Bread & Butter Iron Condors

[cactiman]

Quote from Put_Master:

Cman: My rule is to close all losing Spreads 30-21 days before Expiration, to avoid the Rapid Time Decay near the end, and avoid a Max Loss.

PM: I'm a little confused. Don't you want your credit spread to have that rapid time decay of the last few weeks?
It is NOT the time until expiration that should determine when to close down a deteriorating stock.
It is how close the stock is getting to your upper strike that is the determining factor.
Once the stock is inside and between your strikes, that is where your rate of loss begins to really speed up.
The deeper between your strikes the stock gets, the larger your loss.
Thus, it's always best to close a deteriorating stock BEFORE it hits your upper strike.

That's why the otm safety cushions of credit spreads are an "illusion".
Very risky to let a stock touch your strike. Because once it's inside, and between your strikes, your rate of loss really picks up steam.
And once it's inside, you know you can not consider buying the stock because of the excessive margin of credit spreads.
(The higher the strike, the higher the leverage.) [/B]

Cman: I think we're saying the same thing in different ways.
A "losing" Bull Put Spread to me is when the stock falls below the upper strike, thereby going In The Money.
The Rapid Time Decay then causes the Bull Put Spread to get more expensive to Buy to Close (as the price of the Spread approaches $1.00 at Expiration), thus rapidly increasing your loses.

I don't like closing a Credit Spread as soon as the underlying stock goes In The Money, because if there's enough time left before Expiration (more than 30 days), and the trend is still in place, the stock will many times go back Out Of The Money and I can still win on the trade.

I think you're also referring to the risk of "Early Assignment". As long as the Option you sold still has some Extrinsic Value, it's more profitable for the owner to sell the Option, rather than Exercise it for stock.
It's that Extrinsic Value that rapidly declines during the the last 30 days. So if I Buy to Close at 30-21 days before Expiration I don't lose all the Extrinsic Value, and shouldn't suffer Assignment.

 

[Put_Master]

Quote from cactiman:


<<< A "losing" Bull Put Spread to me is when the stock falls below the upper strike, thereby going In The Money. The Rapid Time Decay then causes the Bull Put Spread to get more expensive to Buy to Close (as the price of the Spread approaches $1.00 at Expiration), thus rapidly increasing your loses. >>>

Just the opposite.
Time decay makes it "less expensive" to close your spread.


<<< I don't like closing a Credit Spread as soon as the underlying stock goes In The Money, because if there's enough time left before Expiration (more than 30 days), and the trend is still in place, the stock will many times go back Out Of The Money and I can still win on the trade. >>>

Sometimes it will reverse and sometimes it will deteriote further.
The question is are you willing to accept a 100% loss if it does not reverse it's deteriorating trend?
Keep this in mind,.... I am going to assume you selected your upper strike because there was tech support there. If tech support didn't hold at a price of previous price support, why assume the price will hold and reverse it's deteriorating trend at a lower price where no previous support has held before?
On the other hand, if you didn't select that strike because of tech support, then you are really just throwing darts, and maybe you will get lucky. But also maybe get wiped out.

HOPING for a reversal is the usual cause spread traders sometimes take 100% losses.
Generally speaking it really is a better idea to close the spread when the stock breaches your first line of defense..... unless you have the cash to consider buying it.
Once the stock is inside and between your strikes, the amount of your loss really picks up steam the lower it goes.
Once your stock is inside your spread, your amount of loss is NOT linear. The amount gets worse the more it drops.

Or to put it another way, when closing a deteriorating spread, ... a 1% drop in stock, when it trades BELOW your strike, will result in a greater dollar loss,... than a 1% drop when it was above your strike.
Hence the reason i suggest closing a deteriorating spread as soon as it breaches your upper strike.... if not before.
On the other hand, the longer you wait to close it, the smaller your loss will be, because of theta. But that asumes you are comparing the closure to take place "at the same price". Just different times.



