Option Condor Spread Writers -- How Long Should A Trading Record Be?

 Short answer: a reliable track record needs at least 10 years! We explain why below, but first some introductory remarks.

One should not confuse a high probability trading strategy with a trading strategy that has an edge. A well known example of high probability strategies is the option condor strategy, in which  one sells one put and one call, and hedge them by buying a put and a call  that are respectively at higher  and  lower strikes, when compared to strikes of  the call and the put that were sold. This leads to "impressive" annualized yields because of  lower margin requirements (which are the difference between strikes adjusted by the net premium), and condors can be designed to achieve a high probability of success in one trade.


For instance, it is not unusual to write these condor spreads so that the probability of the stock ending between the two sold strikes is 80% (with a yield on margin that impresses the eye). When option beginners look at these numbers they are typically  impressed, and .do not think in sufficient depth about the risks.  

The  typical  condor writer makes a series of successful trades, and then one day a non successful trade can come along, and wipes all profits. It may even lead to the loss of  the whole capital, if all of it was used as margin, and the bad trade involves gap well  beyond the long protective strikes.

One can find a number of option advisory services that  provide condor spread signals. People can be easily impressed by the numbers. An advisory service typically posts a track record, and they in different length, from  6 months to 6 years/etc. 

What is an acceptable track record in terms of length of time, and why?


This is a core issue with all trading strategies with high prob of success on one trade. If the prob of success is say 80% on one trade, it would mean that one would need 10 years to generate 24 trades that are bad. A sample size of around 25 is needed to form a scientific conclusion, via the application of the Central Limit Theorem/Law of "large numbers".

Therefore a reliable track record needs at least 10 years!





Interestingly, some of the well known times when option writers took major hits were separated by 10 years: crash of '87, crisis of '98, and the credit crunch crisis ten years later.

There is an alternative to track records based on observed numbers and time:  one needs to prove theoretically (using mathematics) that a high prob strategy has a positive edge.