Strategies for IRA

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Improving Returns Relative to Risk

Strategies for IRA

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Those trading in an IRA account are usually very comfortable with the defined-risk nature of trades like the Iron Condor and the Iron Fly as they are both IRA-compatible short premium strategies. What is especially helpful when trading defined risk is that traders no exactly how much risk they have on for each individual trade. This is calculated by subtracting the total credit from the width of the widest spread in the trade. Today we look at how we can optimize our potential returns relative to that risk.

First, we look to manage our trades at whatever our mechanical management mark is if the trade has become profitable. This management marker is 50% of max profit for Iron Condors and 25% for the Iron Fly. That is, if the trade has become profitable before expiration, so much so that we can take either a half or a quarter of the total potential profit, then we manage our profits and take the risk. Historically, this managing tactic improved returns relative to the risk that is taken. Second, we found that initiating in times of high implied volatility, when IV Rank is high, also increased returns significantly per unit of risk.

This was interesting since the spreads grow wider when implied volatility is high, and thus the risk increases. So when our returns from these strategies grow even larger in high IVR, that would tell us that the trade has been so profitable to have overtaken the increased risk.

Check out the segment above for more details on these historical results.

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