I know these 2 guys personally. They are the real deal. They choose the IC short legs based primarily on delta (of course also credit received, days to expiration, etc.), but delta for risk.
Howard, Interesting thread and approach. I do not trade ICs, as I know several people who were crying like babys over massive losses (after bragging about massive easy gains) suffered when trading with a local guru here in town and it just scared the he!! out of me for doing ICs. So I cringe when I see someone doing them. Counter-wise I see some people on the web saying they can do them. As I do trade some credit spreads and some csp puts, I am interested in approaches that use these elements. My question is why enter at 60 days? What advantage does it hold? Every thing I have read and my own experience would seem to indicate that the closer to a 30 day length is the best. What do you see as gained by that exposure for the first 30 days of the trade being on? If you have talked about this before maybe you could direct me to it. I didn't find anything about it.
I hope that I have the risks managed effectively. What period of time caused those you referred to, to endure massive losses. The 60 day choice over the 30 day choice is due to a couple of concerns. First, the knee of the time decay curve is generally thought to occur around 45 days. Second, in case of a strong move in the market, it reduces the amount of my account at risk and needing aggressive management. A black swan event will impact all expirations significantly. One of the most attractive reasons for adding the companion spread to form an Iron Condor is that the second spread can be added without additional capital. The theory being both spreads cannot be exposed to full loss simultaneously. This opens an additional opportunity. When one side gets into trouble, the other spread will likely be close to its maximum profit. This spread can be closed to capture the profit and a new spread meeting the same entry criteria can be opened on the same series. I've occasionally had one spread closed at a loss, but the Iron Condor showed a profit because of one or more spreads earning credits on the other side.
I've done 60, 45 and 30 and prefer 30. This whole strategy is predicated on time decay which accelerates around 30 days. Why not take full advantage of it? However, the greatest acceleration is during the last week and many traders prefer to exit at the end of the previous week or early in expiration week. The greeks can cause wild premium swings the last few days. It can turn winners into losers even with small movements in the underlying.
I know what you mean, but you're most likely talking about ICs that are put on all at once and left until expiry come hell or high water. I hate those as well. Howard's approach appears to revolve around credit spreads that are used to leg into ICs. I don't think he (correct me if I'm wrong) goes "all in" on an IC.
For me, an IC is an artifact, not a trading unit. The spread is the trading unit, not its legs. I don't care how the broker accomplishes my goals as long as I get the spread credit I am seeking or better.
What I´m getting from Howard is that he is closing spreads that win 80% or so. Or before the market reverses and he loses it again due to collapse of volatility or something like that. The comment by Brook Rimes seems pertinent. The credit spread is about selling Time Decay. So why not go to monthlies instead of 60 day. Which is why I traded weeklies last year and lost my account twice in doing so and gave up. In weeklies you cannot rollover. I tried this week and have an IC on right now. But when I check the premiums, I see while I sold for a premium of .60 cents, Iwill need a $1.00 to get it back. Which means I lose. Presuming TImE DECAY does it´s magic I presume down the road his average of 19 days for TIME DECAY to take effect and reduce that cost. I´m having trouble figuring out what he is doing? A rollover ( I´ve not done one yet ) is basically closing a spread. That way sees a loss. There may be some savings in a rollover, I believe it is supposed to be in commissions? Maybe somebody can enlighten me on that. But if you are going to close a spread in a rollover, then why not just close the darned spread and done with it and restart by legging into another credit spread at an advantegous point and time more to your choosing? The question arises about TIME DECAY and rollovers. I see Howard is using rollovers, so he must be making a gain here somehow? The system I see it of Howard´s seems to be a take a profit on a credit spread when you have it in market gyrations. In weeklies trading I only went for expiration. So I´m not at all sure how the index has to move to give you a profit, or loss, other than TIME DECAY on any spread. Is it the index moves toward your spread, or moves away. I think from my previous losses which happened twice last year, the index has to move away from your spread to profit. Enlighten me on that somebody. Howard seems to be simply selling premium as often as he can and closing any spread whether in an IC or not, so he can resell another month out or something. I´m more concerned in big moves. In the weeklies last year it was common enough to have a move of 3% deviation in one day. Even 4% deviation sometimes. Trying this 60 day system, I see that you get further out in premium strikes than you can in a monthly. No problem to go 6% deviation out and sell premium. I would wonder how you handle something when you get a 11% deviation, or how would you handle it? The only reasonable idea I have seen by OPTION COACH was to stop selling BULL PUT spreads when the VIX rises above 20. Sticking with Bear Call Spreads above that. Other than that in a BULL TREND, the 60 day spread gives you more room at least in the OEX to get bigger premium and a few strikes further out, to 6% deviation. So there is that about it. I´m enamoured of DELTA numbers, or POT too much. They can change in a flash if the market so decides and mean nothing at all. I prefer deviation %. Right now I´m puzzling over how you figure you have a profit, when your buy back closing cost is so much higher than what you sell for. I´ve just made a sheet to follow my sold premium and buy back premium difference to see if I can figure it out over the next month watching and recording the changes.
I misused the term "leg". I was considering a credit spread to be a "leg" into an IC but I know what you mean.
Hopefully the 60 cents is just one side. You can't make money selling for 30 cents on a side. Not sure what underlying you're working with but you don't want to be trading spreads where the bid/ask spread is more than 10 cents. You need liquidity for this type of trading. If you open at 60 and close at 10, you gross 50 cents (before commissions). The 10 cents is slippage and/or the remaining premium that you give up for the security of a winner. Taking these trades into expiry week is risky unless its far, far OTM (out of the money). What works for me is closing the Friday before ex or the Mon of ex week. This type of trading requires patience to allow the time decay to happen and extreme diligence and discipline to watch the trades and take action if it moves against you. I use a combination of watching the screen and alerts sent to my email and cellphone.
Time I begin a new series at around 60 days. As soon as quarantined funds are available Tradeoff of reduced return per unit time for lower risk of all spreads on one side of the underlying instrument price going on life support simultaneously with trending More roll opportunities to make up for the reduced return/time for the early entries I also trade weeklies for smaller money because they have higher risk. They also generally have higher returns/time than 30 day or 60 day entries. Entry Criteria My entry criteria for a spread is the same for the first entry in a series or to complete an Iron Condor or a later entry to complete a roll. Probability of Touching <= 20% Minimum return 3% Target return 5% Roll Opportunity I will initiate a roll given the following conditions. Spread has earned 80%+ of its potential There is another spread available meeting my entry criteria I control the exit price and entry price with limit orders