settlement procedure in iron condors.

Discussion in 'Options' started by osho67, Dec 12, 2011.

  1. say i have sold in iron condor in spy. if one side goes wrong will i have to buy/sell 100 shares or will it be cash settled. Can I instruct my broker to make it cash settled so I donot have to take possession of 100 stock or deliver 100 stock. (with IB)

    Thanks, much appreciated.
  2. rmorse

    rmorse ET Sponsor

    SPY is NOT cash settlement. If one side is ITM and you don't close it down before expiration, you will end up with a position in the SPY Monday.
  3. bc1


    What were the spreads you had on?
  4. You can't just cash-settle stuff at whim. The reason why these options are priced the way they are is because they are, in fact, physically settled, with everything it entails.
  5. thanks for the replies.

    If i donot have enough cash , ib will buy/sell and liquidate my positions. I assume that will happen,

    if difference between buy/sell in my IC is 2 points, my max loss could be more than 200 as it depends at what price i can sell my shares. is this right?
  6. rmorse

    rmorse ET Sponsor

    So close your position down before expiration, if your close.
  7. I have noticed index options (eg DJX) are listed as cash settled. If somebody is interested in cash settlement , these could be better products rather than stocks or etfs . The only problem is bid and ask is so wide.Anybody why is this?

  8. There's normally an important difference between physically settled securities and the cash settled ones. Physically settled options are normally American style exercise, while the cash settled types are generally European (OEX is cash-settled, American style, however). Make sure you're aware of the difference; see the CBOE's product specifications before you jump in...
  9. bc1


    Yes. Your max loss can increase above the 200 depending upon what underlying positions are liquidated by the broker. For example, if your portfolio includes Apple and it is sitting on a gain right now of 10 bux and it also includes Priceline which just happened to incur a 15 dollar drop that day, the broker could sell your Priceline stock at that 15 bux loss. Not nice expecially when you expect it to rebound.

    It is best that you control your own destiny. Sell the option at a loss if necessary or sell what you want to find the cash. You can usually close an ITM leg of an IC for less than the strike spread if you don't wait until the last minute so it is best to close out of a losing spread instead of letting the broker take the max. Make sure you always save enough buying power to close out a trade as the Iron Condor only uses half the buying power because of the opposite positions.
  10. Like these guys are saying, don't even let one side go in the money. I tend to set up SPX ICs with short strikes at about 10 delta. I adjust when one side goes above about 30 delta.

    Not a recommendation of how to trade, but just saying how I do it. Risk/reward isn't great, but if you wait for an IV spike you can get good credit with wide strikes. With proper management you shouldn't even come close to going ITM and risking the max loss. Sometimes (with a sharp rise in IV following a downward market move), an adjustment can be made for a credit. That's not always the case, but at the very least (if you have to make an adjustment for a debit that doesn't eat up all of your initial credit), you're still in a profitable position post-adjustment. Trade defensively and make adjustments well before you're facing liquidation or a large loss.
    #10     Dec 22, 2011