Interesting. Firstly, can I say I enjoy reading your journal - it's clearly written and easy to read.
I really appreciate the feedback. That's a large part of my intent in writing it, and I'm glad to hear it's working.
(A bit of programming lore: one of the major reasons for documenting your code, with verging-on-stupidly-explicit explanations, is not so much that
other people will want to understand it but so that
you, reading it a month down the road, will not go "what the
hell was I
thinking when I wrote that???" Funny as it may sound, it's actually true: once you're no longer in "hack mode", where you're holding all the relevant factors in your mind, your own code - which seemed trivially obvious at the time - will appear absolutely incomprehensible.)
Secondly, if you are open to suggestions, may I make a recommendation? I see that you are currently practising, but when you decide to scale up, I suggest you try trading SPX rather than SPY. I'm sure you are already aware, but these are the various reasons :
1) Lower comms. As SPX = 10 x SPY, you only need 1 lot in SPX for every 10 in SPY.
I am indeed open to, and grateful for, suggestions; in fact, that's one of the other major reasons for this journal. The market is always happy to give me feedback, but 1) the cost of a mistake can be ridiculously high, and 2) the "messages" you get can be absolutely cryptic, especially when you're first starting out. I much prefer, and intend to be (to whatever degree I can), someone who is willing to help their fellow traders grow their skills - and benefit from that mutual exchange.
One of the things I should note is that, as a veteran who is signed up for TradeStation's "Salute" program, I don't get charged commissions. It's a pretty damn stunning benefit, and whatever grousing I do about the TS software or service is always colored by my respect for their
really putting their money where their mouths are, in this regard. It's a huge help to a new guy trading small.
2) Early assignment risk. Since SPY has American style options, there is a risk of early exercise of short options which are ITM. SPX being European style doesn't have this risk. In addition, you don't need to worry about the dividend dates, which could lead to this situation with SPY.
Bloody hell - I completely forgot that SPY had div risk. Wow. Thank you!
I've traded SPX ($SPXW.X, to be exact) a couple of times - in fact, it was this exact sort of trade - and it came off pretty well. The thing is, 99.9% of all trading I've done has been American-style options - so (I'm just now realizing) I have this bit of vague unease about European-style options due to much less familiarity with them.
I realize this is a bit broad, but: other than the larger size, what would you say are the things to watch out for when trading it? I'm going over everything I know, and, all else held equal, it seems like several "free" benefits... which I've grown very suspicious of. Maybe I'm just being paranoid.
3) Cash settlement. SPY is stock settled and SPX is cash settled. Combined with (2), it means it's easier to deal with SPX, if the shorts are exercised against you.
This is actually a concern for me. If, say, SPY is exercised against you, you are short shares: scratch, a little profit, a little loss - all are within a reasonable probability spread. If SPX is exercised against you, you're down $300k per lot, end of story. Am I misunderstanding something?
(Personal episode - about a decade ago, I woke up one morning to see that my account had literally tens of thousands of short SPY shares. My short, deep ITM calls (part of a credit spread) had been exercised. I got out with a manageable loss, but the experience wasn't a pleasant one, and I vowed never to repeat it again.)
Thanks; I appreciate your recounting that story. I've been somewhat on the fence about closing these out right before expiration - I have a friend who has been doing them for years, and he always lets them expire unless they're going obviously bad - but you've just helped me firm up my decision about always getting out before the close.
Someone I know just got assigned 10 lots of SPY last week,
after being told "don't worry - it closed OTM,
you're absolutely safe!" by her broker. Digging into it, I found out that the
price at which she got assigned was fixed at market close, but that the owner's right to "exercise by exception" - i.e., early assignment -
does not end at that moment (TradeStation is impenetrably vague about it despite my hammering as hard as I could, but it's somewhere between 30 minutes after and full settlement the next morning.)
Hell of a shocker to her (although she managed to get out with a few dollars of profit), and to me as well. Between that, and your story above, I'm now committed to getting out every time.
In terms of stop loss, the longs on your iron condor act as the stop loss. Stop losses are unreliable during volatile markets, esp on expiration day near the close, because the bid/ask spreads can go crazy wide and fluctuate madly. Personally, I don't use them on credit spreads or IC's.
Happy trading.
I've just learned that on my own hide. And that may well be the kiss of death for this kind of high-ratio ICs for me. Or certainly a ground-up rethink of this strategy.
My main concept in them - very strongly driven by "trade small" for now - has been that my max loss is capped by my stops, which I set approximately equal to my max profit. But the rude awakening I've just had - which absolutely corresponds to what you're saying - made it crystal-clear that my risk is only capped by the wings, and that the stops are nearly useless (and completely useless as you get within a few minutes of the end.)
Again, I really appreciate your helpful response. Plenty of things to think about, and useful decision factors.
