Condor premium value change vs. stock price change

[OptionSeeker]

Quote from JohnGreen:

Spindr0 makes an excellent point about the adjustments. With an IC, you almost never make an adjustment that doesn't involve taking a profit on one side or the other, which is unlike many other positions which simply worsen with market movements against you. With the IC, it can't worsen on both sides at once.

This is now the situation that Mark is referring to--it's not so much about predicting the market, but rather keeping the risk in check and avoiding catastrophic losses. As an experienced IC trader, I heartily endorse that point of view as well.

The IC is not the "holy grail". You can and will have occasional losses. It's how much you can control and minimize those losses and maximize your good months that determines whether or not you are making an excellent return or losing your shirt.

Many of us also use some other techniques to keep the gamma/ delta situation nicely in check and preserve our credits within the overall context of the IC structure. I also recommend a trip through the elite trader archives for the "SPX Credit Trader" thread started by optioncoach who is still lurking about. It is long and involved, but contains much valuable insight into the inner workings of the thought processes of several veteran traders who used IC's as well as double diagonals and various credit spreads as their primary trading tools.

Thanks John. I have read through many threads on ET and some of the articles people have attached, including examples of IC adjustment trades. One of the articles I read had someone roll down the whole position but in so doing sold more total contracts of the further OTM options, which didn't sit well with me because it seemed like they're adding much more risk to the initial trade. I think this was also the case with the SPX credit Trader thread, but I can't remember.

I'm a directional trader and have a pretty good track record (I'm living off my trading), but boy, it would surely be nice to be able to make consistent profit trading a neutral strategy like IC! The adjustment technique seems to be critical for success, and seeing and hearing many who fail using that strategy makes me wonder what it takes to be successful in it.

 

[spindr0]

JohnGreen

Fine explanation of the possibilities

 

[spindr0]

Quote from OptionSeeker:

I was mainly wondering if predicting what the market will do next is a factor in the way you adjust - when and how much. I guess this is something like the reverse of gamma scalping? If you buy a straddle, you have to determine when you want to scalp and how much.

I'm not really an IC kinda guy. My experience is more with ratioed double diagonals and ratioed calendar strangles for earnings. AFAIK, they're similar to IC's but a bit more complex.

After the EA, the price may move and IV will contract, sometimes quickly right after the EA, sometimes slower as the day progresses. At no time am I guessing or predicting where the underlying might go. At all times, I'm assessing current P&L, what leg I can take profits on as well as what will happen IF the underlying goes somewhere. Adjustment decisions result from any of these three factors.

In all candor, I'm doing very few of these lately because I'm heavily into pairs trading (multiple legs) which has been far more lucrative in the past year's environment. The reason I mention this is because the management approach is somewhat the same. While I care about the losing side, it's not relevant as long as the winning side is making more and I'm booking its gains. I have no clue where the components are going. I only want them to go somewhere. It's a dynamic process where I shift my bias intraday (more long or more short) based on what I see in front of me (direction) but I'm close to neutral by the end of the day. It's similar to what Mark suggested in that long term (which for me is tomorrow) I have no clue. It's today that matters.

 

[OptionSeeker]

Quote from spindr0:

I'm not really an IC kinda guy. My experience is more with ratioed double diagonals and ratioed calendar strangles for earnings. AFAIK, they're similar to IC's but a bit more complex.

After the EA, the price may move and IV will contract, sometimes quickly right after the EA, sometimes slower as the day progresses. At no time am I guessing or predicting where the underlying might go. At all times, I'm assessing current P&L, what leg I can take profits on as well as what will happen IF the underlying goes somewhere. Adjustment decisions result from any of these three factors.

In all candor, I'm doing very few of these lately because I'm heavily into pairs trading (multiple legs) which has been far more lucrative in the past year's environment. The reason I mention this is because the management approach is somewhat the same. While I care about the losing side, it's not relevant as long as the winning side is making more and I'm booking its gains. I have no clue where the components are going. I only want them to go somewhere. It's a dynamic process where I shift my bias intraday (more long or more short) based on what I see in front of me (direction) but I'm close to neutral by the end of the day. It's similar to what Mark suggested in that long term (which for me is tomorrow) I have no clue. It's today that matters.

I am also trying out small calendar spreads on earnings play, just getting a feel for it.

Pair Trading - Are you doing this with two stock pairs, or with options? Wasn't this type of hedging one of the original ideas behind hedge-funds? Thanks.

