Letters To S&C by Technical Analysis, Inc.
IRON CONDORS AND MARGINS
I read “The Queen Of The Iron Condors” by John Sarkett in your July 2012 issue about Amy Meissner and her approach to option trading, and I have a few questions.
If I am correct, a trader would need an account with at least $60,000 to trade the iron condor approach discussed in the article.
In Figure 2 in the article, take the example of the January expiration month with a 31.1% gain of the original credit. The gain would be 31.1% of 4, which is 1.2. With a 1.46% gain of maximum risk, the maximum risk would be 100/1.46 *1.2 = $82,000.
Since you open a new position 80–88 days before expiration, you must have at least two months’ open positions, so the margin must be way more than $100,000.
In addition, the Russell 2000 (RUT) out-of-the-money options have a wide bid/ask spread — for instance, 2.8 to 3.45 — which would make it hard to get good executions.
Or do I have it wrong?
Amy Meissner replies:
Yes, you would need more than a $60,000 account. I’ll have a maximum of two expiration months on at the same time. I started 2011 with about $275,000 and only traded 20 contracts for the first five months, then 25 contracts after that for the rest of 2011. The bid/ask spread can seem wide for the RUT, but I haven’t had any problems getting filled. I sometimes get the mid price and if not will give them 0.05 to 0.10 cents off the mid.