Kelly's formula is good starting point, though I don't use it myself. The problem is a balance of reward against risk for a trader. For me with limited capital, I want to make as high %age as possible. However, to stay in the game, I have to control my risk. I started trading ICs and DDs since July. I started small, and I increased the size slowly but not too slow that the return was meaningless to me. Too better understand the statistics of my IC and DD trades (Your probability of winning is different from that of Coach's because of different entries, exits and selection of strikes), I set up a new account this month only for these two strategies and to gather statistical data. The market is always here. There is no rush to make big, at least not this month especially you are controlled by your emotion now. You can make back your loss easily (Your net loss is only 25K, right?) Look at Coach, Sailing, Cache and others, to make back 25K is very easy esp if you have enough capital and a winning strategy. I would suggest you sharpen your weapons before betting big. [edit] One more thing about IC here. As pointed out by many including RA, Mo, a credit spread strategy with 1:10 reward risk ratio(90% winning prob) is not recommended nor promoted. However, by cutting loss fast or some other adjustment strategies, you can increase your reward risk ratio. I don't recommend trading ICs without exit strategies.
Taking a page from the CTM foks.... My technicals show we could fall to around 1365 which is a moving average area of support or a little more towards 1360 if today;s down day holds. So I sold an ITM call spread to profit the next week or two if we do hit 1360: STO 10 1370/1365 Call Spreads @ $3.10 Credit = $3,100 Risk = $2,900 Maximum profit will probably be less than the credit if I choose to get out earlier with 50% of the credit. If the move occurs over the next week, time value premium in the calls will not let it go to $0. So I will hold through to expiration as long as we are moving lower. My first cut will be if I see 50% of the profit and we are at the support points.
Thanks Yip and Dagyt/Mark for your comments. My idea was not to keep doubling down but rather to try to accelerate back and get back to "even" then taper back to something closer to a Kelly Formula allocation with smaller regular contracts. Having learned a lesson I'd then hold that position size fairly constant month-to-month for about 6 months before I raise the total position size. My goal is to get $10K-$20K ahead in a few months then use that as "free on the house" trading money and not risk even a small portion of my core account ever again. One thing I am also starting to contemplate is just relying on the natural credit spread of 10 points and leveraging the longs as the only natural insurance/hedge and just taking the risk of a full loss if it ever gets to that scenario; or even a partial loss and NOT getting shook out early. I see increasing the hedge as an analog to "doubling down" on losses and replicating the spread hedge redundantly. If I can stick to this discipline and then accept a "natural loss rate" then there is less chance that fear/emotion will force me to increase my insurance/hedge expenses at the time premiums for same are the most expensive. It will also let me hang tough to expiration for cases where the underlying is encroaching near the money but trend is weakening. It really sucks when one is scared by the possibility of losses and punches out early only to find the market reverse and positions to expire OOM as winners. In my way of thinking extra hedging in the face of an approaching storm is metaphorically/conceptually not much different than rushing out and buying more hurricane insurance with lower deductibles every time a hurricane starts bearing down on one's home city/state and paying exponentially more premium for it. Frankly I am surprised the insurance industry does not really operate this way and play on peoples fears to extort more premium instead of current practise of locking out writing of new wind storm policies when a named storm is within 9 days traveling distance yet still subject to rapid changes in direction and intensity etc. ---- On other pragmatic matters: I was going to take a pass this month on SPX IC since there are so many "economic news events", earnings report and major political events. In my simple way of thinking, with VIX relatively low and premiums low I saw this as one of the worst possible options period to attempt IC since each major news event or report is an opportunity to put ripples into the market and shake out a new trend - or inject a sentiment spike that could punch well into the shorts of the IC. However, I hate sitting on my butt so I jumped in a week ago and legged in to open up a modest position as follows: CALL (SXZ) NEW S & P 500 INDEX NOV 1430 50 CALL (SXZ) NEW S & P 500 INDEX NOV 1420 -50 Credit => $0.58 PUT (SXY) NEW S & P 500 INDEX NOV 1335 -50 PUT (SXY) NEW S & P 500 INDEX NOV 1325 50 Credit => $0.48 (a tad low but market was mostly up) Net Credit $1.06 Market was down good today. But by the time I got back to my PC console from some domestic chores I missed the major move. Trying to pick up about 35 more put side spread contracts for a net credit of about .70-.85; if I get another run down this should be possible. My only fear at the moment is a wild spike up by the fanatical bulls who are so deafened by all the frenzied hoof pounding on the stampede up they seem mostly drowning out the din of most all the negative news... I don't expect a correction this month. TrendSailor
TS, It was an eye opening situation for most IC and DD traders in October, and I have learned a lot from it. I am more confident that I can make money from trading options now than ever before, but I still increase my trading size slowly. The reason for a big loss for most IC or DD traders is the exponential increase of negative gamma when the spot is approaching your short strikes. You have to do something (hedge or close your positions) to avoid the exponential increase in risk. A loss is a tuition if you can learn from it. I have paid a lot in tuition but I got the best professors here (Coach, Mark, Murray, Mo, RA etc)
