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Condor premium value change vs. stock price change
- Thread starter ll00l0l
- Start date
Optionseeker, I would like to clarify your understanding a bit. For protection, I buy debit spreads closer to the money as opposed to further away. Despite the fact that FOTM spreads are cheaper and you can easily buy more of them, I have become convinced that the closer to the money (CTM) spreads are more helpful for protective purposes.
First, if both sets of options are in the same expiry month, you will obtain some margin relief.
Second, if everything goes as hoped with an IC, what typically happens is that the FOTM spreads decline in value faster, sometimes much faster, than your credit spreads, leaving you holding a bunch of pretty well worthless put and call spreads that really aren't helping anything anymore. Usually, if you buy CTM, your value holds up better, and often you can wipe out the whole side--buying back your credits, and selling your debits for a net cost of nothing much before expiry, or you can keep them and use them as a safety net for next month's IC, with two insurance spread sets--one in each month. For a couple of weeks, you might actually benefit greatly from a sharp move in one direction or the other!
I agree this makes for holding a number of spread positions. Fortunately, I have negotiated my commissions down, and try to split the bid-ask in every situation. I do find that panic is not an emotion that relates to this type of holding and this means I can be more patient on price. Because you have multiple hedging in place, you have time to react and make level headed decisions. I already have the adjustment points solidly in mind when I set up the initial position, and only moderately vary the strategy based on the time parameters. (If the market goes sideways for a while, I open up the adjustment points to take that into account)
I actually am quite happy to see a nicely, but not sharply trending market in either direction because the debit spreads tend to really ramp up in value as they come even closer to the money. My experience has been that this increases the number of profitable scenarios that can happen for me in any given cycle. As I have mentioned before, it's not the holy grail, but it works most of the time. If it doesn't, and I have a bailout condition, I'm out and we try again next time.
First, if both sets of options are in the same expiry month, you will obtain some margin relief.
Second, if everything goes as hoped with an IC, what typically happens is that the FOTM spreads decline in value faster, sometimes much faster, than your credit spreads, leaving you holding a bunch of pretty well worthless put and call spreads that really aren't helping anything anymore. Usually, if you buy CTM, your value holds up better, and often you can wipe out the whole side--buying back your credits, and selling your debits for a net cost of nothing much before expiry, or you can keep them and use them as a safety net for next month's IC, with two insurance spread sets--one in each month. For a couple of weeks, you might actually benefit greatly from a sharp move in one direction or the other!
I agree this makes for holding a number of spread positions. Fortunately, I have negotiated my commissions down, and try to split the bid-ask in every situation. I do find that panic is not an emotion that relates to this type of holding and this means I can be more patient on price. Because you have multiple hedging in place, you have time to react and make level headed decisions. I already have the adjustment points solidly in mind when I set up the initial position, and only moderately vary the strategy based on the time parameters. (If the market goes sideways for a while, I open up the adjustment points to take that into account)
I actually am quite happy to see a nicely, but not sharply trending market in either direction because the debit spreads tend to really ramp up in value as they come even closer to the money. My experience has been that this increases the number of profitable scenarios that can happen for me in any given cycle. As I have mentioned before, it's not the holy grail, but it works most of the time. If it doesn't, and I have a bailout condition, I'm out and we try again next time.
Hi John,Quote from JohnGreen:
Optionseeker, I would like to clarify your understanding a bit. For protection, I buy debit spreads closer to the money as opposed to further away. Despite the fact that FOTM spreads are cheaper and you can easily buy more of them, I have become convinced that the closer to the money (CTM) spreads are more helpful for protective purposes.
First, if both sets of options are in the same expiry month, you will obtain some margin relief.
Second, if everything goes as hoped with an IC, what typically happens is that the FOTM spreads decline in value faster, sometimes much faster, than your credit spreads, leaving you holding a bunch of pretty well worthless put and call spreads that really aren't helping anything anymore. Usually, if you buy CTM, your value holds up better, and often you can wipe out the whole side--buying back your credits, and selling your debits for a net cost of nothing much before expiry, or you can keep them and use them as a safety net for next month's IC, with two insurance spread sets--one in each month. For a couple of weeks, you might actually benefit greatly from a sharp move in one direction or the other!
