Bread & Butter Iron Condors
- Thread starter cactiman
- Start date
Just about. I was going to post this;
I manage my positions with an excel spreadsheet with 10 lines for 10 positions. I have an algo that if the sum at risk exceeds 10% (I have the % set in a cell so I can reduce if necessary), even if it is trade number 6 it is rejected. Now as I move my stops up in an open trade, value at risk reduces so with funds in reserve I can open more positions. I try to keep the relationship dynamic so I have flexibility to take a trade at 2% risk if it is attractive, but keep overall risk to a prescribed limit.
Now if you are thinking that 10% at risk is conservative, maybe, but if I hit a bad patch and lose all open trades, I am only down 10% and live to fight another day.
And yes, I put in many hours work modeling this to fit my trading style.
Very cool and very wise.
Over the years I've been wiped out twice and really hurt another time by not paying attention to "Overall Risk", so I'm paying a lot more attention to it these days!
Not sure I could do 10%, or computerize it, but will try some different % and see which one suits me best.
Thanks for the ideas.
http://www.thestreet.com/story/799733/1/naked-puts-are-a-dangerous-game.html
"Selling naked puts is one of the most risky strategies around," Fontanills says. "By offsetting that bet and buying another put, Fred, you should reduce the cost of capital and leverage with a bull put spread."
"Selling naked puts is one of the most risky strategies around," Fontanills says. "By offsetting that bet and buying another put, Fred, you should reduce the cost of capital and leverage with a bull put spread."
OK, let's assume all my trades are like this, there's a huge drawdown in December forcing me to take a Max Loss in every trade, and I lose 57% of my total account value.
But if I sold Puts further out of the money over shorter periods of time, I'd probably only get credits of .25 per spread, and if there was a drawdown before those earlier expiration dates, I'd lose 75% of my total account value!
What's the solution?
What's the solution?
Well this is not necessarily 'the solution' but I have extracted a small part of my options portfolio:
SYMB......Option..........Company...................................Contracts.........Paid..............P/L
BAC...Jan13 7.5 Call Bank of America Corporation............2................$2.00...........44.00
BAC...Jan13 10 Call Bank of America Corporation...........-2...............$1.11...........104.00 net: $60
BAC...Jan13 2.5 Put Bank of America Corporation..........-2...............$0.30...........58.00
BAC...Jan13 5 Put Bank of America Corporation.............2...............$1.09...........-212.00 net: ($154)
BAX...Jan13 40 Put Baxter International Inc....................3...............$0.67...........-171.00
BAX...Jan13 45 Put Baxter International Inc..................-3...............$1.07...........261.00 net: $90
CVH...Apr13 35 Put Coventry Healthcare Inc..................-2..............$0.40...........20.00 net: $20
CWT...Dec12 17.5 Put California Water Srvice Group.......-3..............$0.60...........0.00 net: 0.00
GIS...Jan13 25 Put General Mills Inc.......................................4...........$0.25...........-80.00
GIS...Jan13 30 Put General Mills Inc....................................-4..............$0.53...........156.00 net: $76
LOW...Oct12 32 Call Lowes Companies Inc........................-3..............$0.35...........72.00
LOW...Oct12 34 Call Lowes Companies Inc.........................3..............$0.17...........-45.00 net: $27
SO...Jan14 30 Put Southern Co..........................................3..............$1.11...........-162.00
SO...Jan14 33 Put Southern Co..........................................-3..............$1.51...........189.00 net: $27
.................................................................................................................................net:$146
Well this is not necessarily 'the solution' but I have extracted a small part of my options portfolio:
SYMB......Option..........Company...................................Contracts.........Paid..............P/L
BAC...Jan13 7.5 Call Bank of America Corporation............2................$2.00...........44.00
BAC...Jan13 10 Call Bank of America Corporation...........-2...............$1.11...........104.00 net: $60
BAC...Jan13 2.5 Put Bank of America Corporation..........-2...............$0.30...........58.00
BAC...Jan13 5 Put Bank of America Corporation.............2...............$1.09...........-212.00 net: ($154)
BAX...Jan13 40 Put Baxter International Inc....................3...............$0.67...........-171.00
BAX...Jan13 45 Put Baxter International Inc..................-3...............$1.07...........261.00 net: $90
CVH...Apr13 35 Put Coventry Healthcare Inc..................-2..............$0.40...........20.00 net: $20
CWT...Dec12 17.5 Put California Water Srvice Group.......-3..............$0.60...........0.00 net: 0.00
GIS...Jan13 25 Put General Mills Inc.......................................4...........$0.25...........-80.00
GIS...Jan13 30 Put General Mills Inc....................................-4..............$0.53...........156.00 net: $76
LOW...Oct12 32 Call Lowes Companies Inc........................-3..............$0.35...........72.00
LOW...Oct12 34 Call Lowes Companies Inc.........................3..............$0.17...........-45.00 net: $27
SO...Jan14 30 Put Southern Co..........................................3..............$1.11...........-162.00
SO...Jan14 33 Put Southern Co..........................................-3..............$1.51...........189.00 net: $27
.................................................................................................................................net:$146
Thank you for your reply Put_master, it is good to have numbers so we can put this argument to rest once and for all.
