Why is this bad?

Discussion in 'Options' started by TradingPilot, Nov 18, 2007.

  1. Alright I have a question for you guys.

    Im thinking about entering an IC (the picture attached explains the legs).

    I know it has a high prob but bad risk reward and I know about the high comissions.

    I want to know what else is bad about this position. Is it never gonna get filled? Is it gonna be hard to get out? When should i get out 5 days before exp?

    Please help! I have trouble finding good information on the practicalities of spreads.

    Thank You,
  2. Balljet


    Hi TP,

    First of all, I am not an expert and am not going to comment on the IC in particular but in ICs in general. If you can, you let them expire. You want to sell 2 verticals OTm, the delta I look for is about 8,9 on the put side and 9, 10 on the call side. If they go against you and if you believe TOS they most likely during their lifetime will show a loss (Difference between prob. of expiring and prob. of touching) you should not adjust, just trade around it.
    I t might be tough to fill, depends on volatility.

    Anyway, IMO the best site to learn about those is TOS (thinkorswim)
  3. MTE


    Actually it's not a bad position. You might have a hard time getting filled at the mid of 0.27, but 0.20-0.25 may be achievable.

    As the previous poster mentioned, generally you want these to expire rather than closing out.
  4. Let say things went against me, and one of the strikes went in the money.

    How would I close out of this condor. Take it apart by selling off individually or try to offset the whole thing.
  5. At this point you would be close to maximum loss and not much you could do. My quick math tells me that one bad trade will wipe out close to 20 such trades.

    If you take a look at a 2 year S&P500 chart I'm sure there is at least one occasion were this has happened, and likely to happen again within the next 2 years.

    S&P500 2 year chart
  6. MTE


    I usually just leave it as it is. The volatility that caused the index to move against me can bring it back in. I size my position so that I can take a max loss on it.

    Not sure where you're getting 20:1 ratio. The spread is trading at 0.27 and it's 1-point wide. So let's say it's 0.20 to account for some slippage, in which case you have a risk/reward ratio of 4:1 (risking 0.8 to make 0.2).
  7. I entered a trade today with only 1 set to practice.

    Paper money doesnt really teach me I need to have real money on the line even if it is only 67 dollars.
  8. Perfect close today for this position.
  9. I learned alot today :)
  10. sugar


    I think that paper trading is very useful. It will help you to make better your trading and your level of knowledge about options without any kind of psychological load.

    Moreover you'll be able trading with a bigger size that allow you test with several strategies and learn how edge the positions when it don't work like you had took into account.

    Paper trading isn't like "dollar" trading but it's indispensable for dominate the option's mechanics.

    #10     Nov 20, 2007