Dear Opra & forex-forex, Currently i trade short strangles with E-mini SP500 FutureOptions where I use far out-of-the-money options (OTM). App. 6/7 weeks for expiration I setup the position. There is no such thing as Delta Neutral but when I setup the position itâs Delta Neutral. Although the ES moves in many occasions you donât have to do anything because theta does all the work for you. Of course when ES moves to much (up or down) you change your position (Delta Neutral). But what is too much? thatâs difficult to say because it all depends when the options expire (Gamma can kill you in the last two weeks), how big is the distance between the ES and the strike price, etc. I only trade during Regular Trading Hours because there is much more liquidity and the spreads are lower. IMPORTANT: imho you can trade these kind of strategies only with an index (no stocks) and if you have a lot of experience and understanding of options because trading short strangles can kill you when the ES drops 3% in 1 day and you donât know what to do.
A credit spread or Iron Condor certainly does have a bad risk/reward ratio. This is something you have to accept if you wish to use such spreads or ICs. Personally I would nto advocate always putting on ICs. I trade credit spreads and conditions warrant I will leg into ICs depending on market action and premiums and time to expiration. I have had success and most of my option trading is based on credit spreads. However due to the risk/reward ratio (although prop of success is higher) I do not load up my account 100% in these spreads or let non-black swan positions get too far into my gut before deciding what to do. There are no straight forward easy adjustments as there might be with a long call or butterfly. I basically monitor the underlying markets studying charts daily and set up strikes for CS orr legged into ICs I feel most comfortable with based on my expectations. If a side looks like it is gonna get hurt I will either cover and move on or adjust it lower if there is sufficient credit or not too much time to expiration. This is not advocated as the best approach but if you have experience with these spreads you get a feel for when it is time to bail or buy some cushion. In most cases the best advice is GET OUT and move on and LIMIT LOSSES. In black swan events you take on a significant loss and if you are 100% loaded in CS or ICs well then you can see hwo you can get wiped out. I try not to use 100% (closer to 50 - 60%) and unless you sit and do nothing until expiration you will not take a full loss on the spread although it will be significant. Bottom line is if it is a black swan it is a rare event and you will get hit but if you manage your portfolio correctly you will not get carried out on your shield. For my part, I mix in calendar spreads and other directional spreads in addition to credit spreads and I have had success scalping off of ICs on good choppy markets (May was my best month in a long time with scalping ICs and Credit Spreads with a client at over 10% for the month but this is rare). Please let me repeat.... RARE but doable once in a blue moon. By having different spreads on I can generate profits in differnet ways and not just sit back and wait for the spreads to expire worthless. MY honest opinion is that no beginner should trade credit spreads or ICs and most intermediates should do it wearily. It can be used here and there or as I do but only if you truly understand the risk it invovles and not looking to load up 100% of your portfolio. Experience counts a lot. From the end of November to Marh I stayed out of spreads and ICs due to low vols and crappy premiums and nothing meeting my critieria to trade. I could have chased premium but that would have taken me out of my comfort zone. As a result I was not in spreads when the market tanekd hard off of China. My experience told me it was not a good environment and I held off. If a crash never came I would have missed out on months of profits but lucky for me I was not in on a horrible move. I started again at the end of March and swtiched to NDX for better spreads and reminded myself of what that day would have been like if I was in the market. So there are no magic formula adjustments really, if you choose credit spreads or ICs. You really have to manage your whole portfolio and risk and be willing to say, "I better just close out as this looks like it could get ugly". better to take a small loss and look for next opportunity then take a big loss later and be forced to only afford small opportunities... Before I come across wrong, let me remind everyone that CS and ICs are not recommended for beginners or those with poor portfolio risk management (not IC or CS risk management per se, but PORTFOLIO risk managemet). A CS ro IC position will never wipe me out or render me out of the market and I intend to keep it that way.
You're getting off topic, the topic is Iron Condors. You are protected against a 3% drop with the long position, expensive insurance but that's how Iron Condors work.
Thanks FT79. I have yet to become a true neutral trader w/r to IC. I always start out w/ one side, depending market condition, and afterwards, sometimes the other side is put on and sometimes is not. Putting on an IC at the price you want is difficult enough, and to get out you have to offer a pound of your flesh if it goes against you. So I am a not a true convert. Hence my interest in knowing how you change or adjust your position.
That's not an Iron Condor, what you have are Spreads. IC's are 4 option positions with credit received opened at the same time. Example: Stock at $100. Buy 10 June 110 calls. Buy 10 June 90 puts. Sell 10 June 105 calls. Sell 10 June 95 puts. Credit received.
in my case changing/adjusting my position does not happen with strict rules because with option trading you have so many possibilities to change/adjust your position. An important rule is that you never should use your complete account for the margin requirement (max. 50%) so you have money to change/adjust your position. Primary I look at the option prices and in some occasions at the underlying value. The best advice I can give you is by start reading the thread that was started by OptionCoach, it will give you great inside how you should manage your position. http://www.elitetrader.com/vb/showthread.php?s=&threadid=49586&perpage=6&pagenumber=1
FT79, I was hoping you would offer a more specific example of changing and adjusting position. As I said, I usu start w/ directional bias by puttng one side on and sometimes leave the position at that, w/o putting on the other side. For instance, the short put spreads on indices worked very well in the recent market condition, which does not give a good spot to on the call side (I know I know, I have a directional bias). Maybe today would be a good day. FWIW, I do have a multi-month IC on SMH. In May cycle, it was hurt on the call side thanks to semi breakout, so I rolled into Jun and sold Aug put spread and later call spread, and sold TXN put spread along the way as hedge, and got most May loss back. So, now I mostly get into IC by directional trades rather than the otherway around. I did follow optioncoach's thread a while ago. He aims to get 2-3% by selling DOTM on spx. Now, I see him very often in the threads on trading the underlying. Kind regards, Opra
Dear Opra, To be more specific about my strategies: I donât trade IC but short strangles (so yes people, Iâm of topic). 6/7 weeks for expiration I start building up the position, I sell both sides and donât to the directional bet (because I donât know where the underlying will be in the next 6/7 weeks) I will check my Deltaâs (neutral) but I also want to be Premium Neutral (if the underlying goes x up what happens and if the underlying goes x down what happens). Depending how much the underlying moves I will adjust my position. But for example for June, I sold the P 1410/1410 strikes and the C 1570 4 weeks before expiration. Because the market went up I bought some calls back and sold some puts to be neutral (last Friday).and currently it goes ok (still 6/7 days to go). Last Friday I also started building up my July positions and will use July to adjust my June position (to much Gamma in the last week and I donât have the time to watch the market all day). If Iâm pretty sure June will be ok I will completely build up my July position. Hopefully this clarifies some stuff. Best Regards, FT79