical advice for traders, suggesting that if a trade is not reaching the 50% profit target within the expected timeframe, it may be wise to manage it early.
Mindmap
Keywords
💡Iron Condor
💡Decay
💡Strangles
💡Risk
💡Delta
💡Max Profit
💡Theta Decay
💡Premium
💡Profit Target
💡Volatility
💡Expiration
Highlights
Iron Condors tend to lose value more slowly than naked positions due to the extra purchase of long options.
A disadvantage of using an Iron Condor over a short vertical spread is its slower movement.
Different short Deltas in Iron Condors were studied to see how many days it takes to reach 50% of their Max profit.
A 40 Delta Iron Condor, being more aggressive, collects a larger premium compared to a 20 Delta Iron Condor.
Iron Condors with smaller Deltas have a higher probability of reaching 50% of their Max profit.
The win rate for a 20 Delta Iron Condor is significantly higher when held to expiration.
Analysis of 45 days of SPY Iron Condor data revealed insights into different Deltas' performance.
Larger Delta Iron Condors decay slower and take more time to reach 50% of Max profit.
For every 10 short Deltas added, it takes roughly five more days to reach the same profit target.
Iron Condors reach 50% winners slightly slower than strangles due to their compromise state of decay.
If a trade is put on with 45 days to go and aims to collect 50%, managing it early before 21 days is recommended.
Traders often default to 30 Delta Iron Condors, depending on the underlying and volatility levels.
Iron Condors with larger short Deltas generate greater Theta Decay.
Smaller Delta Iron Condors reach 50% of their Max profit more quickly.
The research team's findings provide actionable insights for managing Iron Condor trades effectively.
The study's results are valuable for traders looking to optimize their Iron Condor strategies.
A quick break was taken, with more insights to be discussed post-break.
Transcripts
to look at it iron Condors uh the speed
of Decay according to the research team
we haven't covered a lot in Iron Condors
recently we get a lot of questions and
you know why are they so much slower
than strangles are they so much slower
than strangles let's take a look
so risk to find strategies tend to lose
value more slowly than naked positions
due to the extra purchase of those long
options so iron Condors usually get to
50 of their Max profit slower than
strangles somebody sent me an email
yesterday and said you know like what's
what's the disadvantage and this may be
the Genesis of this study what's the
disadvantage of me using a iron Condor
here or short vertical spread over a
further out of the money naked option
and I said the the only disadvantage is
it's just a slower mover you know that's
it you take more risk you make more
money faster that's it
let's go next slide
since we can choose different short
Deltas we're curious that we're curious
how many days does it take for different
Iron Condors to reach 50 of their Max
profit Target
so we did is we just kind of started
studying a 40 Delta ion Condor the these
are all five dollar wide 40 Delta is
your short option 30 Delta is your short
option and 20 Deltas is your short
option okay let's go next slide so so uh
okay so you have the days oh yeah I'm
just looking
yeah so we found that the small Delta
iron Condor which is the five dollar
wide has and I'm sorry the small Delta
would be in this case the
um uh
the small Delta would be the 20 Delta so
um with the short strike being the 20
Deltas has less Delta than the 40 belt
we found that the small Delta encounter
has a higher probability of reaching a
50 winner
so does does having more winners lead to
faster premium Decay so let's just take
a look here first so with the short
Delta
um you the win rate obviously is going
to be higher because it's further out of
the money and if you look at the
um uh managing or getting to 50 I assume
winner means getting to 50 so yes yeah
yeah so so you you your percentage is
higher when you play it either managing
in 21 days or getting to 50 percent
and and they're all higher than
expiration too
yeah well these are if you look at a 20
Delta just think about this for a second
you do a 20 Delta iron Condor you're
you're you know you can lose on either
side but your win rate is your win
rate's 81 if you imagine early in 70 if
you hold to expiration it's a gap
between those two but really interesting
stats
okay let's go to the next slide
so
to test this we analyzed three 45 data
Explorations spy iron Condors we sold
the 40 30 and 20 Delta strangles
um with five dollar wide wings those are
the iron Condors we did okay let's go
next slide
so what we found is the more aggressive
iron Condors with the larger Delta that
collects a larger premium so the 40
Delta iron Condor is able to get twice
as much premium as the 20 Delta iron
condor but does this mean it takes twice
as long to reach 50 winners so if you do
the 40 Delta iron Condor your your five
dollars wide you're going to collect
let's say two dollars if you do the 20
you're gonna collect one dog that's all
that means but again we're deciding
we're we're seeing what is the speed of
Decay look like so let's go to the next
slide
so what we found is the larger Delta
iron Condor does Decay slower than the
further out of the money counterparts
adding about five counter days for every
10 short deltas that is a new statistic
that we did not know
um
five calendar days for every 10 short
Deltas to get to 50 of Max profit
and you're looking at the average days
required to reach 50 percent you're
looking at a round just over 30
and just under 25 for the 20 Delta
um yeah yeah yeah yeah exactly yeah
all Iron Condors reach 50 winners
slightly slower than strangles due to
their compromise State of Decay and the
discrepancy is wider for larger Delta
strangles
interesting because I guess you're
buying more premium because it's only
five dollars wide
um that's nice well done it almost
highlights here that if you're putting a
trade on with 45 days to go and you're
looking to collect 50 if you get
anywhere near 50 inside that time frame
before 21 days you probably should think
about managing it early really that's
what it coming down to here
yes and you put it over 45 days to get
to 30 you know you have 15 days left you
haven't gotten to your 21 you know
you've passed your 21 day time time
frame
you got it so if you go straight to the
30 Delta which is where we kind of live
you're right there at the 21 days pretty
that's pretty cool yeah
yeah
I don't know what I default to when I do
our encounters it really depends on the
underlying and the level of volatility I
don't think I do 40s at all I think I do
some 30s mostly 20s and 25s mm-hmm
kind of a 25 is kind of like my
wheelhouse yeah let's go to the next
slide
so iron Condors with larger short Deltas
tend to generate greater Theta Decay
okay that makes sense however smaller
Delta encounters reach 50 percent of
their Max profit more quickly and for
each 10 Deltas added to the short Deltas
in an iron Condor it takes roughly five
more days to reach the same profit
Target
percentage-wise same profit Target
interesting
very good very good good job good job by
the team uh short Sweden very nice we'll
take a quick 90 second break and come
back we got more tasty live with them
the moment you've been waiting for us to
knock the opening bell we'll be back in
90 seconds
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