<<< I think you're also referring to the risk of "Early Assignment". As long as the Option you sold still has some Extrinsic Value, it's more profitable for the owner to sell the Option, rather than Exercise it for stock.
It's that Extrinsic Value that rapidly declines during the the last 30 days. So if I Buy to Close at 30-21 days before Expiration I don't lose all the Extrinsic Value, and shouldn't suffer Assignment. >>>

I was not addressing that issue at all. That is an entirely different issue. It has nothing to do with the issue being discussed.

 

[cactiman]

Put Master: Just the opposite.
Time decay makes it "less expensive" to close your spread.

Cman:
You're quite right about Put Credit Spreads if the price of the underlying is going up.
I was thinking of the SPY Call Credit Spread I Bought To Close the other day. It went up in price as the underlying went up.

[Had 4 teeth pulled yesterday, so I'm not quite with it today.]

If the price of the underlying is going down, the price of the Put Spreads does go up, making them more expensive to close.

The Rapid Time Decay speeds up either process, up or down, into Expiration Friday.

Have a bad headache. Will discuss the other issues later....

 

[Put_Master]

I've been in your situation myself.
Keep rinsing with salt water, when it's ok to do that, and just take it easy.
Sorry to hear about your discomfort.

 

[cactiman]

Quote from Put_Master:

I've been in your situation myself.
Keep rinsing with salt water, when it's ok to do that, and just take it easy.
Sorry to hear about your discomfort.

Thanks. Time to rinse with some NACL.
Wait a minute. Is that a stock symbol?

 

[Put_Master]

Quote from 70369:
<<< coming up with ideas that enable you to profit in either direction all the time while lowering overal cost/risk is what separates good traders from great traders. >>>


Respectlly disagree.
Any trade that enable you to profit in either direction, also has the potential to lose you money in either direction.
What separates good traders from great traders, is the same thing that separates current traders from ex-traders....
"How they manage their risk".

Going out. Read you later.

 

[cactiman]

Quote from 70369:

08/06/12 Quote from cactiman:
"Opened the Upper Legs of some November SPY Iron Condors today.
Sold 150/151 Bear Call Spreads into Resistance at 140.02.
Is 150 high enough? Time will tell.
Will now wait for a Pullback to a Higher Low in the Uptrend (around 135?), and then Open the Lower Legs.
Probably with 130/129 Bear Put Spreads, for a total Range of 20 points."

not to cut into your trading strat to deeply but, if you knew that 140 was the internal pivot level, why not simply increase your profitability by drawing a line at that level and defending it either long or short until it breaks either way?

you get three benefits:

1) lower overall trading costs
2) no options maintanence required
3) profit in either direction

you would have to compare the actual cost to defend that level against the actual cost of your options contracts should your strategy fail and price moves against you. that requires study to understand.

coming up with ideas that enable you to profit in either direction all the time while lowering overal cost/risk is what separates good traders from great traders.

Are you talking about trading Straddles and Strangles?
Have you had success with those?

On August 6th, I saw 140-142 as upper resistance, and thought SPY would soon fall back into the 130s.
Obviously, I was completely wrong!
If I'm very lucky the 150/151 Bear Call Spreads might be above SPY's price in November. We'll see.
If SPY is above 150 on October 17th (30 days before Expiration) I'll close the Call Spreads for a loss.

I know I started this thread, but I've gone off Iron Condors now.
Trying to call tops in uptrends (with the upper leg) is a low probability trade.
What happened this month is a perfect example.
All my Bull Put Spreads were good, but I had to close all the Bear Call Spreads for losses.
Will just stick to directional trades from this point forward.
(i.e. Bull Put Spreads and Long Calls during Bull Markets)

 

[cdcaveman]

Quote from cactiman:

Are you talking about trading Straddles and Strangles?
Have you had success with those?

