SPX Credit Spread Trader

1. Did you paper-trade? It is hard to get the price at the mid.
2. Adjustment is hard without large slippage when it is close to expiration.
3. With big movement, you should expect a larger slippage.
4. A plan of no adjustment is a better exit strategy in this case imo. But I don't recommend this trade. Your gamma risk is too high.

 

Thanks to all replies for my post.


Mark,

Glad to see you come back to this thread. Thanks for your insight.

I have some experience on selling DOTM spreads on SPX, RUT & GOOG, but I have never done buying Iron Condors. Before using this strategy, I need to research, study, get some experiences from others, and do paper trading. As SPX bid & ask spreads are so widen, I’ll use IBM as example to explain what I want to know:

Today IBM closed @103.59. As it had good earning and has good out look, I think it will not go down too much in 5 weeks.

Sell 10 Mar IBM 95 put @1.55 Delta -0.21
Buy 10 Mar IBM 85 put @0.40
Credit 1.15
Maximum Gain$1,150; Maximum Loss $8,850 (it could happen if the market melts down)
Exit point: if the price for the spread = 3x 1.15 =3.45, I’ll take loss to get out.
I might do some adjustments based on the condition of the market.

Now I would like to try Iron Condors:
Sell 10 Mar IBM 100 put @2.90 Delta 0.35
Buy 10 Mar IBM 95 put @1.65
Credit 1.25

Sell 10 Mar IBM 110 call @1.95 Delta 0.30
Buy 10 Mar IBM 115 call @0.95
Credit 1.00
Maximum gain $2,250; Maximum Loss $2,750 (no matter what happen with the market)

Compare these two strategies:

Margin Requirement: same
Maximum Gain: $1,150 vs $2,250
Maximum Loss: $8,850 vs $2,750
Probability of winning the trade: 79% vs 65%
Risk/Reward: Bad vs No bad

Please advise:
1. Whether my analysis is correct.
2. How to control my risk by adjustment.
3. Is it a viable strategy in this volatile market?
4. SPX, SPY, QQQQ, Individual Stock with higher price, like IBM/GS, for this strategy which one I should use that I can get better return?

 

Hi zhangw,

You wrote:

"Margin Requirement: same
Maximum Gain: $1,150 vs $2,250
Maximum Loss: $8,850 vs $2,750
Probability of winning the trade: 79% vs 65%
Risk/Reward: Bad vs No bad

Please advise:
1. Whether my analysis is correct."

-----------------------------------------------

I have a question about your probability calculation. In the first case, you lose with a 10 point (approx) move down. You say this is 21% likely. In the second case, you lose with a 10 point (approx) move in either direction. You say this is 35% likely. Intuitively, should this not be about double (42%) likely?

 

Be careful, the probability of winning in the second trade is 0.65x0.70=45.5%.

 

Hi Mark, you have written:
"In addition, the risk/reward is always better for the iron condor because you collect more premium."

Excuse me but I don't agree with you. The risk/reward ratio is theoretically always the same.

With IC you collect more premium but you have more risk in your trade. With a vertical your risk is only for one direction, but with IC you take risk in both legs of the spread.

You can look the numbers that I put before and you will see what I'm talking about.

Regards

 

Sugar:

The risk reward ratio is better, but the probability distribution function of the success changes.

IOW the expectancy is almost the same (both are zero without slippage and commission cost).

 

Apologies, I agree with you about Risk/reward ratio. It was a terminological confusion.

What I wanted to express is that risk is the same in both trades.

Thanks.

 

Mark:

It is great to see you around. It has been very quiet for a long time.