Income trading in the current market environment

[Pinozi]

My bread and butter trading in the past while has been Iron Condors and Calendars/Double Calendars. Been working fine as I know how to adjust, roll, protect etc

Now that the market has gone into this period of high vol its become obvious to me that selling vol and capturing some theta in this market is silly since there is so much delta/gamma on offer. This became obvious only after I finished off last months trading where I had an IC, bought some downside protection, had to roll twice to make a very small but stressful profit. When I looked back at the chart I thought why the hell didn't I just go short?

So just wanted to start a discussion with traders who do monthly option trades on what you guys do when market conditions change. Like even with the vol on offer would you place IC's? ATM Flys? or Cals?

 

[drcha]

I would find this a frightening atmosphere in which to trade condors. When things get rough like this, you might want to consider going out a few months (2 to 4 months) and adjust the long and short legs outward accordingly. Or even stand aside. To me, selecting a day to put on a vega negative trade should be during a light rainstorm, not a category 5 hurricane.

Lately I have abandoned monthly income trades and have been buying distant double calendars with extra short legs, 30 or so strikes apart. On SPY, for example, one could do this:

+2 95 P Dec
-3 95 P Sep
-3 125 C Sep
+2 125 C Dec

These things (not sure what to call them) are not as lucrative as monthly income trades. If you set the strikes right, they are initially vega neutral. It does not matter if the expiration graph is saggy looking in the middle, because at a month prior to expiration (which is when I get out) they look like one of those mile-long flat buttes in Utah. You can adjust if there is a good sized move, or just exit if you're about 3 points outside the strikes. Having wide strikes and distant months is protective. But, it's not hard to imagine a scenario where even those drop 50% in one of these flash crashes, or more in a 1987 scenario. To have any short positions in this mess, ya gotta stay small.

I keep wondering if all this volatility is just the new normal. For years, the market seems to have been getting more volatile. In the last three years VIX has varied between 8 and 90. It's ridiculous. Maybe we are not ever going to go back to the way things used to be.

 

[rew]

Quote from drcha:

I would find this a frightening atmosphere in which to trade condors. When things get rough like this, you might want to consider going out a few months (2 to 4 months) and adjust the long and short legs outward accordingly. Or even stand aside. To me, selecting a day to put on a vega negative trade should be during a light rainstorm, not a category 5 hurricane.

Lately I have abandoned monthly income trades and have been buying distant double calendars with extra short legs, 30 or so strikes apart. On SPY, for example, one could do this:

+2 95 P Dec
-3 95 P Sep
-3 125 C Sep
+2 125 C Dec

These things (not sure what to call them) are not as lucrative as monthly income trades. If you set the strikes right, they are initially vega neutral. It does not matter if the expiration graph is saggy looking in the middle, because at a month prior to expiration (which is when I get out) they look like one of those mile-long flat buttes in Utah. You can adjust if there is a good sized move, or just exit if you're about 3 points outside the strikes. Having wide strikes and distant months is protective. But, it's not hard to imagine a scenario where even those drop 50% in one of these flash crashes, or more in a 1987 scenario. To have any short positions in this mess, ya gotta stay small.

I keep wondering if all this volatility is just the new normal. For years, the market seems to have been getting more volatile. In the last three years VIX has varied between 8 and 90. It's ridiculous. Maybe we are not ever going to go back to the way things used to be.

Well of course what you have is a put calendar, a call calendar, and a short strangle. I'd be worried about that short strangle in this market. I sure as heck wouldn't try to guess where the market will wind up in September. I like income trades I can close out within a month, that's hard enough. I have a couple of multiple strike calendars (calendars at two to four adjacent strikes) that despite the crash are holding up -- they're a bit positive overall. The increase in the volatility has saved my sorry hide, as the long dated long puts have increased in value more than the short dated short puts have.

I agree that this is a brutal market for iron condors. First the irrational exuberance knocks you out of your call spread and then the hard reality knocks you out of your put spread. Are we going to see a rally from here or a repeat of fall 2008? If I knew the answer to that question I'd clean up in directional trades. The basic issue is that none of the problems that caused the 2008 crash in the first place have really been fixed. They've just been papered over with lots of taxpayer backed federal debt. But people who pointed that out last year just got steamrolled by the bull market.

 

[spindr0]

I have 2 answers for you.

Managing to eke out a small but stressful profit last month (with adjustments) in a rough period is not a bad thing and is not a reason to abandon a bread and butter strategy. If that's the worst thing that happens, you're golden.

OTOH, I would take some time to see if you can try to work out a game plan for what you might do along the way to improve the return if the same scenario unfolded again. That might entail different adjustments to your IC or as you suggested, shifting strategies as you mentioned.

After years of option strategies (retail), other than specific earnings plays, I'm mostly equities now (split b/t long and short). But the parallel is that it's essential to shift one's bias as events unfold. Marrying a strategy is not a good time when there's so much turmoil in the world affecting markets.

 

[Premium]

Quote from Pinozi:

My bread and butter trading in the past while has been Iron Condors and Calendars/Double Calendars. Been working fine as I know how to adjust, roll, protect etc

Now that the market has gone into this period of high vol its become obvious to me that selling vol and capturing some theta in this market is silly since there is so much delta/gamma on offer. This became obvious only after I finished off last months trading where I had an IC, bought some downside protection, had to roll twice to make a very small but stressful profit. When I looked back at the chart I thought why the hell didn't I just go short?

So just wanted to start a discussion with traders who do monthly option trades on what you guys do when market conditions change. Like even with the vol on offer would you place IC's? ATM Flys? or Cals?

There are many strategies available in a high vol environment - ways to make cheap bets with lots of potential.

As for condors, I think iron condors are fine in this environment (short strangles are too risky for me). If vols go down, you can make a large percentage in a very short timeframe. Two things I would do is to reduce the size of the trade and add some far OTM long put hedge to reduce vol risk and protect against a market crash.

 

[Pinozi]

Quote from spindr0:

I have 2 answers for you.

Managing to eke out a small but stressful profit last month (with adjustments) in a rough period is not a bad thing and is not a reason to abandon a bread and butter strategy. If that's the worst thing that happens, you're golden.

OTOH, I would take some time to see if you can try to work out a game plan for what you might do along the way to improve the return if the same scenario unfolded again. That might entail different adjustments to your IC or as you suggested, shifting strategies as you mentioned.

After years of option strategies (retail), other than specific earnings plays, I'm mostly equities now (split b/t long and short). But the parallel is that it's essential to shift one's bias as events unfold. Marrying a strategy is not a good time when there's so much turmoil in the world affecting markets.

Yes I am satisfied with the overall result, what I wasn't happy with was my analysis of the overall market situation. When I had the condors on, my mind would play tricks on me and see that the market was going to bounce then trade in a range. Only when I asked myself "If I was flat the market what trade would I put?" was I able to see the potential risk of the market falling quite fast and heavy

So in saying that I'll look to adjust my game plan to something like if the markets are going up - go long, if they are going down - go short & if they are going sideways - go neutral. Just saying that a neutral strategy wasn't the ideal spread last month