HowardCohodas Index Options Credit Spread Trading Journal

[daveyc]

Hi Howard!

I admit I have not read all of the posts because of the #. I do trade these Iron Condors but have had difficulties in staying in my trades because of this huge move higher meaning adjustments to my calls. When I have adjusted, I like to move up a portion of the puts to help pay for the adjustment among others. Sometimes I just add bull/puts and therefore my risk and margin. My goal has been to keep the delta on the whole position as neutral as posible but at some point you gotta let the trade work.

At what point do you consider an adjustment? If you sold 10 deltas and see the short option at 25 deltas?

I wonder if you have already mentioned using the Weeklies in any attempt to hedge risk if you see the market trending higher or lower, for example. If you have an Iron Condor on NDX, for example, and its ripping higher, would you consider a big market cap like AAPL and sell a Weekly bull/put to help pay for any adjustment you may want to do? Same question on SPX, would you use XOM and a similar trade to hedge some of the risk? I am quickly becoming a huge fan of the Weeklies.

I did read somewhere on this topic that there were concerns with having a large vega risk. I wonder if you have considered using Calendar spreads to reduce the vega risk as well as way OTM puts?

Just a few questions, I have met you on another forum.

Happy trading,
Dave

 

[falconview]

Interesting questions on hedging credit spreads and iron condors.

I admit to being fuzzled here. Though I get the general picture. I guess I´m just a simple man. When it gets to the point of increasing your positions to hedge, I only wonder if the net result is actually worth it at the ordinary retail trader side? So my question again, do you make more money, or less, or what counting all those commissions when you hedge. Is there a size like a $100 K, or a $1 million that these things become practical?

 

[stevegee58]

Actually hedging a credit spread is pretty straightforward.

Say you sold a put credit spread with a delta was 0.10. You're bullish to neutral on the underlying, as reflected in the positive delta.

Instead of the underlying cooperating and moving up or staying about the same, it starts moving down toward your short strike. As the underlying moves closer, your delta increases. As part of your trading plan you could have a rule that if the credit spread's delta gets around 0.25 you either bail or hedge.

To hedge, you'd just buy a put (long put = negative delta) for the same delta as the troubled credit spread. What about theta, you ask? You can buy a put that's the next month out from your credit spread so that the theta isn't as hot as the credit spread's.

So say you have a March credit spread that you opened with a delta of 0.10 and now it's 0.25 due to adverse movement of the underlying price. You could buy the April put that has a delta of -0.25 to neutralize the adverse delta of the credit spread.

When do you take off the hedge? When the credit spread's delta subsides due to the underlying moving back up would be one way. Maybe you could take if off when the credit spread's delta returns to 0.15 or 0.10 or whatever your analysis says is best. If your credit spread is totally overrun, you'd just leave the hedge put on.

Yes, this sort of thing costs money, but it sure beats having your whole credit spread overrun with no protection.

 

[atticus]

Quote from stevegee58:



To hedge, you'd just buy a put (long put = negative delta) for the same delta as the troubled credit spread. What about theta, you ask? You can buy a put that's the next month out from your credit spread so that the theta isn't as hot as the credit spread's.

Yeah, and pay more in premium than you received on the short vertical.

 

[daveyc]

Thats a good answer, Steve. In your example, by buying the next month Put (creating a calendar) is a good way to help the position and a good adjustment especially if the market is going down. I would also add a new bear/call spread to help pay for the next month Put.

There are a few different adjustments that could get the delta neutral on your overall portfolio including using the Weeklies and buying/selling the underlying or its equivalent.

I have also read somewhere in this longggg thread about whether or not the OP has an edge or what may be his edge. I know its not that difficult in putting on a trade but the whole game and art form comes from adjustments and there is no person out there that has an advantage over another. You basically want to open an Iron Condor when there is a bump up in volatility to allow enough distance and more credit on the trade.

Trading credit spreads is not as easy as it may appear at first glance and should be watched closely.

Dave

 

[stevegee58]

Quote from atticus:

Yeah, and pay more in premium than you received on the short vertical.

Yes, but what we're talking about is salvaging a potentially disastrous situation. If both strikes of your credit spread are overrun, it'd take months to get back even again. By putting on a hedge you might have a losing month but you'd be back in the game in a much shorter time.

You'd pay premium to get into the hedge, but you'd get most of it back when you close the hedge anyway.

 

[Maverick74]

Quote from stevegee58:

Yes, but what we're talking about is salvaging a potentially disastrous situation. If both strikes of your credit spread are overrun, it'd take months to get back even again. By putting on a hedge you might have a losing month but you'd be back in the game in a much shorter time.

You'd pay premium to get into the hedge, but you'd get most of it back when you close the hedge anyway.

The best hedge for a credit spread is to buy it back in its entirety. Don't try to make things more complicated then they are. Ego has sunk many a trading ship.

 

[stevegee58]

Quote from daveyc:

In your example, by buying the next month Put (creating a calendar) is a good way to help the position and a good adjustment especially if the market is going down. I would also add a new bear/call spread to help pay for the next month Put.

In a calendar spread, the long and short strikes are the same and the expiries are different.

Buying the next month out put in my example doesn't make a calendar necessarily. You select the strike of the hedge put based purely on its current delta; who knows where the strike would be.

I personally wouldn't overcomplicate things by adding more spreads. A simple long option will do what's needed.

 

[atticus]

Quote from Maverick74:

The best hedge for a credit spread is to buy it back in its entirety. Don't try to make things more complicated then they are. Ego has sunk many a trading ship.

+100

 

[stevegee58]

Quote from Maverick74:

The best hedge for a credit spread is to buy it back in its entirety. Don't try to make things more complicated then they are. Ego has sunk many a trading ship.

I know, I'd be inclined to pull the plug and just take the loss myself. I'm just saying that you have "options" as an options trader that a long stock trader doesn't have.