My answer to your question is that I would rather be on the credit spread. I'll explain a couple points first:
1. The only way that the credit spread will have 100% loses with that fall is if the black swan ocurrs on expiration day around 1:00PM at least
But for the sake of this discussion lets assume that anyway.2. The fact that you are using margin to sell the naked puts, means that you will not have the required amount of money to fulfill any assignments in the contracts, it is called margin for a reason. That escape route is not an option at all in your scenario, so your only solution is to buy the contracts back.
And there lies the problem. To see how much money the naked seller is losing lets work with your number in the upper range:
1. Stock is at $30
2. Strike is at $25.5 (15% away from the UL).
3. Margin requirements in a real broker like Interactive Brokers is:
Put Price + Maximum ((20%[2] * Underlying Price - Out of the Money Amount), (10% * Strike Price)).
In this case because the put is OTM the inital marging is just 10% of the strike price plus anything you collected so in this case is: $2.55 +X (where X is the amount you collected).
4. Now a black swan that takes to stock 30% down means that new price it is sitting at $21 and the put is $4.5 ITM. So now you can see the disaster. You only have $2.55 +X in your account and the puts are at least $4.5+extrinsic value. So you better have collected a premium that is at least $1.95+extrinsic just to have your account at zero.
But that discussion is moot, because as soon as the price hits $24.99 (or less) you will get a nice margin call requesting $2.45 per contract in extra money in your account ($5-$2.55) so you are already under water there. No need for a black swan for you to be screwed up.
Even if you manage to collect enough premium so your account stays above zero, you are exposed to the margin call or worse yet, to the fact that your counterparts are better served exercising their options (if they expect the stock to fall further) in which case you are royally screwed as you will never have enough money to buy them.
As you can see, a cash secured put its relatively safe, but a naked put on margin can be as or more painful than the credit spread.
WRONG!Quote from cactiman:
OK, let's assume all my trades are like this, there's a huge drawdown in December forcing me to take a Max Loss in every trade, and I lose 57% of my total account value.
But if I sold Puts further out of the money over shorter periods of time, I'd probably only get credits of .25 per spread, and if there was a drawdown before those earlier expiration dates, I'd lose 75% of my total account value!
What's the solution?
First of all, you need to compare apples to apples.
Thus, you would select the same contract date of Dec for the naked put.
Which means you would earn a higher credit. Not less.
Secondly,... you would not be able to sell as many contracts naked.
Thus, you would be able to buy "ALL" the stocks if they were put to you. You would NOT be "forced" to sell for a loss. You have the ability to CHOSE to buy or sell.
If the stocks were put to you, you could own them, collect dividends, if any, and sell covered calls for additional income.
Third,... even if you selected a deeper otm cushion, you can go as deep as you need, to earn a credit you are comfortable with.
Up to you if you want a strike of 149, 148, 147, ect....
Although I do NOT want to imply that I am recommending GLD naked.
I have not analyzed it at all. Nor do i intend to.
The problem with doing a spread on a stock as expensive as $150 is,
you can NOT possibly buy any or most of those contracts with your $20,000. You MUST close for a loss.
Going naked, even on 40 - 50% margin, you can buy all your contracts.
You are NOT forced to sell. You can CHOOSE to sell or to buy.
If you are going to sell a spread, it is safer to do so on a low priced stock, for example under $20. Those you can consider buying most of the contracts if they are put to you. You are NOT FORCED to sell. You can "chose" whether you want to buy or sell.
You can sell a put naked at any price.
But if you are not willing to even consider buying the stock, then do NOT sell a put naked on it. Naked selling is NOT for dart throwers.
Also, if you are going to sell spreads, use VERY WIDE strike gaps. That will also keep you from using as much excessive margin.
