Bread & Butter Iron Condors

Quote from cactiman:

Do you subscribe to the "Buy Options when the $VIX is low, Sell Options when the $VIX is high" theory?
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While that makes sense from a "theoretical" point of view, I do not subscribe to it as a strategy.
But if I'm long a stock, it's a great time to buy insurance with the VIX low.

But I'm not going to buy an option just because it's cheap, nor am I going to sell an option just because it's expensive.
Instead, I'm going to be more careful and more selective in the trades I initiate, and adjust my goals to adapt to current market conditions, when the VIX is low and when it's high.

Remember, when the VIX is high, and credits are higher, its because stocks are more volatile. Instead of trying to make more money on the trade, I'm more inclined to use that higher credit for a deeper OTM safety cushion. That assumes i'm still able to earn the desired % return I want.
And when the VIX is low, that could be a warning sign that the market is over valued. Instead of buying a cheap call, just because it's cheap, I might instead sit in cash and wait for a buying opportunity.
So I really can't generalize about how I might react to various VIX changes.
It's best to evaluate each potential trade based on it's own merits.
 
Quote from Put_Master:
But isn't that the equivalent of earning a 6.5% return via a credit spread?
That is a goal of trying to earn close to 80% a year.
That seems a bit unrealistic.
Bottom line.... the higher your % goal, the lower the probability of actually achieving it.
Set a goal of earning in the range of 20 - 25%, and you have a much higher probability of actually achieving it.

My personal goal used to be in the 20 - 25% range. But with the VIX being so much lower these days, I adjusted my goal to adapt to current market conditions.
Hence, my current goal is in the teens (13 - 19).
I'm not happy about it, but it's better than putting my account at risk of severe damage, by not adapting and adjusting to current market conditions. [/B]
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Of course I don't assume I'm going to win on every trade, but because of the lower Risk/Reward Ratio, one bad trade won't wipe out all my previous profits either.

If one just did Bull Put Spreads and only went for 24% a year, or 2% a month, that would be risking $98 to make $2 on each trade.
I couldn't deal with that.

Very much liking Buying Calls these days, which can win a whole lot more than they can lose, and there's very easy to execute loss control that works, without "support level" or "trailing" Stops.

I don't buy cheap "lottery ticket" Calls either, that are way OTM and depend on a big sudden up-move to succeed.
I get as high a Delta as my 2-3% "Equity Stops" allow, and try to enter after multi-week Bull Flag Pullbacks (for the best Call prices) in strong uptrends.
Also trade Breakouts from long Rectangular Channels in "recovery plays", as in the GLD example.

Anyway, time to go to the day job.
Haven't been able to trade my way out of it yet!
Good Trading!
:)
 
<<< Of course I don't assume I'm going to win on every trade, but because of the lower Risk/Reward Ratio, one bad trade won't wipe out all my previous profits either.
If one just did Bull Put Spreads and only went for 24% a year, or 2% a month, that would be risking $98 to make $2 on each trade.
I couldn't deal with that. >>>


When evaluating R/R it should NOT be analyzed in a vacuum.
It needs to be considered in the "context' of "probability".
The "probability" of an 80% annualized return goal being achieved at year end, is simply not as great, as the probability of a 25% return goal.
The more OTM your strikes, and/or the shorter your contracts, the higher the probability of the trades being successful.

Also keep in mind, it's not like you can buy and hold your stocks for a period of months, if you are wrong. The excessive leverage of spread type strategies prevents that.
If you are fully invested, and you picked the wrong time to be in the market,.... you have no plan "B" to fall back on.
It's over!
It's one thing to make an occasional excessively risky trade, hoping to earn 80% on it.
It's another to make that level of risk the central focus and goal of your strategy.
 
Quote from Put_Master:


The swan could occur anytime during the contract, and the result would be 100% loss.... assuming it remained below your strike on expiration day


So bottom line is, if the stock dropped to 21, I would be at max margin with covered calls or have to sell about 10% of my theoretical shares..
But my account would not be 100% wiped out as in the case of the spread trader.
Or did I explain the theoretical example to them incorrectly?

But again, either way, the naked put seller is NOT wiped out. The spread trader is.
Or am I mistaken?
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Thanks again for your response Put_Master. The answer to your question is: indeed you are mistaken.

Remember that this whole discussion centers around writing puts in a Reg T. (margin) account. We agree that cash secured puts are relatively safe. Perhaps that is where you are confused.

In any case, the best way to show how a naked put seller can wipe out his account is using a real world example.

Take Facebook (FB) for instance. On July 18 2012, it closed at $29.11 (right there in the range you were suggesting). Lets say that just before the close you sold the Sept 25 Put. You collected in total a $1.05 premiun per contract (last close for that strike).

Also lets say that I sold the 25/23 Sept spread which at that same day and time fetched $0.45 (mid).

All those numbers can be cross-checked in any place you want.

So now, you and I have $100K to play around so you sell in total:

-400 FB Sep 25 PUT for $1.05

And I sell

-645 FB Sep 25/23 PUT spread for $0.45

The 400 and 645 are the number of contracts require to max out the $100K in our accounts respectively. So far we are fulfilling the terms of your example with a real world scenario.

Now, fast forward to July 31 2012, Facebook closed the day at $21.71 (right there in the "black swan" range), Now lets check our accounts.

The FB Sept 25 PUT is now at $4.10
The FB Sept 25/23 Put spread is at $1.40

Again those values are real quotes from the closing of that day.

With the values of that day the P/L for the naked put seller (you in this case) is of $-122000.00 (You were just wiped out).

In contrast, the P/L for the put spread is of $-61275.00 (I still have more than $38K in my account to play with).

