Few more questions on condors and butterflies

R

rselitetrader

Hi all:

In condors and butterflies, how does one manage delta, gamma, vega, theta, and the volatility smile/skew/slope? Or is there a need to do so? It seems if there is smile or skew or slope, sometimes buying higher volatility at the wings is unavoidable.

Looking at the way volatility and time decay relate to the option price at various strikes, I have come to the conclusion that both butterflies and condors are positive theta and negative vega strategies. Am I correct?

I have placed a condor on SPX. Please post any comments.

Dats Source: IB TWS Options Trader
Date: 04/03/07-11:36PM PST
Underlying: SPX at 1437.77
Chart: Resistance/Support 1460/1375 approximate
Reason: SPX survived the recent mini-crash and seemed to be in range between support and resistance.
NFP this Friday may temporarily increase volatility and adversely affect position.
Condor spread between support and resistance offer higher probability of non-loss, though
lower profit expected.

April options
Strike Price IV
1470C $2.35 9.62
1460C $4.65 9.97
1375P $2.15 16.84
1365P $1.75 17.87

Credit: (4.65 + 2.15) - (2.35 + 1.75) = 2.7
Break Even: (1462+ 2.7) = 1462.7 on the upside and 1372.3 on the down side
Max Risk: (1470 - 1460 - 2.7) = (1375 - 1365 - 2.7) = 7.3
Max Reward: 2.7
Probability of SPX below resistance: 73%
Probability of SPX above support: 97%

Expected profit: (73% * 2.7) - (27% * 7.3) = 0

This is 100% losing trade if bid-ask spread and commissions were included. If I place the two middle strikes closer, then the probabilities will be adversely affected.

What is the right way to do condor on SPX? Suggestions for alternative strike selections?

Thank you.
 
First off, on a 4 leg trade like this, you never buy at the ask and sell at the bid, you'll just kill yourself on the spreads there.

You need to place the trades as a spread trade, at a net credit or debit, depending on your strategy. If you try to do all 4 legs seperately, you'll end up chasing the price and losing, that's a gaurentee!

Second, in a market like this, with high volatility, I would advise against doing a short iron condor. A short iron condor is only an effective strategy if you expect low volatility and a sideways market movement.
 
he is expecting it to move sideways between s+r.

calculate expectancy with an early exit, such as when the shorts are atm.
 
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