 

[MTE]

Quote from OptionSeeker:

Thanks John. I have read through many threads on ET and some of the articles people have attached, including examples of IC adjustment trades. One of the articles I read had someone roll down the whole position but in so doing sold more total contracts of the further OTM options, which didn't sit well with me because it seemed like they're adding much more risk to the initial trade. I think this was also the case with the SPX credit Trader thread, but I can't remember.

I'm a directional trader and have a pretty good track record (I'm living off my trading), but boy, it would surely be nice to be able to make consistent profit trading a neutral strategy like IC! The adjustment technique seems to be critical for success, and seeing and hearing many who fail using that strategy makes me wonder what it takes to be successful in it.

If you are a good directional trader then you can use your directional techniques to leg into ICs as well as make adjustments/leg out. However, the question then is, why bother with all this sh*t, when you are making good money trading directional moves!?

 

[spindr0]

Quote from OptionSeeker:

I am also trying out small calendar spreads on earnings play, just getting a feel for it.

Look at some calendar combos, eg. one of each either ATM or a strike away. As an example, short the 40 straddle and long the next month's 35p/45c strangle *or* short the 35p/40c strangle and long the 30p/45c strangle. Both are a pair of calendars combined. Then see what happens to the P&L graph when you ratio them. As John Green suggested about IC's, you can't lose on both sides at the same time. And I'll tell you that it takes a very special person to lose on both sides

Pair Trading - Are you doing this with two stock pairs, or with options? Wasn't this type of hedging one of the original ideas behind hedge-funds?

With stocks and sometimes it's more than two of them. I first read about of it 25+ years ago but I don't know if it was one of the original ideas behind hedge-funds. I had no use for it until this recent Black Swan. My earliest recollection of it was a strategy involving the buying of top rated Value Line stocks and shorting the worst rated in the same sector where the idea was that the cream would rise faster than the crap in an up market and vice versa in a down market. Guess what? It''s true!

 

[spindr0]

Quote from MTE:

If you are a good directional trader then you can use your directional techniques to leg into ICs as well as make adjustments/leg out. However, the question then is, why bother with all this sh*t, when you are making good money trading directional moves!? [

LOL. Some people just have a knack for cutting right through this sh*t and getting right to the point.

 

[OptionSeeker]

Quote from MTE:

If you are a good directional trader then you can use your directional techniques to leg into ICs as well as make adjustments/leg out. However, the question then is, why bother with all this sh*t, when you are making good money trading directional moves!?

Perhaps I overstated my skills as a directional trader. For over 5 years I have lived off my earnings, but mainly from covered calls on a basket of solid stocks. Depending on my outlook for the individual stocks and the market in general, I would place the CC OTM, ATM, or DITM. I put aside a small portion for more speculative trades, like verticals, butterflies, and calendars, on those stocks and stock indices.

Maybe I've been lucky on my performance, and my strategy won't last, which is why I'm always looking for different ideas and giving something a try if it makes sense to me.

 

[OptionSeeker]

Quote from spindr0:

Look at some calendar combos, eg. one of each either ATM or a strike away. As an example, short the 40 straddle and long the next month's 35p/45c strangle *or* short the 35p/40c strangle and long the 30p/45c strangle. Both are a pair of calendars combined. Then see what happens to the P&L graph when you ratio them. As John Green suggested about IC's, you can't lose on both sides at the same time. And I'll tell you that it takes a very special person to lose on both sides

By ratio, do you mean buying more of the wings, or selling more of the guts?

With stocks and sometimes it's more than two of them. I first read about of it 25+ years ago but I don't know if it was one of the original ideas behind hedge-funds. I had no use for it until this recent Black Swan. My earliest recollection of it was a strategy involving the buying of top rated Value Line stocks and shorting the worst rated in the same sector where the idea was that the cream would rise faster than the crap in an up market and vice versa in a down market. Guess what? It''s true!

I had toyed around with pair trading for relative strength a long time ago. There's an interesting, ongoing journal entry by johnnysharp, aiming for reverting to mean, which I've been following and might try after I've done more research on it. Thanks.

 

[Ms Varima-Garch]

Quote from OptionSeeker:

There's an interesting, ongoing journal entry by johnnysharp,

I have also looked at jonnysharp's journal, very interesting.

I wonder what people think about pairs trading. Does it have less built-in risk than non pairs trading. I mean trying to be market neutral? Anyone?

I think it must be an art, really, because you have to know how the spreads behave. Has anyone ever used the Pair Trader software?

Varima-Garch