How do you guys handle it? Say you have a complex strategy involving a butterfly, several verticals and single calls. It works together in unison. You're at the profit level you were seeking and want to close them all out. How do you go about avoiding the exposure to the market that will come if some of your options take longer to close out than others? Particularly the positions in an index like SPX or RUT? Or is it just another hazard of training?
Complex options strategies: when it comes time to close out the trades
- Thread starter darkshogun
- Start date
There's going to be no clear answer as it depends on the position you have and what your risks are.
In Russel and SPX at least they are cash settled so you don't have to stress through expiry.
My philosophy is to not get into such a position in the first place. If you need more than 4 legs to express a view on a single underlying then you either aren't being efficient or you are over optimizing. Reduce the number of legs in your trade from the beginning. You will find you can get the same risk characteristics with fewer commissions paid and with less complications (even a box has risk).
In Russel and SPX at least they are cash settled so you don't have to stress through expiry.
My philosophy is to not get into such a position in the first place. If you need more than 4 legs to express a view on a single underlying then you either aren't being efficient or you are over optimizing. Reduce the number of legs in your trade from the beginning. You will find you can get the same risk characteristics with fewer commissions paid and with less complications (even a box has risk).
close them all out together as one strategy if possible or package them as such.....
reason being - you will not be left with things you dont want, and the combined strategy might have enough theoretical margin for a MM to take the opposite side in one hit, as opposed to legging it on and paying across multiple bid-ask spreads.
reason being - you will not be left with things you dont want, and the combined strategy might have enough theoretical margin for a MM to take the opposite side in one hit, as opposed to legging it on and paying across multiple bid-ask spreads.
- Dissect the position into simplest components
- Liquidate most/part position with greatest risk with a single trade
- In practice, often leads to buying back short options, leaving long wings as lottery tickets if too cheap to sell
- Depends a little on whether underlying is cash or stock settled
Post details of position and we can have some fun dissecting!
SPX and SPY mix where positions are interacting as a part of a whole strategy. Just for fun lets say 1 SPX 1790/1840/1890 PUT BUTTERFLY, 1 SPY 181 CALL, 7 SPX 1840/1850 CALL DEBIT VERTICALS, AND 3 SPX 1840/1830 PUT DEBIT VERTICALS.
Ignoring the SPY position; in order to quickly neutralise the position you could:
1. Buy 1x 1790 / 1840 Put Vertical or
2. Buy 4x 1830 / 1840 Put Verticals or
3. Buy 1x 1790 / 1860 / 1890 Iron Fly
Does this help?
Yes, thanks for your ideas. I'm still running a demo, not live trading. My opening position is 10 put butterflies per 1 call. I won't be mixing SPX and SPY trades at all, due to the risk of getting filled on the butterflies without getting filled on the call. I'm going to initiate my trade with a custom 4 leg spread in order to get filled on all positions. Being a beginner, I'll practice live with SPY minis until I get the hang of it then increase my positions in the regular SPY. If successful I plan to eventually transfer to the SPX.
The strategy will involve adding debit spreads when necessary and/or picking up the butterfly and moving it. The goal is to close out the entire trade when the position has gained about 9% of the capital put into the trade, or when there is a 9% loss. Position is closed a few weeks before expiration, even if the 9% hasn't been achieved.
The strategy involves pursuing small, regular profits and safety over large, quick profits and large risk. Since all the parts will be working together as a whole, it would be preferable to be able to close out the entire strategy at once, simultaneously, rather than, say, closing out the butterfly and then trying to close out the debit spreads (as a violent move in the stock could wipe out the gains while the butterfly has been closed out and the spreads are still in play). This is what I seek to avoid.
While trading smaller positions on the SPY minis and the regular SPY etf, when it comes time to close down the strategy and collect the profit, does anyone happen to know if there's a way to send the custom 4 leg spread (put butterfly + 1 call), + the debit spreads, together in one order so that the broker will be required to close out all open positions at one time? Such as All - or - none?
edit: maybe I'll skip the SPY minis, as the commissions are atrocious profit killers.
Are you asking when to close a profitable trade (book profits)? Or how to submit the order (complex vs. legging out)?
Personally, when closing option spreads I do it as a complex order (all legs fill simultaneously, as a package). I have rarely been successful in legging out of one side before the other. If I wanted to buy/sell a fly, I do not want to have an open vertical spread, as that was not my original intent. This does not apply to a market-making structured book.
As far as trade management is concerned, there is no right answer for when to close a trade. Everyone uses different parameters. At the risk of sounding ambiguous; close the trade when it reaches fair value (whatever that may be).
Personally, when closing option spreads I do it as a complex order (all legs fill simultaneously, as a package). I have rarely been successful in legging out of one side before the other. If I wanted to buy/sell a fly, I do not want to have an open vertical spread, as that was not my original intent. This does not apply to a market-making structured book.
As far as trade management is concerned, there is no right answer for when to close a trade. Everyone uses different parameters. At the risk of sounding ambiguous; close the trade when it reaches fair value (whatever that may be).
How to book the profits on a complex trade where the profit is minimal. I can see from fiddling around in TOS that there are ways to close out the order in custom parts to reduce the risk of not being able to close out everything simultaneously, but not completely eliminate it. This obviously changes depending on the amount of debit spreads that have been traded. I suppose what I'm asking is if there is a way (in TOS) to close out the original custom 4 leg spread (the original butterfly + 1 call), along with the debit spreads at the same time (have it considered as a "6 leg spread" to be closed as one piece).