As you can see the put spread is not wiped out right away, while the naked put seller is in a lot of trouble trying the find money to fulfill the margin calls or God forbid being assigned. I doubt the naked seller will survive for another day.

I hope that now you can see the real risk of selling naked puts in a Reg. T. account.
 
Quote from Put_Master:
When evaluating R/R it should NOT be analyzed in a vacuum.
It needs to be considered in the "context' of "probability".
The "probability" of an 80% annualized return goal being achieved at year end, is simply not as great, as the probability of a 25% return goal.
The more OTM your strikes, and/or the shorter your contracts, the higher the probability of the trades being successful.

Also keep in mind, it's not like you can buy and hold your stocks for a period of months, if you are wrong. The excessive leverage of spread type strategies prevents that.
If you are fully invested, and you picked the wrong time to be in the market,.... you have no plan "B" to fall back on.
It's over!
It's one thing to make an occasional excessively risky trade, hoping to earn 80% on it.
It's another to make that level of risk the central focus and goal of your strategy. [/B]
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I don't expect to make 80% on my account this year, but I certainly expect GLD to be above 150 in January!
I reckon that's a slam-dunk, with Gold's traditional Autumn Rally underway, plus QE3, etc.

I know less risk = less gain, with a higher probability of success, of course.
That's why it pays a smaller credit.
But monthly "non-directional" trading is different from Trend Trading and Recovery Breakout Trading.

More time can help with those types of trades, by
giving the underlying a good chance to move far away from the upper strikes, before it pulls back to form a higher low in the uptrend.

Of course no one bats a thousand, but making more than 24% on a trade is very possible with credit spreads, if the Trend/Recovery Breakout is strong.
:)
 

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Quote from blueplayer:

Thanks again for your response Put_Master. The answer to your question is: indeed you are mistaken.

Remember that this whole discussion centers around writing puts in a Reg T. (margin) account. We agree that cash secured puts are relatively safe. Perhaps that is where you are confused.

In any case, the best way to show how a naked put seller can wipe out his account is using a real world example.

Take Facebook (FB) for instance. On July 18 2012, it closed at $29.11 (right there in the range you were suggesting). Lets say that just before the close you sold the Sept 25 Put. You collected in total a $1.05 premiun per contract (last close for that strike).

Also lets say that I sold the 25/23 Sept spread which at that same day and time fetched $0.45 (mid).

All those numbers can be cross-checked in any place you want.

So now, you and I have $100K to play around so you sell in total:

-400 FB Sep 25 PUT for $1.05

And I sell

-645 FB Sep 25/23 PUT spread for $0.45

The 400 and 645 are the number of contracts require to max out the $100K in our accounts respectively. So far we are fulfilling the terms of your example with a real world scenario.

Now, fast forward to July 31 2012, Facebook closed the day at $21.71 (right there in the "black swan" range), Now lets check our accounts.

The FB Sept 25 PUT is now at $4.10
The FB Sept 25/23 Put spread is at $1.40

Again those values are real quotes from the closing of that day.

With the values of that day the P/L for the naked put seller (you in this case) is of $-122000.00 (You were just wiped out).

In contrast, the P/L for the put spread is of $-61275.00 (I still have more than $38K in my account to play with).

As you can see the put spread is not wiped out right away, while the naked put seller is in a lot of trouble trying the find money to fulfill the margin calls or God forbid being assigned. I doubt the naked seller will survive for another day.

I hope that now you can see the real risk of selling naked puts in a Reg. T. account.
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I just re-read your example, and it seems you totally ignored my 40% margin example. Instead you put me at max margin even before any drop. Where is the 40% margin in your example???
Nor do i see how you sold as many 2 point spread contracts as you did for your account with $100,000.
According to Schwab, I can borrow $250,000 with a $100,000 account.
Thus sell 250 contracts.
In addition i used an extreme example of 40%, which means i can borrow $250,000. If i had dropped it just a few % to 37 - 38%, which is still an extreme example, I would not even be in a margin call.

Where is my 40% margin in your numbers???
Please explain how you sold as many 2 point spreads as you did in your example, with just $100,000.
Seems you are ignoring my 40% margin example for my account and just totally making up numbers for your spread account.
I have no idea how you have me selling 400 contracts.
I can only sell 250.
 
Blueplayer, I'd love to see the math of how you sold 645 spread contracts of FB, with a 2 point spread of $25/$23,.... with only $100,000???
 
Catiman,.... You currently have a 12% otm safety cushion on GLD.
That is a lot more reasonable than the 3% otm cushion you started with.
But GLD is not the issue. Nor is this or that stock the issue.
The issue is your strategy of using very small otm safety cushions of 3% in order to earn % returns closer to 80% vs 25%.
I hope it works out for you. My only concern is, if you pick the wrong stock, at the wrong time, for the wrong length of contract,....
it may not end well.
But i really do wish you luck. If you are successful, you will have a lot more money in your account to trade with in the future. And your GLD currently has a nice 12% otm cushion.
Just keep in mind the market can be surprisingly volatile, when we least expect it.
Always better to plan for that, than to be forced to react to it.
 
blueplayer:

Thanks for your efforts to shut up the local looneytuner. Most of us don't have the time or patience.

images


Rather than argue on and on and on... just put him on your ignore list and you will be surprised how the quality of this board goes way up.

:)
 
Perhaps oldnemesis will explain for us, how blueplayer sold 645 spread contracts of FB at $25/23,.... with just $100,000???
Can anyone explain it?

I'd also love to know, how he sold 400 naked puts at $25 with that same $100,000, using 40% margin.
Even if you raise the margin to the max, how do you get to use that much leverage?
 
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