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-   -   OTM Iron Condors during Flash Crash (http://www.elitetrader.com/vb/showthread.php?t=210842)

daniel_asimov Nov 22nd, 2010 05:43 PM

OTM Iron Condors during Flash Crash
 
Hello everybody...

It had been an enjoyment to read ET Option forums,
Many sharp traders with years of experience.

I've been studying and trading condors for some time
But only 5 months of live Condors trading experience.
Been trading condors on monthly bases non stop for this period

for the body, I always sell OTM call and puts with about 8~10 delta each
for the wings only one strike away from the short put and call

Want to ask anybody out there who had a Condor during the Flash Crash, please share some experiences...

For a Condor, a flash crash it's the worse case scenario,, no way to get out, or manage the position. a guaranteed max loss... I hope I'm wrong and want to learn a way to get out of a condor when price moves FAST!!!

for worse case scenario.. at this moment I think of a contingent order placed far at where the break even points are to close the losing spread at market price...
I'm not a big fan of fancy adjustments.. I rather close the losing spread and take the loss when there are big odds to go beyond break even point (which happens very seldom with OTM spreads)

But please share ideas and thoughts.. everything it's highly appreciated..

Thanks

spindr0 Nov 22nd, 2010 11:04 PM

Re: OTM Iron Condors during Flash Crash
 
If the UL drops fast, there's a good possibility that your contingent order may not fill (if a limit) because it may pass through your price faster than you can say Flash Crash. And if it triggers a market order, you may get the worst fill of your life. It's also possible that there's a gap and it doesn't even trade anywhere near your "take action" point.

As far as fancy adjustments go, under normal circumstances (not a crash), if the UL moves from the midpoint and has incurred on a reasonable loss, one can roll the profitable side in an pull in some more premium, providing a bit more breathing room.

And FWIW, IC breakeven points are expiration numbers. If the UL moves against you soon after establishing the position, you may never see a breakeven point during the life of the position.

If you are willing to give up some of the potential profit in return for less risk, you can underwrite your condors. Say 1 or 2 more long strangles than short. On an expiration basis, this would mean recovering some of your losses once you pentetrated your maximum loss pts (long strikes). A bigger move would mean recovery of some of those losses and possibly profiting if the move was large enough. Prior to exp, the BE pts would be a bit wider but the same concept applies.

Fear or greed. Which do you prefer?? :)

nfamousyoungest Nov 22nd, 2010 11:19 PM

OTM Iron condor in a flash crash...IMO you need to find your spots to get short in the underlying to hedge that bull put, at new lows, swing lows, etc. Tight stops so you don't waste that much premium if it rebounds. Of course that means you need to have margin set aside.

Roll down the bear call too as previously mentioned, but too far OTM and the R:R just isn't there.


*edit: I just looked back at may 6th, the crash happened between 2:40-2:45, all of five minutes, you couldn't even turn on bloomberg/cnbc in time before your head got blowed off in an otm bull put, I don't know what execution was like but by the time you tried to roll down or whatever....game over. In that regard, only protection is not to be levered to the point that one move can wipe you out, old school principles.

Maverickz Nov 23rd, 2010 12:06 AM

Quote:

Quote from nfamousyoungest:

...only protection is not to be levered to the point that one move can wipe you out, old school principles.
This is rule #1 of trading. If you are trading size to the point that one bad trade wipes you out, you would be better off blowing that money on a hooker and lots of cocaine. Either way you get fucked but only one of them is the least bit enjoyable.

MTE Nov 23rd, 2010 02:48 AM

Re: OTM Iron Condors during Flash Crash
 
First of all, let me say that the last 5 months have been absolutely perfect for iron condors so please don't make any extrapolations about your future returns and/or ability (not that you do in your post, but just wanted to point that out for the benefit of anyone else reading this thread).

I had iron condors during flash crash and the thing happened so fast that there was nothing you could do. Most of the options went 0.01 bid at 10,000 or some other ridiculous number so even if you had a contingent order and got filled, you would had wished you never had that order in place as the fill would had been awful (and that's an understatement).

In these kind of situations your best protection is to properly size the trades and to not overleverage, as others have already pointed out. An iron condor is a limited risk position so take advantage of this feature. As I was watching the market in freefall during the flash crash I was really happy knowing that no matter what would had happened next my risk was limited to a comfortable level. Heck, the market could had gone to zero that day and I would had lost only 10%.

Also, I'd say that, arguably, flash crash was not really the worst case scenario for an iron condor, since the market dropped and recovered before you even had a chance to make any adjustments to it.

daniel_asimov Nov 23rd, 2010 04:40 AM

Thanks big time.. Really useful thoughts..
Specially about the "contingent orders"
it would be a total nightmare to get the worse fills.

and agree with keeping the max risk to a reasonable level.
But not to the point of missing up the action.
"best protection is to properly size the trades and to not overleverage"

shortly after posting this thread spent some hours reading option related blogs and some hands on looking at RUT options chains,
comparing different condors at different expiration dates...,

trading the front month it's way riskier than lets say, 2~3 months away from expiration...
the further away from expiration, the wider of a condor can we make.
Thus more room to maneuver as well with less gamma exposure.

Before today.. My condors where all at "front month" for RUT
and even weeklies with the relatively new CBOE weekly options for SPY... after today I realized how fragile those condors are.

luckily,, like MTE pointed it out,, these had been good months for Condors.. But next months?,,as soon as I open next condor, I will start trading them 2~3 months away from expiration (depending on volatility being high or low)

I haven't traded yet far from expiration condors,,, So it's a journey that it's about to get started


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