Bread & Butter Iron Condors

[cactiman]

Quote from cdcaveman:

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..

Thanks for the info.
Just like another spoonful of NyQuil!
Zzzzzzzzzzz......

 

[Put_Master]

<<< 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 fa >>>lls back into broker risk....>>>

Yes, they will be responsible for the money at that time.
But then they will come after you to make up the difference, once the immediate crisis is contained.
Whether or not they sue you will depend on your assets.
If you have a job, and they win the case, they will garnish a % of your wages per paycheck.
If you stated your account is "speculative", vs "conservative", when you filled out the forms, you will be responsible.
If you said it was to be a conservative account, but they allowed you to speculate, then it was their fault.

 

[Put_Master]

Quote from cactiman:

<<< I don't think they'll put a guarantee in writing about a hypothetical situation like that. >>>

I find it interesting you don't want to even ask them.
It's not really a hypothetical question.
Either they are responsible or you are. Nothing hypothetical about it.
If they didn't close your position because some market event made them too busy to protect everyone, and you own the shares you can't afford to buy monday morning, and the stock drops before you can sell it,.... who is responsible for the potential loss?
Simple question.


<<< 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. >>>

So it would be in their best interest to take the loss on themselves, than to risk losing you as a customer?


<<< Did something real bad like this happen to you? Is that why you're so worried about it for other traders? >>>

I'm concerned for traders who don't even realize they are on margin leverage via credit spreads. Because it's so easy to assume there is no margin, since it appears like the trade is based on 100% cash.
Those are the folks I'm trying to warn.
For the traders who already know it.... I really have no issue with the risk they have decided to take.
My message is not for them.

Selling naked calls is also a very risky trade. As are other type trades, such as naked puts. But you don't see me warning traders about naked puts and calls,... because it is an obvious risk.
Selling credit spreads is NOT as obvious a risk.
That's why I'm warning them about it.

Many traders are attracted to it because the "concept" of a limited loss and the "concept" of the total cash margin requirement up front, seems like a safe trade, with predictable risk.
They have no idea of the risk their account is in, if a bad market drops their stock a mere penny below their strikes. They can not even consider buying 95% of them, due to the margin they are not even aware they are on.
I'm warning people because I'm a nice guy.

 

[cactiman]

Quote from Put_Master:

Quote from cactiman:

<<< I don't think they'll put a guarantee in writing about a hypothetical situation like that. >>>

I find it interesting you don't want to even ask them.
It's not really a hypothetical question.
Either they are responsible or you are. Nothing hypothetical about it.
If they didn't close your position because some market event made them too busy to protect everyone, and you own the shares you can't afford to buy monday morning, and the stock drops before you can sell it,.... who is responsible for the potential loss?
Simple question.


<<< 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. >>>

So it would be in their best interest to take the loss on themselves, than to risk losing you as a customer?


<<< Did something real bad like this happen to you? Is that why you're so worried about it for other traders? >>>

I'm concerned for traders who don't even realize they are on margin leverage via credit spreads. Because it's so easy to assume there is no margin, since it appears like the trade is based on 100% cash.
Those are the folks I'm trying to warn.
For the traders who already know it.... I really have no issue with the risk they have decided to take.
My message is not for them.

Selling naked calls is also a very risky trade. As are other type trades, such as naked puts. But you don't see me warning traders about naked puts and calls,... because it is an obvious risk.
Selling credit spreads is NOT as obvious a risk.
That's why I'm warning them about it.

Many traders are attracted to it because the "concept" of a limited loss and the "concept" of the total cash margin requirement up front, seems like a safe trade, with predictable risk.
They have no idea of the risk their account is in, if a bad market drops their stock a mere penny below their strikes. They can not even consider buying 95% of them, due to the margin they are not even aware they are on.
I'm warning people because I'm a nice guy.

You do seem like a nice guy, yes.
Thanks for the warning and your time.
I really don't think I'm in danger, but I'll think some more about all you've said.

 

[Put_Master]

Quote from rocky_raccoon:

<<< 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? >>>

The issue is not whether it's a single trade, a handful of trades or 3 dozen diversified trades.
The issue is they may do such a risky thing because they don't even realize they are on margin leverage via their spread trades.
Whether you are on margin of 10 times your accounts value via one trade or 30 is irrelevant, if you can't afford to buy any of them, and thus risk a potential total account wipe out,... if the stocks trade too deep between your strikes, and you have not closed them.



<<< 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. >>>

As I stated above, it doesn't matter how you diversify the risk, if the risk is all in credit spreads or spread type trades, and a market event drops them a penny below your strikes, you risk a total wipe out of your account.

Some folks here think that is unlikely to happen, because the brokerage firm wants to keep a fantastic trader like that in their company, and doesn't want to risk losing them as a customer.
If so,... then don't worry about it. You'll be fine.

 

[cactiman]

Quote from Put_Master:

Quote from rocky_raccoon:

<<< 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? >>>

The issue is not whether it's a single trade, a handful of trades or 3 dozen diversified trades.
The issue is they may do such a risky thing because they don't even realize they are on margin leverage via their spread trades.
Whether you are on margin of 10 times your accounts value via one trade or 30 is irrelevant, if you can't afford to buy any of them, and thus risk a potential total account wipe out,... if the stocks trade too deep between your strikes, and you have not closed them.



<<< 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. >>>

As I stated above, it doesn't matter how you diversify the risk, if the risk is all in credit spreads or spread type trades, and a market event drops them a penny below your strikes, you risk a total wipe out of your account.

Some folks here think that is unlikely to happen, because the brokerage firm wants to keep a fantastic trader like that in their company, and doesn't want to risk losing them as a customer.
If so,... then don't worry about it. You'll be fine.

Do you know if this has this actually happened to anyone before, or is it just a legal loophole possibility kind of thing?

 

[Put_Master]

Quote from cactiman:

You do seem like a nice guy, yes.
Thanks for the warning and your time.
I really don't think I'm in danger, but I'll think some more about all you've said.

The danger you are in is remote.
Extremely unlikely to occur.
It's more of a "what if" type issue.

That being, "what if" there was a sudden and severe market event on option exp day,.... and "what if" the firm didn't get around to closing your trade for you,... and "what if" you could not afford to buy the shares put to you,.... and "what if" the shares dropped even further monday morning before you could sell them,.....

Extremely remote.... but what if?

 

[rocky_raccoon]

Quote from Put_Master:

Quote from rocky_raccoon:

As I stated above, it doesn't matter how you diversify the risk, if the risk is all in credit spreads or spread type trades, and a market event drops them a penny below your strikes, you risk a total wipe out of your account.

Strawman again? How is it a "total wipeout" if a) the max value at risk in the AAPL spread example is ~$270 ($500 less credit received) on 25K account and b) the spread is closed 3 days before expiration no matter what?

The rest of the account is in cash just to make it a complete example.

 

[Put_Master]

Quote from rocky_raccoon:

Strawman again? How is it a "total wipeout" if a) the max value at risk in the AAPL spread example is $500 on 25K account and b) the spread is closed 3 days before expiration no matter what?

I'm obviously NOT talking about or to responsible traders.

 

[webicknell]

Quote from Put_Master:

I'm obviously NOT talking about or to responsible traders.

PM, I thank you for that comment....
Some of us work hard to place and maintain our trades (even credit spreads) where we will not experience significant losses... this may require closing early at a loss.

I place my spreads very carefully and monitor them and the overall market very closely. I have plans for making necessary charges when certain price points are hit....

I am sure there will be the time when I will have to take a loss on a spread trade... knock on wood, it hasn't happened yet.

I do understand the risks and manage those risks.