Your vocabulary below tells me you are not approaching this the right way mentally. There are some trading methods and systems that require toughness. If you "wimp out" on a trade that turns into a big winner, you have just lost out on much of the potential of the system. The big winner would have made up for all the small losers you had along the way. Selling premium is not that system! There is very little to be gained by "hanging tough" with a credit trade. If you hang tough and the options expire OTM, congrats! You're a winner! Tell all your friends! But all you won was 0.50. This wasn't the big winning trade that makes all your money for the year. Its just a little clink in the piggybank. You will last a whole lot longer in this game if you get a little more scared. I don't mean really scared and emotional. But don't treat any trade like its very important. Winning sure isn't very important, because you just don't get much reward for a win. Losing is VERY important. Its the losers that will define your results. Anything you can do to reduce the likelyhood of a loser, or reduce the cost of a loser, will pay big dividends in the long run. You need to be ready and happy to close a trade for b/e or a small loss if you don't like what you see in the market. You will *not* be ready if you are worried about being scared, being a loser, not being tough, or any of the other pejorative phrases used to describe a trader who wimps out. This isn't the "Man Law" table or something. If you need to close a trade to reduce your risk, do it and move on. Go back and read some of Mark's posts about being a risk manager. Good stuff there on how to approach this type of strategy.
Interesting comments within your post. Some ideas to mitigate being "scared out of" a position. 1) Position size, as discussed 2) More favorable risk/reward. Good luck with your journey TrendSailor! Your posts are nearly as long as mine when I first joined ET I'd like to reiterate my suggestion to read the entirety of the thread if you are able to. You may come across some viable alternatives to the high probability iron condors that are worth considering. Prosperous trading! MoMoney.
LMAO. That's too funny how we both picked out almost identical phrases! TrendSailor is going to think we are picking on him....
Thanks Yip - I am learning a lot of things here. This has to be the single best IC and options forum I have ever seen. Participants and principals that you mention seem very seasoned and at the 2-3 sigma level of superior intelligence as well. Very refreshing and enlightening - and humbling. I am going to meditate on the merits of self insuring my IC risk by extracting out 20% or so of monthly IC income to use as a slush fund to pay the natural loss rate of a typical month's 10 point spread liability - which is $1000 per contract. It will take me a while to generate the "insurance" slush fund so to speak but I am thinking I do not want to be over insured either with too many market driven ad-hoc extraneous hedges. I don't want to prematurely pay additional premium each and every time an ill market wind starts to blow toward the short side of the condor's vulnerable areas. I am sure that knowing when to consider extra hedging is more an art than it is a science. I have been prematurely shaken out of a couple winning IC positions this year already. That opportunity cost hurt since I have already paid for the natural 10 point spread insurance as well as the reduced premium for higher altitude away from the underlying. I need to think this out some more but it seems the key to forming a self insurance/hedge fund is knowing how many contiguous/back-to-back partial IC assaults or full losses one's account can tolerate. Basically if one is flying their condors high off the underlying (e.g. 40-50 beyond the underlying) that extreme distance is is also natural insurance (payed by reduced premium) and should be sufficient for the overwhelming number of market cases. I need to think about it some more and focus on the fact that options writers want to be net writers and not net buyers who resell "perceived" risk for an exorbitant premium to re-insurers... TS
Good post jeffm, I agree that the IC is not suitable for that kind of mental approach. [ QUOTE]Quote from jeffm: Your vocabulary below tells me you are not approaching this the right way mentally. There are some trading methods and systems that require toughness. If you "wimp out" on a trade that turns into a big winner, you have just lost out on much of the potential of the system. The big winner would have made up for all the small losers you had along the way. Selling premium is not that system! There is very little to be gained by "hanging tough" with a credit trade. If you hang tough and the options expire OTM, congrats! You're a winner! Tell all your friends! But all you won was 0.50. This wasn't the big winning trade that makes all your money for the year. Its just a little clink in the piggybank. You will last a whole lot longer in this game if you get a little more scared. I don't mean really scared and emotional. But don't treat any trade like its very important. Winning sure isn't very important, because you just don't get much reward for a win. Losing is VERY important. Its the losers that will define your results. Anything you can do to reduce the likelyhood of a loser, or reduce the cost of a loser, will pay big dividends in the long run. You need to be ready and happy to close a trade for b/e or a small loss if you don't like what you see in the market. You will *not* be ready if you are worried about being scared, being a loser, not being tough, or any of the other pejorative phrases used to describe a trader who wimps out. This isn't the "Man Law" table or something. If you need to close a trade to reduce your risk, do it and move on. Go back and read some of Mark's posts about being a risk manager. Good stuff there on how to approach this type of strategy. [/QUOTE]