OTM Iron Condors during Flash Crash

Discussion in 'Options' started by daniel_asimov, Nov 22, 2010.

  1. 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..

  2. 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?? :)
  3. 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.
  4. 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.
  5. MTE


    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.
  6. 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
  7. MTE


    Don't forget that there is a trade off with trading 2-3 months out condors rather than front month - time decay is relatively low in the beginning (less gamma means less theta), so you would still have to wait for the last month to get any decent decay.

    In addition, while it is true that you can go more OTM to get the same premium with a 2-3 month condor compared to a front month one, but it also means that there is more time for the underlying to move against you.
  8. Got it..
    In fact, that was what attracted me the most about weekly Condors.
    Although they are commissions intensive, the relatively small margin requirements are hard to resist.

    to get similar credit returns with far from expiration condors, margin requirements would go up proportionally to time...

    I agree with your comment in regard to far from expiration having more time for the underlying to move against the Condor... rolling up the call spread or rolling down the Put spread will be the best thing to do... Just not overdoing it, (one adjustment and if it fails, close the spread being affected, take the loss and move up to the next trade) .. I said earlier I'm not a big fan of adjusting, but now that we talking about far expiration,, I must be prepared to adjust

    This is something that I'm working on, designing a trading plan for condors,, So thanks to this thread,, "contingent orders" are out of the plan,, as well with keeping the Condor "margin" to an acceptable level to avoid a Max Loss
  9. rew


    During that last flash crash there wasn't much you could do. The option market makers hunkered down in their bomb shelters and bid/ask spreads got wider than the Grand Canyon. I had a bull put credit spread on at the time, and for a few minutes it was fully in the money. After the markets settled down (i.e., well up from the low point of the crash) I got out with a loss but nowhere near the size loss I would have had if I had tried to get out during the crash.
  10. Since you appear to be comfortable with varying degrees of time, if the UL has dropped, consider rolling your call spread down and out a month for more credit. If you set up an index IC with a 100 pt range and it's now 30/70, rolling the call spread down 20 pts will restore your 50 pt buffer on the cll side plus give you an extra month of premium. If a crash still concerns you, only extra insurance will protect against that.

    I don't remember the exact numbers but in the Flash Crash, trades X% lower were busted (30?). That another potential nightmare because a new position busted isn't a big deal but an adjustment made to an existing one and busted could be a big problem.
    #10     Nov 23, 2010