On August 6th, I saw 140-142 as upper resistance, and thought SPY would soon fall back into the 130s.
Obviously, I was completely wrong!
If I'm very lucky the 150/151 Bear Call Spreads might be above SPY's price in November. We'll see.
If SPY is above 150 on October 17th (30 days before Expiration) I'll close the Call Spreads for a loss.
I know I started this thread, but I've gone off Iron Condors now.
Trying to call tops in uptrends (with the upper leg) is a low probability trade.
What happened this month is a perfect example.
All my Bull Put Spreads were good, but I had to close all the Bear Call Spreads for losses.
Will just stick to directional trades from this point forward.
(i.e. Bull Put Spreads and Long Calls during Bull Markets)

its impossible to be directionless.. that was part of the wrongs of the dynamic hedging model... even then your volatility forcasting.. and there is a cost to everything... i think guys who are ICing it are rolling out bigger and bigger as they get more deltas... it takes fucking nuts to get these things going... paper trade rolling out and up see how well that works for ya... i'm curiuos myself.. my impression is most newcomers are so either risk adverse they bleed to death.. or they get so uneducatedly risky they blow up quick.. and if they bleed they get tired and then throw on tons of risk because of frustration... its like bi polar mania of trading.. i can feel it in myself alot... just as relationships are about about boundries.. so is your relationsihip with your trading strategy... if your going to be rolling out and up.. you should have parameters for that.. say i'm only rolling out twice and up 1.5 times every roll.. or something else.. and then stick to it..

 

[cactiman]

Quote from cdcaveman:

its impossible to be directionless..

Exactly. What's so safe about trading ranges?
By the time they become clear on the chart, the Stock/ETF is probably ready to break out to the upside or downside.
If the Trend/Bias is up, go with it. That's the high probability trade.
Don't try to predict "it won't go any higher than this in the next 4-6 weeks."

 

[cactiman]

Quote from Put_Master:

<<< I don't like closing a Credit Spread as soon as the underlying stock goes In The Money, because if there's enough time left before Expiration (more than 30 days), and the trend is still in place, the stock will many times go back Out Of The Money and I can still win on the trade. >>>

Sometimes it will reverse and sometimes it will deteriote further.
The question is are you willing to accept a 100% loss if it does not reverse it's deteriorating trend?
Keep this in mind,.... I am going to assume you selected your upper strike because there was tech support there. If tech support didn't hold at a price of previous price support, why assume the price will hold and reverse it's deteriorating trend at a lower price where no previous support has held before?
On the other hand, if you didn't select that strike because of tech support, then you are really just throwing darts, and maybe you will get lucky. But also maybe get wiped out.

HOPING for a reversal is the usual cause spread traders sometimes take 100% losses.
Generally speaking it really is a better idea to close the spread when the stock breaches your first line of defense..... unless you have the cash to consider buying it.
Once the stock is inside and between your strikes, the amount of your loss really picks up steam the lower it goes.
Once your stock is inside your spread, your amount of loss is NOT linear. The amount gets worse the more it drops.

Or to put it another way, when closing a deteriorating spread, ... a 1% drop in stock, when it trades BELOW your strike, will result in a greater dollar loss,... than a 1% drop when it was above your strike.
Hence the reason i suggest closing a deteriorating spread as soon as it breaches your upper strike.... if not before.
On the other hand, the longer you wait to close it, the smaller your loss will be, because of theta. But that asumes you are comparing the closure to take place "at the same price". Just different times. [/B]

The reason I only trade Options now, instead of Stocks and Futures, is because I HATE STOPS!
I've just been whipsawed too many times.

With an Options trade, I set it up so my Max Possible Loss is -2% of my Equity.
Then I let it go where it wants, in this Insane Super Volatile Market.

At 30 days before Expiration, I check to see if the trade is losing, and if it is, I close it down.
There will still be some extrinsic value in the Options at that point, so I won't have a Max Loss.
Thus, all my losses are Less Than -2% of my Equity!

This Loss Control System seems to work much better with my "Trading Psychology".
I'm a much happier trader now than I used to be!