Volga, How would you manage (short) Iron Condors (SPX/DIA) when underlying is reaching/touching your short option?
Good question, that I like to hear the answer to. I recently closed the short put side of IC as the underlying was threatening the downside. Barring a sharp spike upward, the IC would come out about breakeven, as the call side would expire. Not too bad, but there must be a better way from the pro. Looking forward.... tc
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taigong: ahh zee iron condor.. this is very subjective... There are two ways of looking at such a trade: 1. Breakeven. You collect 5 for something maximum worth 7 or something.. In which case, leave it alone.. you know u will only lose 2 or make 5. 2. Trade in and out of it. at which time u are trading direction and vol... take a view.. place your bets! I would look for what might be well offered on a vol basis and pick that up.. maybe some teenie puts in a 2-4X ratio against your short strike is always a good idea.. you might give up profits, but u are going to win big if the market really moves either way.. In response to CKor30's question.. Im a little confused. I think you are long close to atm options and short wings. If you want to ask me how to manage your book as the market drops when you are basically long a put spread.. Check your delta, if its close enough to expiry, you should be pretty short. you could buy it back!.. but im not here to tell u which way the market is going, just to help u understand options.. Or buy puts and buy the underlying like i suggested above. Depends on what your view is on vol and direction. You either trade breakeven.. or u trade real direction and volatility.. thats it... I dont know what the spx or dia is gonna do.. but i will tell u i am a bear on the daq for the moment..
Wan2BTrader, You ask about where to find beginning book on options. Do NOT start with the Natenberg book. I would start with something more basic. Thomsett is one I like a lot, some on ET like Cottle, I don't but majority seem to. I would use a McMillan book as phase 2, then Natenberg. Look at reviews here and at Amazon. I also disagree with Volga about lumping a sale of a time-spread into the credit spread category. Technically correct But I think it was directed to a beginner. Margins on selling a time spread can be brutal, profit potential there, but somewhat limited. Call vertical, put vertical, combo of both easier to manage. Volga correct on exit point being subjective if being squeezed, might help to have game plan as trade entered into. kny3
Volga; I am short the ATM, long the wing. Please give me an example for #2. of your answer. Suppose SPX 1070 Short 1 P 1070 Long 1 P 1065
ok now I get the picture much better.. Still depends on whether you want to trade it as a breakeven (in which case always do nothing!) or manage it delta/gamma/vega/theta If you want to manage it: Depends if you want to take real delta risk.. do u think the market is going to dump? If so, you can do one of two things: buy more 1065 puts or even 1060 or 1050 puts as protection. This is a soft delta, meaning that your max loss is the premium.. ie: you pay out say 1 tick net net for more downside options.. if the market rallies, u lose your tick and your return from the trade is lower. sell the underlying. this is a hard delta though.. meaning, if you get it wrong u are going to lose more money quicker (get the picture!) so, if the market rallies another 5 points, bam, u get shafted on your trade.... I hope this helps you out..
The natenberg book is simple enough for anyone.. it goes through options in an easy fashion.... it may take 2 reads, but once you have it, you really have it.. Mcmillan I feel is a bit naive.. Cottles book is good, but a bit confusing.. as for the time spreads... there are big returns in certain markets... you just haven't seen them! But you are right, not a beginner strategy.. ( or for those who don't like risk!)