If You Have Two 5 Years Condor Spread Trading Records From Two Advisory Services, Could One Of Them be Reliable?

If You Have Two 5 Years Condor Spread Trading Records  Each, Could One Of Them be Reliable? You guessed it right: the answer is the classical expression "It depends". Let us check what it depends on, and how to make a determination.

In the previous post, we explained why a minimum of 10 years are needed to make a judgment on an 80/20 condor spreads trading record.  Suppose that when you visit the web, you find a number of advisory services that provide five year record. Could some of these trading records be useful? It depends on the probs assumed in the spread, and the duration of the spread, which we shall assume is 1 month.

We mentioned the expression of a "bad trade", but we did not define it. For the purpose of this analysis at least, a bad trade where the stock price is at or above the short strike at expiration. Please make sure you do not confuse this definition, with another definition that may be in your mind such as  a trade in which the stock reaches a short strike during the life of the trade, which is probably the one you may have in mind, or an even worse definition of a bad trade. The latter definitions of a bad trade lead to larger percentage of bad trades than implied in the numbers attached to the condor spread. In the next post, we are going to address this issue in more depth. So do not go away as they say on CNN-- we will be right back.

Now we are back to our analysis. If we take the 80/20 condor spread, a bad trade (for the purposes of this post) is a trade that finishes at or above a short strike. There are 20% of them on average, and we explained in the previous post why one needs 10 years. Let us call a advisory service that offer these spreads as advisory A. 5 years in not enough for advisory A. Let us say a second advisory, denoted advisory B, follows  (more aggressive spreads) 60/40 monthly condor spreads . In this case, a 5 year period would generate 24 bad trades for advisory B, and therefore the 5 years meet the minimum requirement for advisory B, but not for advisory  A.

The lesson: A smart condor spread trader should then ask not only for the duration of a spread, and the length of the trading record, but should also ask about the nature of the spread, and make sure that it was kept consistent---For instance, you do not want to have in the same record 80/20 spreads in certain months, and 60/40 in another  months, etc. You then use the rules as discussed above.

While asking your questions to the advisory guys, if the guys do not seem to understand what you are asking for and why you asking for the information, then you have an indication about the intellectual strength of the intellectual strength of the advisory service---Edges can take a conceptual form.

Before I leave you, I have a question: Could we have a 50/50 condor spread ? If yes, could you apply the analysis above?

Answers:  I will wait before I give it to allow you time to think about it. Make sure you visit in a few days. It will be here. You can also post your answer in the comments section below.