OTM Iron Condors during Flash Crash

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

  1. Daniel, you're getting good advice from the above posters, many of whom have seen some tough days and have plenty of experience. I have traded through the 2008 time period, and been at it a while myself, so I've also seen some tough periods.

    Here's my take:

    1) Contingent orders for options are scary! Most of the time you will get absolutely pillaged. Use limit orders always-- no exceptions. During the flash crash, orders went crazy, and that's a good time to watch from the sidelines or throw in some cheap orders at great prices for yourself. You may just get a ridiculous fill from someone who is too eager to get out at any cost.

    2) It's wise to have a little protection available to mitigate losses. A couple of spreads going in the other direction can help quite a bit. For the put side, you can often buy these well OTM quite cheaply. The other posters are totally correct to say that past few months have been quite good for IC traders, but it won't always be that way.

    3) Never panic. Work the situation, and don't be afraid to make a suitable adjustment. A few of my put spreads went "underwater" in the flash crash, but I've been able to work my way out of them without incurring major losses. I suspect the same is the case with MTE, and spindr0 as well, and perhaps some of the others who have also posted. After all, the market has now recovered all that it lost during May, and if you had stuck with it, you would have, too.

    4) NEVER PUT ALL YOUR MARGIN AT RISK!!!! This is critical. You must be able to adjust-- the roll down, or roll up method (depending which way the market is pushing you) works. Rolling out to the next month is also a possibility if the conditions are right. These are not super complex things-- one condor trade, or a vertical roll-- to do, and they will usually help reduce your losses. It is also usually a good idea to do your IC's in stages, committing a little of your capital at a time. This way, you will build a portfolio of IC's at different strikes and you are more likely to avoid a major meltdown or sudden strong advance blowing through all your short strikes.

    Happy trading!
     
    #11     Nov 23, 2010
  2. Thanks everybody for kind comments and ideas.

    Comparing Condors
    2~3 month away from expiration; widest, easier to adjust
    1 month away from expiration; manageable, but last week
    weeklies; too fragile, difficult too adjust, they too near expiration
    (today's example,, huge move down,I had to adjust)


    trade off (no free lunch theory) ...
    the nearer to expiration,, the more attractive is theta.
    further expiration,, less gamma exposure, wider condors

    I think 2 month condors are good balance...
    Opening a 2month condor every month,,
    eventually we still get monthly income..


    Thanks!
    This is really good approach, and since I'm planing to open 2 month condors every month,, will have the risk spread at different strikes. But, How does your broker manage so many spreads? Isn't a problem?

    I wonder if trading platform wont get confused in regard of margin requirements when looking at so many spreads all over the place.
    Should be no problem, after all every short side it's covered.
    I'm using tradestation
     
    #12     Nov 23, 2010
  3. spindr0

    spindr0

    Broker management of multiple spreads isn't a problem if all short positions are covered because there's a finite loss amount on credit spreads (and vice versa).

    It's a bit of work but if you do a search on DAGNYT (a poster) and read his thoughts on iron condors, you may pick up a lot of pointers. I did, over the years. He has (had) a web site blog that may also have some IC info. Sorry, but I don't know the web addy - I'm sure it was in some of his posts :)
     
    #13     Nov 23, 2010
  4. Broker Margin calculation is not really much of a problem. They all have pretty sophisticated software. I use TOS and they do a good job of calculating margin. They match sides on the IC's for you and have a little box that explains where you are with margin. The will set up iron butterflies if at all possible, which may result in slight miscalculations occasionally-- and this is probably forced by the SEC or CBOE. (I use Excel and use the maximum loss as my own margin calculation which is even more accurate, but the amounts rarely differ by much, and you shouldn't ever use all the margin anyway) I sometimes run into some minor issues because I have a habit of having some calls and puts inside the position, and they use them for iron butterflies in the margin calculation. If you ever get in the miserable position of having your short puts and calls overlapping--which should not happen, then your margin will be incorrect for your real risk, but I hope you would avoid that situation like the plague anyway.


    If you go with the second month options-- which would be January right now, space out the additional purchases by at least a week or two and this will give the market time to move, allowing you to open up two totally separate positions. Make sure they are at completely different strikes, but retain the same spacing. I use SPX, which gives my less transactions and commissions, but the RUT, NDX and SPY are completely acceptable (SPY does have a very small risk of assignment, but it is very unlikely as long as you stay out of the money). Your broker is more likely to calculate your margins correctly if you use the same amount of spreads on each side and the same strike spacing.

    An example of this now would be 5* SPX 1235-1250 calls combined with 5* SPX 1120-1105 Puts with the 1120's and the 1200's being the short options. Almost every broker will calculate this as costing you $7500 in margin.

    If you go with January options, buy a couple of Decembers as insurance or buy some inside spreads for January. Spindr0's idea of selling your credit spread slightly ratiod is another way of doing the same thing in the same month. I've thought of using the weeklies for this, too, but so far the volume doesn't impress me. I see too many options with a volume of less than 30 in a day. With the size I'm doing, I'd probably have to let them expire and face the SET which can be a lot different than you expect. I don't generally recommend it although I have gone through it occasionally and done OK overall.

    I use both current month and the next month options frequently, moving into the future month as the current month expiry gets nearer. Ideally, I like to be mostly in the next month with less than two weeks to go in the current month. I will move pretty aggressively into the next month as that week goes along. I try to avoid the last week as much as possible, but it doesn't always work out as hoped.
     
    #14     Nov 23, 2010
  5. Very interesting thread, and something I think about often.
    I don't see the problem with contingent orders. Given I wasn't doing IC's at the time of the crash, if the shorts were within 5-7% of the current price of the index (I'm going to assume index for this purpose) you were doing this on, as I recall that day the order would have been executed. The MMs went south only when things got past this area and got really extreme. But I'd need to hear this from someone who actually had an IC on on that day and experienced it firsthand from this POV.
     
    #15     Nov 23, 2010
  6. spindr0

    spindr0

    When the MM's head south, spreads may widen and IV may expand dramatically. While I'm not a conspiracy theorist, somehow market orders in a fast market tend to get the worst fills of the day :)

    One is usually better off trading in the underying but during the Flash Crash, even that was tough because as fast as it took to enter price and size in a one click order ticket, price was gone. It was like trading in after hours right after a GOOG earnings release. And the reversal was just as nasty.
     
    #16     Nov 24, 2010