Bread & Butter Iron Condors
- Thread starter cactiman
- Start date
Yeah,,, crack safari. Anyhow, stops are fine for the risk management of unexpected events or market moves, but generally they are a poor replacement for an otherwise dynamic decision set which is the result of market condition analysis. Lots of literature has been written othe high cost of stops. Options should be traded for gamma, nothing else.
If talking about straight directional trading, when one says a stop is set at 2% of equity, it means 2% of account value. That may mean a trade moves 10% against you before it hits your stop.
I can understand why some would use a 2% stop, I typically use 1% or less. Chose that based on my limited understanding of risk of ruin and theory of runs.
I can understand why some would use a 2% stop, I typically use 1% or less. Chose that based on my limited understanding of risk of ruin and theory of runs.
Quote from Put_Master:
Perhaps an example will clear this up:
On 06/12/12 I saw GLD priced at 154.57, and saw support at around 150-149.
I know GLD tends to rise each year after the summer "goldrums", so I sold some January GLD 150/149 Bull Put Spreads, for a credit of .43 per spread, with a total possible Max Loss on each spread of $57.
So, if I have a $20K account, I can withstand approx. $400 worth of Max Loss per trade.
That's -2% of total equity in the account.
So I'm allowed to sell as many as 8 spreads (-$456 possible Max Loss).
If I bought a Call Option instead, I'd get the highest Delta possible for around $400.
The more ITM and Time I can get the better, because I view the Call as a Stock/ETF surrogate.
So if GLD bumped down against 148 in July, would you close the trade?
That's what a Stop would do.
Does that make sense, with all that time left for GLD to go up?
I don't have to worry about little fluctuations like that, because the most I can possibly lose is $456.
This approach gets rid of the entire "whipsaw" problem one has with Stops.
And I won't lose as much as $456, if GLD is below 150 on December 19th, when I close the trade with 30 days to go before Expiration.
Of course I also have the choice of closing the spreads early, for less than the full .43 credit, if it gets way ahead.
Quote from cactiman:
<<< On 06/12/12 I saw GLD priced at 154.57, and saw support at around 150-149. I know GLD tends to rise each year after the summer "goldrums", so I sold some January GLD 150/149 Bull Put Spreads, for a credit of .43 per spread, with a total possible Max Loss on each spread of $57. >>>
Ok. So your otm safety cushion for a potential 6 - 7 month trade is only 3%. (I suspected you were using very small otm cushions).
I like that you were using the tech support in the $150 area, but given that your otm safety cushion is only 3% for such a potentially long trade, it seems like a low probability trade to me.
That being, a low probability of being successful.
<<< So, if I have a $20K account, I can withstand approx. $400 worth of Max Loss per trade.
That's -2% of total equity in the account.
So I'm allowed to sell as many as 8 spreads (-$456 possible Max Loss) >>>
So if I used the way this trade is set up, as a model for the rest of your remaining trades, over that same 6 - 7 month period, for the $20,000 account,... your max loss for that period would be 57% of your account value.... plus commissions.
Assuming I am correct about the potential maximum 57% loss of account value, if some market event dropped your stocks,... that seems like a high risk model, given that your average trade will only be 3% otm for a 6 - 7 month trade.
(Just as a side note, you are using margin leverage of 6 times your $20,000 account on this single trade. So buying the stock if it trades between your strikes is NOT an option. Thus, youl either must close early, or accept a max loss.)
<<< So if GLD bumped down against 148 in July, would you close the trade?
That's what a Stop would do.
Does that make sense, with all that time left for GLD to go up?
I don't have to worry about little fluctuations like that, because the most I can possibly lose is $456.
This approach gets rid of the entire "whipsaw" problem one has with Stops.
And I won't lose as much as $456, if GLD is below 150 on December 19th, when I close the trade with 30 days to go before Expiration. >>>
Given that you are already at max loss if the stock trades a penny under $149, i don't see the benefit of closing the trade at $148.
Yes, your loss will be a little less than 100%, due to the time remaining on the contract. But that will still be a huge % loss.
While the most you can lose is only $456 on this trade, if that trade represents the rest of your portfolio, that's nearly 60% of your acccount value.
<<< Of course I also have the choice of closing the spreads early, for less than the full .43 credit, if it gets way ahead. >>>
Yes, if the stock has a nice move up, you can close early for a gain. But you will not get much theta benefit, due to such a long contract.
Bottom line,...(Using the option model above for the rest of the stocks in your portfolio)... I don't like the idea of risking close to 60% of ones account, on 6 - 7 month contracts, with a mere 3% otm safety cushion,... with an inability to consider buying the stock(s), due to the use of massive margin leverage.
