How's your Money Management in Options Trading ?

N

nell

Hi guys,

I'm learning money management right now, and found very curious and contradiction money management with mine as a options credit spread trader.

Are you experience the same things ?

I came to a conclusion, most of Money Management system do not let us to risk more than more than 3% of our equity. Based on my trading system-it's not worthed for me if i only risk 3% of my equity.

As example, let's say you have $10,000, and your strategy based on IronCondor/Calendar/etc (market neutral strategy), simply we just put $1000 for each strategy and for 10 types of stock. Therefore, we have 10 types of stock that each cost $1000 margin, most of the time we target 10%-20% profit, with risk reward 1:1 or 1.5-3 :1 (more risk) because we're in credit spread strategy that have stinky risk reward ratio. It means, we are risking 1%-3% of each our basket, and totally we risking 10%-30% of our equity.

It makes no sense for me if usually i risk 10%-30% risk, and with this money management i must lower 10x to be at 3%, and that also means i only have 1%-2% reward from my entirely portfolio in a month (usually i collect monthly premium)

I analyze that, the motivation behind 3% risk, is because mostly traders doing trade with multiple transaction daily and with smaller winning ratio but high reward, but i don't think it can be applied in trader who use credit spread, am i correct ?

and another reason, because it's because we're selling premium monthly basis, so it hard for us to practice the 3% money management risk.

All we see is the greeks (delta/gamma/vega/theta) and make them balanced in whole portfolio

Do you have better idea ? or is there any system specially for credit spread trader like me ?

Is there any good book for money management ?

Thx for sharing buddy
 
When it comes to trading Iron Condors, the basic rules are: Extreme liquidity, tight spreads (near zero), cheap commissions (near zero) and excellent executions. So, first you need to find a broker like that, which is impossible (unless you are a professional trader) my suggestion is for you to trade straddles and strangles. Look for highly liquid ETFs and stocks, they are about to increase in volatility and always buy them 60 days + from expiration, depending how long you are going to keep the position open (the longer you are planning to keep the position the further away you should buy them.
As far as money management, here is a link on some simple money management rules: http://financialsaint.com/cms/cms/viewer/page/422

Good luck
 
Only you can answer that question based on your past transaction history. Calculate the expectancy of your system and that should give you an idea.

With options and all the greeks, I find it easier to just close the position when I am down 25% of my original starting position. Tried all the greek mumbo jumbo earlier and took big losses and small gains. Options can be tricky like that.

Van Tharp has some good Money management strategies in his books--grab one and see which one you favour.

As far as risking only 3% of your equity not being worthwhile to you, look at how much you would lose too if you are wrong--test it out. Only you know yr winning percentages and other things like how often you get setups etc.
 
Quote from nell:


It makes no sense for me if usually i risk 10%-30% risk, and with this money management i must lower 10x to be at 3%, and that also means i only have 1%-2% reward from my entirely portfolio in a month (usually i collect monthly premium)



Is there any good book for money management ?

Thx for sharing buddy
More...

if your risk:reward is 1:1 wouldnt you be making 2-3% from each position for a total of 30% or did I miss something?
 
Quote from nell:

Hi guys,

As example, let's say you have $10,000, and your strategy based on IronCondor/Calendar/etc (market neutral strategy), simply we just put $1000 for each strategy and for 10 types of stock. Therefore, we have 10 types of stock that each cost $1000 margin, most of the time we target 10%-20% profit, with risk reward 1:1 or 1.5-3 :1 (more risk) because we're in credit spread strategy that have stinky risk reward ratio. It means, we are risking 1%-3% of each our basket, and totally we risking 10%-30% of our equity.
More...

Hi nell,
Are you placing Iron condors at the money (ATM) or out the money (OTM)?
 
The iron condor spread is a limited risk, non-directional option neutral trading strategy (similar to the Iron Butterfly) and is made up of both call options and put options on the same underlying stock (or index). It’s constructed by purchasing one put with the lowest strike price, selling one put with a higher strike price, selling one call with an even higher strike price, and purchasing one call with the highest strike priceof (like two credit spreads: one Bull Put Spread and one Bear Call spread). The difference between the put contract strikes will generally be the same as the distance between the call contract strikes.

The premium earned on the sales of the written contracts is very likely greater than the premium paid on the purchased contracts, a long Iron Condor is typically a net credit transaction. This net credit represents the maximum profit potential for an Iron Condor.

The loss for the iron condor spread is also limited but significantly higher than the maximum profit. It occurs when the stock price falls at or below the lower strike of the put purchased or rise above or equal to the higher strike of the call purchased. In either situation, maximum loss is equal to the difference in strike between the calls (or puts) minus the net credit received when entering the trade.
:)
 
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