iron condor on sp500 futures option help

N

newguy05

Hi, can someone please answer a few questions about this article:

http://www.libertytradinggroup.com/market-commentary.html#article

1) Just to confirm the article is talking about writing options on SP500 index FUTURES (Symbol: SP ) correct?

2) Trying to wrap my head around this. A SP500 index future (SP) simply means a contract between buyer and seller to trade the sp500 stocks at certain price. This contract moves with the SP500 underlying stocks and is due at expiration date of each month and cash settled daily.

Now you have options using the sp500 index future as the underlying. How does this actually work? i mean do you even care the option is based on futures which is based on the real underlying stocks? Or do you just trade the options like it is based on a single stock (SP)?

What's the difference between an option based on sp500 index future (SP) vs say option based on the actual sp500 (SPX)

3) Lastly does the strategy in the article make sense based on current market condition? You sell a way otm iron condor profitting from high vol and put stop loss at either the 2x credit, or when the index future price become atm in either of the legs

thanks
 
Nothing is as easy as they make it sound. It sounds like they are selling a commission intensive plan.

Could it work. Yes. Would it work more times than not? Yes. Does that mean it is profitable? Not necessarily.

Volatility is high, because the market has been volatile. Could it become less volatile? Yes. Could it become more? Yes
 
i guess my question is are there any special consideration one needs to be aware of for index futures options vs the normal stock options?
 
Newguy, it will work most of the time, but the few times it doesn't work, those can be big losses. In the end, I think you'll be even. If your more interested in these kinds of trades, it would be very profitable for you to take a week and read all of Maverick74's posts. I learned a lot by doing this.
 
hi i read some of his posts, see you asked almost the same question as i did back then :) the difference is your question was more on selling options on spx directly (much higher margin requirement) vs selling options on sp500 futures.

I know this has been asked millions of times, but looking at the june strikes for the sp500: http://quotes.ino.com/options/?s=CME_SP.M08

i can sell a Jun 925 put for $3.10, when the current price is at 1350. That's pretty insane isnt it? the amount of premium you can collect. Add a Jun 825 for $1.10 to make it a put spread, you still have a credi tof $2

Yes blackswan, picking up pennies in front of a steamroller etc... But just speak common sense, what are the chances the sp500 will drop to 925 from 1350 by Jun expiration when the market is already this beatup.
 
Quote from newguy05:

hi i read some of his posts, see you asked almost the same question as i did back then :) the difference is your question was more on selling options on spx directly (much higher margin requirement) vs selling options on sp500 futures.

I know this has been asked millions of times, but looking at the june strikes for the sp500: http://quotes.ino.com/options/?s=CME_SP.M08

i can sell a Jun 925 put for $3.10, when the current price is at 1350. That's pretty insane isnt it? the amount of premium you can collect. Add a Jun 825 for $1.10 to make it a put spread, you still have a credi tof $2

Yes blackswan, picking up pennies in front of a steamroller etc... But just speak common sense, what are the chances the sp500 will drop to 925 from 1350 by Jun expiration when the market is already this beatup.
More...

In October S&P was at 1580 and in January it fell down to 1260. In less than 3 months! Do the math.
 
Quote from MAESTRO:

In October S&P was at 1580 and in January it fell down to 1260. In less than 3 months! Do the math.
More...

Not to nitpick that's still not close to the 425 point difference between 925 & 1350.

Anyway my point is lets use this example:

At Oct when SP is at 1580, say i sold put at strike 1280 (300 pt otm). As the SP comes down in price hitting my stop loss (be it 2x credit, or strike or midpoint), i would take the loss, close the spread, then roll it out by doubling my position to cover the losses (of course assume i have the cash/margin to do this)

Yes i would be doubling my risk by the roll to try protect my profit. If you keep doing this it bascially becomes the dreaded martingale approach (or worse).

But my question again is what are the probability realistically that you would need to roll more than once given that:

1) You start off selling 300 point OTM put spread
2) 300 pt drop on the SP would take some time, so you are gaining the time decay
3) With such a big drop, volatility will be up, so logical to assume when you roll, you can write another 300 point OTM put spread receiving the same credit as the previous one.

So now you are again 300 point otm, with twice the risk exposure, same expiration month, similar credit profit.

What are the chances you need to roll AGAIN before expiration?
 
Quote from newguy05:

Yes blackswan, picking up pennies in front of a steamroller etc... But just speak common sense, what are the chances the sp500 will drop to 925 from 1350 by Jun expiration when the market is already this beatup.
More...

Rhetorically asking "what are the chances" is kind of not a justification for exposing yourself to a black swan, since a black swan is by definitinon a "what are the chances" type of event.

Also, you're getting 2 points for a 100 point spread over 4 months, so if the black swan shows up once in 17 years you break even. Is "once in 17 years" the answer you wanted to "what are the chances"?
 
Condors can be great right now. I like fading them back and forth and rolling down and up whenever the possiblity presents itself. ie rolled my may 1200/1190's down today to 1150/40. Scraping pennies grabbing 1.20 on each spread today. I also like the Dime spreads . Be careful naked and with quarter + spreads!

I get great fills directly from the floor which is important when trading sp's..having a floor guy can be crucial to getting in and out.
 
Quote from newguy05:


1) You start off selling 300 point OTM put spread
2) 300 pt drop on the SP would take some time, so you are gaining the time decay
3) With such a big drop, volatility will be up, so logical to assume when you roll, you can write another 300 point OTM put spread receiving the same credit as the previous one.
More...


1) Thats fine and vols are pretty pumped now so you can go that far out in distace from the at the money right now.

2) Its a bad idea to assume it will take a lot of time and volatility will be PUMPED higher a lot higher even if we drop 100 points. Mean while your margin is exploding as this happens. Time decay wont mean a whole heck of a lot if we tumble 10 points in the first 10 days of the options cycle.

3) You may or may not recieve the same credit, that would depend on time and volatility. Mean while you'd have taken a HUGE loss on the first one to get it back and roll.
 
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