Concerning Iron Condors

[heiasafari]

I have a question about hedging an iron condor position:

Lets say for example that you have 100000$ available to allocate to an IC. You still want some protection in case things turn south.

Would it be better to say, use only half of the money (50K) for the position and keep the rest cash. Or instead use the full amount and use half of the premium to buy extra puts and calls to serve as units? What would give the best hedge?

 

[Don Bright]

Quote from heiasafari:

I have a question about hedging an iron condor position:

Lets say for example that you have 100000$ available to allocate to an IC. You still want some protection in case things turn south.

Would it be better to say, use only half of the money (50K) for the position and keep the rest cash. Or instead use the full amount and use half of the premium to buy extra puts and calls to serve as units? What would give the best hedge?

All these strategies that we played with back in the 1970's and 1980's on the trading floor (for quarter points, not pennies) have some risk no matter what. If you negate too much risk, the actual transaction costs will overcome any possible profits...sort of like buying insurance on your insurance policy.

Overall "risk reward" should be the prime factor base on your tolerance...IMO.

FWIW,

Don

 

[spindr0]

What's best depends on what the underlying does.

Using half of the premium to buy extra puts and calls would make the position more like a long strangle than an iron condor on the wings.

I have no clue what serving as units means.

 

[KINGOFSHORTS]

Quote from Don Bright:

All these strategies that we played with back in the 1970's and 1980's on the trading floor (for quarter points, not pennies) have some risk no matter what. If you negate too much risk, the actual transaction costs will overcome any possible profits...sort of like buying insurance on your insurance policy.

Overall "risk reward" should be the prime factor base on your tolerance...IMO.

FWIW,

Don

Damn, you showed up in the Options side of the house quite surprised. I thought you prop guys like to keep it pure equity in and out

 

[dagnyt]

Quote from heiasafari:

I have a question about hedging an iron condor position:

Lets say for example that you have 100000$ available to allocate to an IC. You still want some protection in case things turn south.

Would it be better to say, use only half of the money (50K) for the position and keep the rest cash. Or instead use the full amount and use half of the premium to buy extra puts and calls to serve as units? What would give the best hedge?

You must keep some extra cash, in case you want to adjust the position in a manner that does not decrease margin.

Owning insurance is a sound, conservative play. But spending half the money to insure the other half is over-doing it by a large amount.

If you spend use 60 worth of margin to open the positions, then I'd spend no more than 15k to buy extra long options.

However, consider the kite spread as a better insurance policy. The kite spread is <a href= "http://blog.mdwoptions.com/options_for_rookies/2009/11/the-kite-spread-1.html">defined here</a>.

Mark

 

[spindr0]

What's best depends on what the underlying does.

Using half of the premium to buy extra puts and calls would make the position more like a long strangle than an iron condor on the wings.

I have no clue what serving as units means.

 

[jwcapital]

With a 100k account, I was basically risking 10% of the account equity; in this case 10k. I only put on enough IC's so that in the worst case scenario, I can only lose 10K. Here's the problems I encounter with IC's: 1) where to put my wings. I put the short legs at some fraction of SD (depending on the IV), so that is no problem. Where you put your longs will determine your max profit and max loss. 2) Your vega can explode or you can get huge moves up or down. You will not be able to effectively hedge this without some serious adjustments (the adjustments are up to you and they should be planned out in advance). If you do not make adjustments, you will need the cash to maintain your positions, for your margin requirements will increase.

This strategy like many others should not necessarily be held to expiration. Volatility explosions the week of expiration will nullify any time decay. Two, if volatility is low, you want to keep some of your time value for your longs. Personally, I find IB's easier to manage with none of the problems I mentioned above.

 

[Don Bright]

Quote from KINGOFSHORTS:

Damn, you showed up in the Options side of the house quite surprised. I thought you prop guys like to keep it pure equity in and out

LOL, yeah, but I don't like to waste all those years on the various option exchanges.....And, yes, we do prefer equities these days.

All the best,

Don