Bread & Butter Iron Condors
- Thread starter cactiman
- Start date
It really upsets cdcaveman that I dare to merely warn investors of the risks of being on excessive leverage via credit spreads,... particularly since many don't even realize they are on margin via their spread strategy.
It is YOU cd, who is the one who knows little about intelligently managing the risks of spreads.
You are the typical book investor who knows lots of definitions, but trades like a fool.
My goal is to keep others from making the kinds of mistakes that have turned previous successful credit spread investors into losers, simply because they accidently got in over their heads via excessive margin.
According to CD, don't worry about being on excessive margin via spreads. The worst that can happen to you is, you will lose all your investment money in those trades. No big deal.
And don't worry about possibly owing the brokerage firm any extra margined money via those spreads, if things go bad and you don't close the trade. Accoroding to cd, the company will ALWAYS protect you from your own stupidity, recklessness, and failure to manage the risk of your trade(s). That's a really great message to share withh investors.
As I stated above,... like most book investors, cd knows lots of definitions, but manages risk and trades like a fool.
CDcaveman has told us about his taking maximum credit spread losses. Care to share any potential credit spread trades going foward, so we may monitor your risk management, and the remote possibility of you incurring an actual gain?
@Put_Master:
We all agree that excessive leverage is bad (LTCM anyone?) but why do youkeep arguing with a strawman? You keep saying that people put their entire account at 100% risk on a single trade or a handful of trades and then get wiped out. But why would any one do such a stupid thing to begin with?
If your max loss is 2% of account equity per trade, then no matter how you construct that trade you have to keep the size of that trade to fit into 2% max loss. It's that simple. In the previous example, $500 max risk on AAPL credit spread is OK for 25K account (2% max loss). Going above that is risking too much.
Oh and put a conditional order to close your position no matter what 3 days before expiration to avoid potential assignment problems.
We all agree that excessive leverage is bad (LTCM anyone?) but why do youkeep arguing with a strawman? You keep saying that people put their entire account at 100% risk on a single trade or a handful of trades and then get wiped out. But why would any one do such a stupid thing to begin with?
If your max loss is 2% of account equity per trade, then no matter how you construct that trade you have to keep the size of that trade to fit into 2% max loss. It's that simple. In the previous example, $500 max risk on AAPL credit spread is OK for 25K account (2% max loss). Going above that is risking too much.
Oh and put a conditional order to close your position no matter what 3 days before expiration to avoid potential assignment problems.
Here's what thinkorswim had to say about all this:
Question: If AAPL closed at 580 on Expiration Friday in November, and I had neglected to close my AAPL 590/585 Bull Put Spread, what exactly would happen? And what would happen if AAPL closed in between the two Strikes, at 587?
Answer: If AAPL closes at 580 on Nov expiration, and you did not close your AAPL 590/585 bull put spread, what would occur is that your put spread would be exercised since both strikes expired ITM.
In this case your 585 bought put would be exercised and your 590 sold put would be assigned. The exercise of the long option would be offset by the assignment of the short option. Offset in that you would not come in long or short AAPL stock on Monday.
Of course there is never a guarantee that the short option will be assigned, since that decision is entirely up to the long contract holder. However, if the short option expires a few pennies in the money (ITM) there is a good chance it will be assigned.
In the case where a bull put spread expires with both legs ITM, you would realize max loss at expiration.
If AAPL closes between the strikes, only the ITM option would be auto exercised and the OTM option would simply expire worthless. In this case, you would come in on Monday with a stock position.
In this example, if AAPL closes at 587 on Nov expiration, the spread would have 1 ITM option and 1 OTM option. The 590 sold put option would be ITM and hence would be assigned, causing you to buy AAPL stock at the strike price of the put contract. The 585 long put would expire worthless (this option would not be exercised).
How different brokerage firms will handle this matter will depend on their in-house policy. For example, if the client does not have enough stock buying power in the account to take delivery of the stock, some firms will liquidate the ITM option (or entire option spread) before it expires. Others might allow you to take delivery of the stock, on the condition you close the position on Monday morning.
Question: What is the policy of TOS? And are there any commissions or penalty fees involved with all this?
Answer: In terms of our policy, it is on a case by case basis. We have our Margin Team (risk team) monitoring expiring positions, and if they see that a client does not have the funds to hold the stock position if the option expires ITM, they will try to contact the client by phone to allow the client to close the position on their end before expiration (they make their calls on the last trading day of the option).