Unfortunatley, those wider strike gaps will not be as much help when closing down a deteriorating position, as a more narrow gap would. So there are positives and negatives to consider, regarding strike gaps, if you are doing spreads.
HOWEVER..... HOWEVER...... HOWEVER..... HOWEVER..... HOWEVER......HOWEVER.
HOWEVER, if you are going to sell puts naked, you must be more selective in the names of the companies you are investing. And more selective in the strikes you select.
If you are either too lazy to do the work, or you don't know how to be selective, then you might as well stick with spreads.
Going naked is NOT recommended if you prefer to throw darts for stock selection, or prefer stocks just because they have high premium, or you prefer to select the hot stock "story" of the week, or you prefer to ride a stock that is currently in an uptrend, and so on.... What made you pick GLD? Was it one of the reason above?
If the above is how you pick your stocks and prices.... do NOT go naked. That will be a slow bleed to death. You might as well kill your account quickly with spreads.
One of the reasons so many investors like doing spreads is, they feel they don't need to do their homework in selecting stocks.
They can chase any stock at any price and for any reason,... such as they like its high credit, or they like it's current uptrend, ect....
Afterall, they are hedged (? protected ?), so they don't feel the need to be selective or careful. They don't even care that their account is leveraged 10 times their account value.
WHY?
Because they feel protected.
They are actually NOT protected. But they feel protected.
Hence their reckless behavior.
So again, if you are not willing to be selective about stock and price, don't go naked. Kill your account quickly with spreads, instead of the slow bleed of going naked.
Picking the same WRONG stocks naked, as you would with spreads, is not going to improve your situation.
Quote from Put Master:
>>WRONG!
First of all, you need to compare apples to apples.
Thus, you would select the same contract date of Dec for the naked put.
Which means you would earn a higher credit. Not less.
Secondly,... you would not be able to sell as many contracts naked.
Thus, you would be able to buy "ALL" the stocks if they were put to you. You would NOT be "forced" to sell for a loss. You have the ability to CHOSE to buy or sell....>>
Cman:
Didn't mean to touch a nerve here, nor compare different fruits!
I wasn't talking about Naked Puts. My fault, sorry.
It should have read, "But if I sold PUT SPREADS further out of the money over shorter periods of time, I'd probably only get credits of .25 per spread, and if there was a drawdown before those earlier expiration dates, I'd lose 75% of my total account value!
What's the solution?"
I don't trade Credit Spreads unless I get a 2/1 Risk/Reward ratio or better (this trade got a 1.33/1 ratio), and that's much harder to achieve since the $VIX has fallen.
Even before the $VIX fell back, one had to add quite a bit of time to get such a ratio. Thus the need for 6-7 month out expiration dates on the GLD Spreads.
As to Naked Puts:
I've always heard you shouldn't sell them unless you are prepared to buy the underlying stock.
The Naked Puts are used as a way to "get paid to wait" for the price to fall to a level you're willing to pay for the underlying.
I don't want to buy Stock or ETFs right now, and don't want to deal with the large margins required for Naked Puts either, so it's not an issue for me at this time.
>>WRONG!
First of all, you need to compare apples to apples.
Thus, you would select the same contract date of Dec for the naked put.
Which means you would earn a higher credit. Not less.
Secondly,... you would not be able to sell as many contracts naked.
Thus, you would be able to buy "ALL" the stocks if they were put to you. You would NOT be "forced" to sell for a loss. You have the ability to CHOSE to buy or sell....>>
Cman:
Didn't mean to touch a nerve here, nor compare different fruits!
I wasn't talking about Naked Puts. My fault, sorry.
It should have read, "But if I sold PUT SPREADS further out of the money over shorter periods of time, I'd probably only get credits of .25 per spread, and if there was a drawdown before those earlier expiration dates, I'd lose 75% of my total account value!
What's the solution?"
I don't trade Credit Spreads unless I get a 2/1 Risk/Reward ratio or better (this trade got a 1.33/1 ratio), and that's much harder to achieve since the $VIX has fallen.
Even before the $VIX fell back, one had to add quite a bit of time to get such a ratio. Thus the need for 6-7 month out expiration dates on the GLD Spreads.
As to Naked Puts:
I've always heard you shouldn't sell them unless you are prepared to buy the underlying stock.
The Naked Puts are used as a way to "get paid to wait" for the price to fall to a level you're willing to pay for the underlying.
I don't want to buy Stock or ETFs right now, and don't want to deal with the large margins required for Naked Puts either, so it's not an issue for me at this time.