NOTE: Jim Riggio’s modified Weirdor is the JEEP trade. Jim did a presentation at Options Tribe about this recently. The replay and slides are available at Capital Discussions
Dan Harvey is a retired Sheridan Options Mentoring mentor who has been trading iron condors for many years. Dan is a retired medical surgeon who has done surgery on the Iron Condor to modify it to address several problems he saw in traditional Iron Condors.
What’s wrong with the Iron Condor?
- Iron Condors are short Vega and volatility normally goes up as the underlying price goes down. This pushes the P/L curve down from volatility while you are losing money from price action at the same time.
- As you move from the center of an Iron Condor, gamma kicks in and makes the T+0 curve “bend” and change relatively quickly so you tend to adjust fairly soon.
- There is more time premium in Puts than Calls so you have less distance to your upside short strike (assuming you are selling the same delta for the Puts and Calls). Markets tend to rise so you spend many expiration cycles fighting the Iron Condor on up moves.
How can we address these problems?
The first step is to add a put debit spread near the money. This helps reduce the Vega and reduces Gamma so as price moves down and volatility moves up, the Put debit spread is flattening your T+0 curve and reducing the negative effect of Vega.
To flatten the T+0 curve on the up side, we sell less call credit spreads. If you are selling 12 to 15 put credit spreads, a typical Weirdor will sell two or three. This makes the upside risk much less from the beginning of the trade and it’s easy to manage.
If the market is moving up, the typical Weirdor defense is to take the calls off if the price of the short call increased 50% to 100%. Because there are so few calls, taking the calls off doesn’t hurt the profit potential of the trade very much. It also eliminates risk to the upside.
Why did Dan Harvey call this trade a Weirdor?
Dan said the graph has a “weird” looking shape but it’s really a modified Iron Condor. When you combine “Weird” with “Iron Condor” you end up with a “Weirdor.”
Let’s see an example of a Weirdor
With RUT at 1047.70 and 37 Days to expiration, here is a typical Weirdor:
Put debit spread
+1 RUT NOV 1040 PUTS @ 26.40
-1 RUT NOV 1020 PUTS @ 19.60
Put credit spreads
-12 RUT NOV 920 PUTS @ 4.30
+12 RUT NOV 900 PUTS @ 3.20
Call credit spreads
-2 RUT NOV 1135 CALLS @ 1.85
+2 RUT NOV 1155 CALLS @ 0.80
This example is at 37 days to expiration. Most Weirdor traders start 45-60 days to expiration. Don’t start a Weirdor with less than 30 days to expiration.
What does this trade look like?
Weirdor Risk Chart
As you can see, there is little risk on the up side from the beginning of the trade. Typically a Weirdor will have +3% profit on a move up. If the market goes sideways, you can usually get a bit more than +3% because the T+0 line actually goes above the expiration line a little bit near the end of the trade.
If the market falls, the debit spread can provide a nice boost to the profit and end up with +8% or more.
What are the characteristics of the Weirdor?
That varies from trader to trader, but typical traders win about 85% of the time. This is similar to an Iron Condor that you are selling 8 delta options. The trade has a very smooth equity growth chart compared to an Iron Condor due to the lower drawdowns and the Weirdor has a higher expected return than conventional Iron Condors. Dan Harvey’s results have been:
- 87% wins
- Average winner 6% to 7%
- Average loser -3.5% to -4.0%
- Expected return of +4.6% of margin
- Probability of Ruin 0.0000%
Risk is easy to manage with zero or one adjustment per trade being typical.
What vehicles can you trade the Weirdor?
Almost anything. You can trade indexes, stocks or futures options as long as there are enough strikes available. Lower priced stocks probably aren’t suitable. Make sure you check the open interest and option volume.
Does this mean you shouldn’t trade an Iron Condor?
Not necessarily. The Iron Condor will make more money if the market goes sideways or up a little bit. The Iron Condor requires more adjustments than the Weirdor. If you are late adjusting, you can put yourself in a hole too deep to dig out of very easily. People do trade the Iron Condor and make money, but you have to have a good trading plan and risk management to make it work.
The biggest problem of the Iron Condor compared to the Weirdor are the larger average losses. This is what makes the equity growth chart choppier.
My initial experience so far
I have been trading a mini-Weirdor on the RUT in the last two months. I was in the first trade for 31 days and made +3.26%. I’m still in the second trade. It weathered the recent market sell off and reversal quite easily. I added one extra Put debit spread that smoothed my T+0 line and reduced my Vega. The margin on the trade is $11,000 and my maximum unrealized loss was -$560, or about -5%. That was primarily due to volatility spiking up and pushing the T+0 line down. If I didn’t have the additional debit spreads, I think I would have been down over 10% at one point.
When the market reversed, I simply took off my additional Put debit spread for a small loss. I did sell one additional put credit spread below my original put credit spreads to offset this loss. My margin increased to $13,000 temporarily but is now back to $11,000 and my Weirdor has no risk to the upside as I took off the Call credit spreads already.
If the RUT stays above 1070 (currently at 1084) the Weirdor will net +3.93% and if the RUT goes below 1060, it will net +13.36% if I leave it on until NOV expiration in 34 days.
I found the adjustment to be quite easy. I entered the additional Put Debit spread manually, but if I had a job and couldn’t be at the computer, my adjustment could have been put on automatically with a contingent order.
The Weirdor is a low stress alternative to a conventional iron condor. It has a very high win percentage with very little upside risk. Downside risk is easily managed by adding wide debit spreads. The Weirdor consistently attains yields of 5% to 8% with smaller drawdowns than conventional iron condors. The low drawdowns is what makes the equity growth curve so smooth.
You should back test and/or paper trade any new strategy. When you start live trading, trade very small until you prove to yourself you can successfully handle the trade. Then start scaling it up in size.
Post your questions or comments about your experience with the Weirdor in the comments below.