If they cannot reach the client and they feel that there is simply too much risk in letting the client take delivery of the stock (in a case where the net liquidating value is a bit too low in the account for the stock position that will result from the exercise) they will close the option for the client.
There are no pennlty fees. However, there is the exercise/assignment fee of $15 per strike/leg.
Question: If AAPL closed at 580 on Expiration Friday in November, and I had neglected to close my AAPL 590/585 Bull Put Spread, what exactly would happen? And what would happen if AAPL closed in between the two Strikes, at 587?
Answer: If AAPL closes at 580 on Nov expiration, and you did not close your AAPL 590/585 bull put spread, what would occur is that your put spread would be exercised since both strikes expired ITM.
In this case your 585 bought put would be exercised and your 590 sold put would be assigned. The exercise of the long option would be offset by the assignment of the short option. Offset in that you would not come in long or short AAPL stock on Monday.
Of course there is never a guarantee that the short option will be assigned, since that decision is entirely up to the long contract holder. However, if the short option expires a few pennies in the money (ITM) there is a good chance it will be assigned.
In the case where a bull put spread expires with both legs ITM, you would realize max loss at expiration.
If AAPL closes between the strikes, only the ITM option would be auto exercised and the OTM option would simply expire worthless. In this case, you would come in on Monday with a stock position.
In this example, if AAPL closes at 587 on Nov expiration, the spread would have 1 ITM option and 1 OTM option. The 590 sold put option would be ITM and hence would be assigned, causing you to buy AAPL stock at the strike price of the put contract. The 585 long put would expire worthless (this option would not be exercised).
How different brokerage firms will handle this matter will depend on their in-house policy. For example, if the client does not have enough stock buying power in the account to take delivery of the stock, some firms will liquidate the ITM option (or entire option spread) before it expires. Others might allow you to take delivery of the stock, on the condition you close the position on Monday morning.
Question: What is the policy of TOS? And are there any commissions or penalty fees involved with all this?
Answer: In terms of our policy, it is on a case by case basis. We have our Margin Team (risk team) monitoring expiring positions, and if they see that a client does not have the funds to hold the stock position if the option expires ITM, they will try to contact the client by phone to allow the client to close the position on their end before expiration (they make their calls on the last trading day of the option).
If they cannot reach the client and they feel that there is simply too much risk in letting the client take delivery of the stock (in a case where the net liquidating value is a bit too low in the account for the stock position that will result from the exercise) they will close the option for the client.
There are no pennlty fees. However, there is the exercise/assignment fee of $15 per strike/leg.
Don't fall asleep just yet.Quote from cactiman:
Whew! Thank goodness. Looks like they got it covered to me.
I'll be able to sleep like a baby tonight!
You did not ask the correct question.
Ask them the followng:
If there is a market event friday, and the company is way busier than usual.
If I obviously don't have the cash to buy the position on monday, is it possble that the company may not get around to closing my position, and that I may own the shares monday morning?
Or am I guaranteed that the company will protect me?
Is your protection merely a goal, or a guarantee?
Under what circumstance would they not protect you?
I don't think they'll put a guarantee in writing about a hypothetical situation like that.
I'm satisfied with their answer and have a copy to show them if they screw it up.
I was called once on an ITM Put (it was right on the line all day, and I waited too long to close it). We had to sell the assigned shares After Hours. Was not a problem.
Also, they make commissions and fees on all this stuff, so it's just another trade to them. That's how they make a living.
It's not in their interest to lose me as a customer and get all the bad publicity involved.
Did something real bad like this happen to you? Is that why you're so worried about it for other traders?
if their risk management team doesn't catch it.. and the option gets assigned... its on them to make up the difference for the money that you don't have in your account to cover the stock.. thats just not going to happen... this all falls back into broker risk.... there are many things that can happen i'm sure on the broker side to put them in all kinds of trouble... if something as simple as not closing out a short leg in a credit spread is something they can't handle.. they would never make it..
by the way.. IB said when i talked to them that they only care about the short position...when closing the trade for clients.. they wouldn't close the long .. thats what they told me anyway...
BOTTOMLINE... most people close their credit spreads at .80 percent profit...spreads are a active trader weapon and basically need to be monitored..
by the way.. IB said when i talked to them that they only care about the short position...when closing the trade for clients.. they wouldn't close the long .. thats what they told me anyway...
BOTTOMLINE... most people close their credit spreads at .80 percent profit...spreads are a active trader weapon and basically need to be monitored..