I agree this makes for holding a number of spread positions. Fortunately, I have negotiated my commissions down, and try to split the bid-ask in every situation. I do find that panic is not an emotion that relates to this type of holding and this means I can be more patient on price. Because you have multiple hedging in place, you have time to react and make level headed decisions. I already have the adjustment points solidly in mind when I set up the initial position, and only moderately vary the strategy based on the time parameters. (If the market goes sideways for a while, I open up the adjustment points to take that into account)
I actually am quite happy to see a nicely, but not sharply trending market in either direction because the debit spreads tend to really ramp up in value as they come even closer to the money. My experience has been that this increases the number of profitable scenarios that can happen for me in any given cycle. As I have mentioned before, it's not the holy grail, but it works most of the time. If it doesn't, and I have a bailout condition, I'm out and we try again next time.
Thanks for the post. So if I'm reading this right, you're putting some debit CTM spreads on both sides when you initiate the IC, and not as part of an adjustment?
Optionseeker,
Right! I usually start out this way, and then wiggle and waggle with the market, but only if it makes a reasonable move. You do not want to be trading with every 5 or 10 point move on the SPX. The slippage will kill you. With the insurance spreads, you won't need to adjust as often, either, so there is a modest benefit from that.
The only question is how much of your IC credit to devote to the insurance spreads. I think you need at least 25% to make the insurance worthwhile, but you could go above that if you were worried. Remember, though, that the money devoted to insurance spreads is often spent for nothing in the end. It protects you quite a bit from serious losses, but much of the time it proves to be unnecessary. If you go higher, you may reduce your average monthly returns, but occasionally it will also pay off in a much higher return (20+% for that month) that makes up for many months of "throwing" 1 or 2 % away.
Right! I usually start out this way, and then wiggle and waggle with the market, but only if it makes a reasonable move. You do not want to be trading with every 5 or 10 point move on the SPX. The slippage will kill you. With the insurance spreads, you won't need to adjust as often, either, so there is a modest benefit from that.
The only question is how much of your IC credit to devote to the insurance spreads. I think you need at least 25% to make the insurance worthwhile, but you could go above that if you were worried. Remember, though, that the money devoted to insurance spreads is often spent for nothing in the end. It protects you quite a bit from serious losses, but much of the time it proves to be unnecessary. If you go higher, you may reduce your average monthly returns, but occasionally it will also pay off in a much higher return (20+% for that month) that makes up for many months of "throwing" 1 or 2 % away.
John,
I like the insurance idea - it's certainly more appealing to me than a straight IC . Being very risk averse, I'd probably end up adjusting too soon on ICs. Even if it eats up some of the profits, the insurance fits my personality better, as I don't like being so negative on gamma. Thanks!
I like the insurance idea - it's certainly more appealing to me than a straight IC . Being very risk averse, I'd probably end up adjusting too soon on ICs. Even if it eats up some of the profits, the insurance fits my personality better, as I don't like being so negative on gamma. Thanks!
Optionseeker, since I follow all the option threads, I happened to notice your discussion with Atticus about double butterflies. If you are quite risk averse (and that is a good thing --I am fairly risk averse, too), you may want to do a double broken wing butterfly formation. This is about the same in complexity as my IC with insurance scheme, but safer and requiring even less in the way of adjustments typically. What you try to do is set up your butterflies with a small credit because they are unbalanced--the wings are not the same size in span. I'll give an example so you can follow my thinking better--
AAPL JULY OPTIONS (I'm using the last trade as approximate prices) current stock price= $135.81
Calls--- buy 1--165strike@ 0.64;
sell 2--170strike @ 0.43 each;
buy 1--180 strike at $0.19 net cost = $-0.03
Puts--- buy 1--105strike @ 0.75;
sell 2--100 strike @ 0.55 each;
buy 1--90strike @ 0.31 net cost =$-0.04
Now, you will receive only a very modest credit using this scheme and you will use some margin ($5.00-your worst case scenario) so the cash return is quite low.
The system only loses money if Apple is above 175 or below 95 at July expiry, but you have a chance to make a very good return if Apple is between 166 and 174 or between 104 and 96 at expiry. You could probably wait until Apple hit 160 on the upside before even considering an adjustment without too much worry and also not worry about adjustments until 110 on the downside, giving you a nice window to sit on the sidelines and watch the stock without having to do anything.
