Iron Condor/ATM Binary Strangle Almost No Risk?

#1

Hi Darrell,

I’ve been studying in depth with your videos very attentively over the last two weeks. I was wondering if you ever thought of an iron condor being combined with by two binaries as close to the money as possible. I wish i could buy and sell the ATM binary but that would close the order. So on an instrument with a lot of different contracts, you would buy the binary slightly ITM and sell the one ATM. Or you could sell the one OTM and buy the one ATM. But the goal is to make as close as to what would be a straddle as possible. The Iron condor hedges off the one that begins to lose. You can close out your binary thats losing and keep the one winning on and collect the full profit from the winning binary and collect the premium in the direction of the binary. It seems like no matter what, if you close your losing binary position out (ie selling a OTM at 43 and closing at 15) the premium from the iron condor towards that direction would help hedge that off while the ITM binary made the 100 at expiry and you collected premium from the iron condor in that direction. the only risk would be if the price expired right between the binaries which is very slim. Im pretty much aiming to make my own floor and ceiling with binaries and not have them move much… because even one tick ITM for either would allow one to make 100 at expiration. And at worst case scenario, if the market moves a little against us and one binary loses (and we didnt close out early), the iron condor helps hedge that off while the other one wins for a profit. Other than requiring a lot of initial capital to start, it seems like there isn’t that much drawdown to this strategy. And if the price is in consolidation fluctuating very little between the two strikes, you could actually take profit in both directions on the binaries if you really wanted to. The only other thing I can think of that can mess up this idea is if the strikes on the binaries were pretty far apart because it would open the gap of risk in the range between the two binaries. Even if the market flies up crazy in one direction and you don’t close any positions, you have the profit from the binary that expires ITM and the premium from one spread that might hedge off the loss of a spread (that might not loose much or become break even at expiration) and the loss of the other binary. So it seems the risk is limited in most situations with a much larger profit potential especially if the price is oscillating and you take profit in both directions on the binaries. What do you think?

#2

Khari, A couple of things to consider here. When doing an Iron Condor you are looking to take advantage of premium, expecting the market to finish within a range to collect premium, not expecting the market to take off in one direction. It could go up, then back down, then go up again etc. but finish within a range. So, if you have a binary that is going against you and you are looking for the spread to help you make up some of that loss you have to be careful. Because a binary can drop in price by $30 very quickly late in the hour with just a few ticks move. The spread on a few ticks will only make you a few dollars. So it will not really help you hedge much without a big move. I suggest you try your strategy in your demo account for a couple of weeks to see your results. But here is the concern. If you sell an binary for $43, and buy one for $65 ( as an example). Well , per your example if the sold binary drops to $15 you would sell it and take a $28 loss. But you only have a potential of making $35 on the bought binary if it expires in the money. We always teach to NOT hold binaries until expiration but to exit them early. So if you exited at $95 you would make $30. After paying your fees for both trades you would actually be negative! Yes, maybe your could buy for a little less than $65, but you see my point, there is not a whole lot of potential there. Honestly I think you would be better off doing 2 iron Condor Contracts as opposed to one, since the risk would be about the same. The other thing to consider is this. Even if you could buy for a little less and make, say $10- $15 with this binary strategy, what is the market shot one direction and you exited that trade for $28 loss, then it came back the other direction and had to get out of the other side as well with a $28 loss or more? Then it would take you 3 winning trades just to make up for that one trade that loss. You are much better off doing the Iron Condors, or looking at doing Butterflies with binaries .

#3

I see exactly what you were saying. My only point is if there was an instrument with relatively small distance between strikes, the price might not be as wide as say 43/65 it might be 50/65 or 38/50. I know for the most part you don’t hold till expiration unless its a butterfly. I was trying to capitalize on the outcome of holding till expiration. But different scenarios can play around with holding/closing early. These were the scenarios I thought of

(minimum profit)

Lets say I was trying to implement this as a hybrid rangebound trade (expecting the market not to move much at all) and lets just say for the sake of the idea we hold both binaries till expiration. With the market not moving much, you have a high probability of the nadex indicative making one of your binary trades a true statement upon settlement unless the settlement was between the two strikes which wouldnt be likely if the strikes were close. So estimating 90% probability that one of your binaries will win (with insanely close strikes), the premium from an iron condor in a stale market will help hedge your loss while your winning binary would make profit upon expiration.

(Small Loss)

Scenario 2, If the market flies in one direction, we can then take off one of the binaries for a loss and possibly gain little to no premium from the iron condor (little profit or breakeven on the iron condor), The other binary would then be in the upper 90’s and then we close that out, and as a whole the trade is a small loss.

(Max Profit)

Scenario 3, Market is choppy, We watch price oscillate in the direction of each binary. We take profit on both sides of the binaries and still possibly come out with the premium from the iron condor at expiration.

I dont know. I’ll test it out in demo to see if it is possible. Its probably too complicated for what it is lol. I just thought it was worth pitching as an idea. Or if it provides any real profit advantage over other strategies. Thanks for the feedback though!

#4

When you test this out in demo, I would say to run three tests at a time.

  1. Try doubling up on Iron Condors and compare the extra Condor to your profit / loss on your binary strategy
  2. Test your binary strategy as listed above
  3. Butterflies Test those all out at the same time over some time and compare your results. Please post the results here to the community so we can see the as well. thanks
#5

No problem man. I look forward to testing it out.

#6

Great! Let me know how it goes, interested to see the results!!

#7

How did the results go?

Basically you can do strangled butterflies strangled condors, straddles butterflies and straddles condors

Lots of combinations.

#8

I’ve had some small success with a little modified version of Darrell Martin’s version of this. I use the scanner. Find a spread offering $17+ premium, buy two top, and two bottom. Then do a binary strangle not too tight to atm, but not too wide near the break-even prices. Do the binary strangles just inside the spread purchase prices. Put a stop loss trigger on one of each of the spreads. One on the top, one on the bottom, not both top-both bottom. The binary strangle will give you an extra $10-$20 extra run-off room if price wants to break outside the break-even points. Having two spreads top, two spreads bottom (4 total) outweighs if your binary strangle loses (price expiring inside). This is as close as I can come to a no loss strategy