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Sunday, July 24, 2016

The Iron Elephant options strategy explained

The Iron Elephant, also known as the Lazy Elephant, just because it has a nice ring to it, is similar to an Iron Condor position. The difference is that the Long Call portion of the Credit Call spread is played with a greater number of contracts than the Short Calls leg.

For example, instead of playing the following:

+20 Long Puts
-20 Short Puts
-20 Short Calls
+20 Long Calls

the Elephant would be as follows:

+20 Long Puts
-20 Short Puts
-20 Short Calls
+22 Long Calls

or also, 

+20 Long Puts
-20 Short Puts
-18 Short Calls
+20 Long Calls

Basically that: more Long Calls than Short Calls.

The goal of the position is to reduce the weaker side of typical Iron Condors, by achieving a pretty flat T+0 Line to the upside:

With this T+0 line (pink line) the trader can wait much longer before adjusting the Call spread, without necessarily incurring additional losses due to this "waiting", as it happens in typical Iron Condors.

Of course, this bonanza on the upside is not obtained out of nothing. In order to achieve it, we have to weaken the downside (Pink line curving a little more ferociously to the downside than in typical Iron Condors).

To mitigate this weakness, I like to add a Long Put at 16 deltas using the ETF. So, if I'm playing an SPX Iron Elephant, I would add a 16-delta Long SPY Put. Of course, you can add more or less Puts until you feel comfortable with the risk profile. Each long Put will eat into the credit received from the Elephant but flatten-out the risk curve to the downside.

This is just for the purpose of quickly defining the term. I needed to have this reference article on the site for when readers ask me what an Iron Elephant is.

Inside, a new, much more detailed 16-page guide was published with all the details about this position, trade management and my thoughts on what the Pros and Cons are.

Why this name?

It would be too annoying to refer to this new position as:
“Iron Condor with fewer short Calls than long Calls and with an additional 16-delta Long Put”.

Say that 10 times a day and you suddenly want to stop existing. For this reason, the new position needed to be baptized.

I always like to add some humor to my every-day activities, and with just a little bit of imagination, it’s pretty clear that this position totally looks like an elephant:

The necessary disclaimer: I haven't traded the Iron Elephant with real money yet (July, 2016). Consequently, this could all be a worthless, useless experiment. I have studied it deeply for months. I think I have a good understanding of its evolution over time and its weaknesses. However, only practice will tell if it is more effective than the traditional Iron Condor, or the Unbalanced Iron Condor that I usually play nowadays. I'll start deploying this new variation with real money soon, publicly tracking, as always, entries, exits and gains/losses but using smaller positions.

If it is worthless, at least it may pick someone's interest out there and perhaps stimulate more creativity, study and experimentation.


Go to the bottom of this page in order to see the Legal Stuff

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