In effect, this scheme is very similar to an IC, but with using 95%+ of the proceeds as insurance. You drastically reduce the monthly cash credit, but now you have a decent chance of a very solid windfall. Of course, you can manage this like you might an IC, and try to milk better gains out of it without having to move very quickly one way or the other.
Disclaimer: this trade is merely an example of how one of these might be set up not a specific recommendation!
AAPL JULY OPTIONS (I'm using the last trade as approximate prices) current stock price= $135.81
Calls--- buy 1--165strike@ 0.64;
sell 2--170strike @ 0.43 each;
buy 1--180 strike at $0.19 net cost = $-0.03
Puts--- buy 1--105strike @ 0.75;
sell 2--100 strike @ 0.55 each;
buy 1--90strike @ 0.31 net cost =$-0.04
Now, you will receive only a very modest credit using this scheme and you will use some margin ($5.00-your worst case scenario) so the cash return is quite low.
The system only loses money if Apple is above 175 or below 95 at July expiry, but you have a chance to make a very good return if Apple is between 166 and 174 or between 104 and 96 at expiry. You could probably wait until Apple hit 160 on the upside before even considering an adjustment without too much worry and also not worry about adjustments until 110 on the downside, giving you a nice window to sit on the sidelines and watch the stock without having to do anything.
In effect, this scheme is very similar to an IC, but with using 95%+ of the proceeds as insurance. You drastically reduce the monthly cash credit, but now you have a decent chance of a very solid windfall. Of course, you can manage this like you might an IC, and try to milk better gains out of it without having to move very quickly one way or the other.
Disclaimer: this trade is merely an example of how one of these might be set up not a specific recommendation!
Quote from JohnGreen:
I buy debit spreads closer to the money as opposed to further away. Despite the fact that FOTM spreads are cheaper and you can easily buy more of them, I have become convinced that the closer to the money (CTM) spreads are more helpful for protective purposes.
I've drawn the same conclusion - CTM is better than OTM when the spreads are bought for insurance purposes.
For insurance, I prefer to buy a few naked long CTM options, rather than CTM spreads, but the idea is the same.
Mark
Thanks John. I have looked at unbalanced butterflies like the BWB, though I've never actually traded one. It seems like a popular trade. I do see the similarities with IC as far as being a high probability trade, when you go pretty far OTM.Quote from JohnGreen:
Optionseeker, since I follow all the option threads, I happened to notice your discussion with Atticus about double butterflies. If you are quite risk averse (and that is a good thing --I am fairly risk averse, too), you may want to do a double broken wing butterfly formation. This is about the same in complexity as my IC with insurance scheme, but safer and requiring even less in the way of adjustments typically. What you try to do is set up your butterflies with a small credit because they are unbalanced--the wings are not the same size in span...
In effect, this scheme is very similar to an IC, but with using 95%+ of the proceeds as insurance. You drastically reduce the monthly cash credit, but now you have a decent chance of a very solid windfall. Of course, you can manage this like you might an IC, and try to milk better gains out of it without having to move very quickly one way or the other.
Disclaimer: this trade is merely an example of how one of these might be set up not a specific recommendation!
Mostly I've been doing pregnant flies close to ATM, directional and a few times the double flies. The key is picking the strike prices, and more often than not I made it pretty wide to give a better chance of being profitable. I've also been doing backtesting around earnings, and I think there are opportunities for these types of trades, based on IV crush and even taking into account the risk of big price moves, like GOOG up or down $50 the next day. There's a lot more testing I need to do, but I'm going to try these (of course small trades). My main question about flies is whether you can usually get the mid-point for all legs or not. So far, I've had pretty good fills with flies, but the further out I go on the strike prices, I'm guessing the harder it will be. I'll find out! Thanks.
Mark, if you buy calls and puts outright, doesn't that take a big chunk out of the initial credit? What sort of ratio are you doing it at, like 1:10? Thanks.Quote from dagnyt:
I've drawn the same conclusion - CTM is better than OTM when the spreads are bought for insurance purposes.
For insurance, I prefer to buy a few naked long CTM options, rather than CTM spreads, but the idea is the same.
Mark