i've been thinking the better thing is to emulate the probability distro of your instrument.. if it has a super steep kurtosis with fat tails.. butterfly and wrangle it in such a way that it looks like the distro... ANY THOUGHTS ON THAT
haha becoming a trader will make a skeptic of anyone! haha you always feel like their is a hole in everyone's story of how they made money.. especially when they are telling you how they made money..
Good points about the VIX, volatility and time. This is why I've stopped doing ICs on individual stocks. Do all my ICs on SPY now, because it's the least volatile vehicle I know of, which is also very liquid and pays OK credits. I also won't trade a Credit Spread with more than a 2/1 Risk/Reward ratio. (i.e. Minimum Credit of .35 for a $1 Spread) I don't like risking $95 to make $5! You can be right 9 times in a row and lose it all back and then some on the 10th try. No thanks.
So especifically right now you'd be getting +0.30 for both credit spreads, with a maximum risk of 0.70, that is in dollars basis 1 option each leg: Max profit: + $30 (initial credit) Max risk: - $70 ?
@cdcaveman: Thank you for the great material. I've not looked at ICs from this perspective. @all: One thing that the article did not mention was her position size relative to to her account size. Yes, she has 65K on the line but is it 100% or 1% of her account or anything in between? Cactiman mentioned that he only risks 2% of his account equity per IC. If that's the case, even 100% annual gain on 2% is just 2% of the entire account. There are plenty of ways to make 2% a year. Why mess with options at all? Another thing is delta numbers in the article. I always thought that delta is expressed as a number between 0 and 1. How do I interpret delta of 8 or -16? Is it 8% or 0.08?
Not sure on your math here. That's just a Max Possible Loss for 1 trade. Say, -$200 for a $10K account. A pretty standard loss tolerance for most traders. It means you must have a total loss 50 trades in a row to get wiped out. But you're not limited to winning only that much per year. I hope!
The Upper Leg I opened yesterday gave me a credit of .15 Yesterday I could have opened the Lower Leg for .17 But if I wait for SPY to pull back I should get a larger credit for the Bull Put Spread (the Puts become more valuable when SPY goes down), which is why I prefer to Leg-In to Iron Condors. Let's say in a month's time SPY falls to 135 and I get .22 for the Bull Put Spread. Now we're at .37, less .06 commissions = net .31 credit for the entire IC. .31 divided by the Max Loss of .63 = 49.21% gain over 3 months = 16.40% per month. The Risk/Reward = .63/.31= 2.03 For single leg Credit Spreads on individual volatile stocks I only allow a 2/1 Risk/Reward ratio. For the slower moving SPY and 2 legged Iron Condors I'll go up to a 3/1 Risk/ Reward ratio, especially when the $VIX is low.
I as well hate how they always state the delta in different ways.... Another thing about this strategy i think about sometimes... Is what do you consider the position size... The first spread you put on, the first time you roll it goes up 150 percent.. For 80 percent of the credit.. The second time you roll its another 150 percent on top of that for 80 percent of that credit... And then the third roll your at 150 percent of that at. 80 percent of that... And then no more rolls... So don't think think the position size should be considered by the total cost of rolls extrapolated.... Say this... Start out with 1000 bucks up on margin.. Considering the width of both strikes... Boom you roll once your at 1500.. Roll twice your at 2250 third time your at 3375.... So basically your third roll is 3375 which is 3.37 times your first position for.. If you got a 4 on 30 return. 13 percent.. You would start out with a 130 dollar credit. And after three rolls have a. 66 percent credit.. Boy thats in it to win it on the last roll there.. 3375 for a 66 dollar credit.. Haha tell me if my math is wrong
I guess I misunderstood you. So, let's say you have 10K and open one IC with max risk of $210 and max profit of $90 (using .30/.70 numbers from your other example). Some time later you want to open another IC with similar parameters. Will you close your first position and then open a second one (same risk) or open a second one in addition to the first one (double the risk)? If the latter, at what point will you stop opening new positions?
Not sure about your math but 7.5:1 risk/reward does not seem very attractive. Also, I don't feel easy about all these double-down rolls. It goes against "never average a loss" principle. I heard about other adjustment procedures though: 1. Close the winning leg and move it closer to the current price of the UL. This way overall risk does not increase while the profit potential does. 2. Divide your maximum allocation for the strategy in tree parts. Establish a first IC now, another one a week later, and a third one 2 weeks later. All three ICs will be positioned around different strikes and may balance each others deltas more or less neutral. There is one more thing about ICs. They are vega negative and thus work best when IV has just peaked and about to fall down. Hence, I view them as a special occasion trade (IV spike) and not as a "bread & butter" strategy.