While your max loss is limited and controlled, it seems like a "low probability" of being successful type model.
<<< On 06/12/12 I saw GLD priced at 154.57, and saw support at around 150-149. I know GLD tends to rise each year after the summer "goldrums", so I sold some January GLD 150/149 Bull Put Spreads, for a credit of .43 per spread, with a total possible Max Loss on each spread of $57. >>>
Ok. So your otm safety cushion for a potential 6 - 7 month trade is only 3%. (I suspected you were using very small otm cushions).
I like that you were using the tech support in the $150 area, but given that your otm safety cushion is only 3% for such a potentially long trade, it seems like a low probability trade to me.
That being, a low probability of being successful.
<<< So, if I have a $20K account, I can withstand approx. $400 worth of Max Loss per trade.
That's -2% of total equity in the account.
So I'm allowed to sell as many as 8 spreads (-$456 possible Max Loss) >>>
So if I used the way this trade is set up, as a model for the rest of your remaining trades, over that same 6 - 7 month period, for the $20,000 account,... your max loss for that period would be 57% of your account value.... plus commissions.
Assuming I am correct about the potential maximum 57% loss of account value, if some market event dropped your stocks,... that seems like a high risk model, given that your average trade will only be 3% otm for a 6 - 7 month trade.
(Just as a side note, you are using margin leverage of 6 times your $20,000 account on this single trade. So buying the stock if it trades between your strikes is NOT an option. Thus, youl either must close early, or accept a max loss.)
<<< So if GLD bumped down against 148 in July, would you close the trade?
That's what a Stop would do.
Does that make sense, with all that time left for GLD to go up?
I don't have to worry about little fluctuations like that, because the most I can possibly lose is $456.
This approach gets rid of the entire "whipsaw" problem one has with Stops.
And I won't lose as much as $456, if GLD is below 150 on December 19th, when I close the trade with 30 days to go before Expiration. >>>
Given that you are already at max loss if the stock trades a penny under $149, i don't see the benefit of closing the trade at $148.
Yes, your loss will be a little less than 100%, due to the time remaining on the contract. But that will still be a huge % loss.
While the most you can lose is only $456 on this trade, if that trade represents the rest of your portfolio, that's nearly 60% of your acccount value.
<<< Of course I also have the choice of closing the spreads early, for less than the full .43 credit, if it gets way ahead. >>>
Yes, if the stock has a nice move up, you can close early for a gain. But you will not get much theta benefit, due to such a long contract.
Bottom line,...(Using the option model above for the rest of the stocks in your portfolio)... I don't like the idea of risking close to 60% of ones account, on 6 - 7 month contracts, with a mere 3% otm safety cushion,... with an inability to consider buying the stock(s), due to the use of massive margin leverage.
While your max loss is limited and controlled, it seems like a "low probability" of being successful type model.
If one uses a "% of Equity Stops" the chosen % can depend on your account size.
If you have a $100K account you can use 1/2% Stops and still buy a $500 Call Option.
Credit Spreads enable a trader with only a $2K account to use 3-4% Stops, because with a $100 Spread he only needs to risk $60-$80 per trade.
Most of my Stops seem to end up in the 2-3% range.
The next problem to deal with in risk management is "Total Account Risk".
If you have Fifty 2% Equity Stops out there, and there's a major Market Drawdown, and all of them fall at the same time..... not good!
So how much Cash should you keep in the account to survive such a cataclysm? 10% 20% 25%??
Quote from cactiman:
If one uses a "% of Equity Stops" the chosen % can depend on your account size.
If you have a $100K account you can use 1/2% Stops and still buy a $500 Call Option.
Credit Spreads enable a trader with only a $2K account to use 3-4% Stops, because with a $100 Spread he only needs to risk $60-$80 per trade.
Most of my Stops seem to end up in the 2-3% range.
The next problem to deal with in risk management is "Total Account Risk".
If you have Fifty 2% Equity Stops out there, and there's a major Market Drawdown, and all of them fall at the same time..... not good!
So how much Cash should you keep in the account to survive such a cataclysm? 10% 20% 25%??
Ah, now the discussion gets more interesting. How many positions should one have? As you note, 50 positions each risking 2% is 100% at risk.
I used to be haphazard in allocation, until I made a decision to force myself to choose quality. So I set an arbitrary 7 max positions. Now I always keep some funds in reserve, so if I have 7 open positions and a great opportunity comes along, I can take it. But before I do that I review and see whether it would be a good time to close an open position and switch funds. If not, I open number 8.