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Iron Condor return/risk
- Thread starter larryb
- Start date
You should easily find a broker for 1/2 that amount. Just look at the listings at www.cbot.com or whatever the merc has that is equivalent on their website, and start calling. You should also be able to negotiate your existing broker down quite a bit from there, especially if you are trading 4-leg spreads.
Jessie
Jessie
Quote from larryb:
I am using a broker to help me learn the ropes and as such am paying the high commissions. Who would you recommend i use for this pit traded product?
Larry,
I know nothing about options. However, I do believe that learning to trade from a broker, especially where cool-sounding, complex transactions are concerned, is a mistake. Remember: if your broker really knew what he was talking about and knew how to trade, then he would not likely be a broker. Add to that his need to generate commissions, and then connect the dots. Good luck.
Regards,
Thunderdog
Quote from larryb:
I am using a broker to help me learn the ropes and as such am paying the high commissions. Who would you recommend i use for this pit traded product?
Why do you need to learn about ICs with a pit traded contract?
Obviously - because it is in the best interest of your broker - he keeps you captive to his assistance.
A better alternative would be to buy a good options book and then open an account with IB and put some positions on the OEX one contract at a time. Later if you begin trading more volume, you might consider moving to an online options specialist like OptionsXpress or ThinkorSwim.
I'll tell you, I learned the hard way when younger and less experienced. When putting on these types of credit spreads, or doing ANY sort of option trading in which the risk is concentrated (Unlike Mavs thread of spreading the risk around 20+ positions), you HAVE to trade around the core position. If you think that you can put it on and then wake up at expiration with money in your pocket, you are in for a painful lesson one day.
Here is my advice for learning to play these credit spreads, or anything else. First, get a hell of a lot smaller as fast as you can.
If you like this ideal, learn it on the emini. Or better yet, learn with 1 lot of IBM or 3 lots of QQQ or whatever. Show yourself you can manage the risk first.
Next, learn how to manage that risk to the best of your abilties. Whenever I spread, or put on one of my trades (which Mav will hate because of the negative gamma) of selling the front month straddle on the QQQs. Then, I relentlessly micro mange my risk. Always trying to stay delta neutral and being aware of gamma risk (This is easier to manage on an Index than an individual stock). If the QQQ moves and the deltas start qetting out of wack because of the gamma, I adjust the position to get back in line. People think Im getting paid to rent the option. Wrong. Im getting paid to manage my risk.
So, what I would suggest is learn how to do this with a couple hundred shares of Cisco or something else. Get your position on some software so you can always see where your deltas and gammas and ADJUST that position constantly. Learn how to sell more options to change it one way, buy some or close out some to change it the other. Buy or sell the underlying. Whatever IT is that YOU have to do keep it in line.
You HAVE to figure out how you will ALWAYS be monitoring the risk in these situation. You should ALWAYS be playing in your mind your response if you wake up and the futures are limit up, the presidents been shot or, more likely, the market has been in a slow grind toward one of your wings while you pray it reverses.
Believe me, Ive been there. You can buy these condors and spreads your whole life and never have them explode into the money. Then one way day you will think to yourself, "Hey, I could be the one getting all that premium." So you become the seller. Then you wake up one morning and a plane has flown into a building.
Here is my advice for learning to play these credit spreads, or anything else. First, get a hell of a lot smaller as fast as you can.
If you like this ideal, learn it on the emini. Or better yet, learn with 1 lot of IBM or 3 lots of QQQ or whatever. Show yourself you can manage the risk first.
Next, learn how to manage that risk to the best of your abilties. Whenever I spread, or put on one of my trades (which Mav will hate because of the negative gamma) of selling the front month straddle on the QQQs. Then, I relentlessly micro mange my risk. Always trying to stay delta neutral and being aware of gamma risk (This is easier to manage on an Index than an individual stock). If the QQQ moves and the deltas start qetting out of wack because of the gamma, I adjust the position to get back in line. People think Im getting paid to rent the option. Wrong. Im getting paid to manage my risk.
So, what I would suggest is learn how to do this with a couple hundred shares of Cisco or something else. Get your position on some software so you can always see where your deltas and gammas and ADJUST that position constantly. Learn how to sell more options to change it one way, buy some or close out some to change it the other. Buy or sell the underlying. Whatever IT is that YOU have to do keep it in line.
You HAVE to figure out how you will ALWAYS be monitoring the risk in these situation. You should ALWAYS be playing in your mind your response if you wake up and the futures are limit up, the presidents been shot or, more likely, the market has been in a slow grind toward one of your wings while you pray it reverses.
Believe me, Ive been there. You can buy these condors and spreads your whole life and never have them explode into the money. Then one way day you will think to yourself, "Hey, I could be the one getting all that premium." So you become the seller. Then you wake up one morning and a plane has flown into a building.
Eldrige, I would hate to present myslef as a guru, but here goes an example.
First of all, we have to get rid of the ideal of locking in a loss. Trading IS a losing game. Absolutely. Assume all trades are losers the minute you put them on. Now, try to minimize the loss so you can survive to make money.
I specifically do the short QQQ straddle in order to do nothing BUT handle risk. The trade (selling at the money calls and puts) is non directional. I use this trade to keep me mentally sharp on risk, because the the whole trade IS risk management. Nothing else.
So, if I sell the calls and puts, I look at my computer and it says im delta neutral. Good. Im also short some Gamma. Bad (to revue, the short gamma means that your deltas move OPPOSITE the underlying. So if QQQ goes higher, you are getting more Delta negative, or shorter.)
So, I start Delta neutral. Now, there is a big rally. The QQQs go higher. My short calls are going against me, but my short puts are working for me, so it should be no problem. Right? Wrong. This is the effect of gamma. The deltas on the calls are increasing at a faster rate than the deltas on the puts are decreasing. So, now I have to get to Delta Neutral. Remember - that is my job. To stay neutral. The deltas on the short calls are getting greater, so I am getting more delta negative away from neutral. So I sell puts. This is a delta positive trade. I sell enough puts to even me up.
I check the position once in the mid morning and once in the afternoon. I probably adjust it one to three times a week.
Now, to alleviate Mavs fear of the negative gamma piling up. As I try to stay delta neutral, if I see the gamma is getting too high, then instead of selling the puts, I'll start buying back the calls.
I would never do this on a stock. Only an index. One big move could blow you out in a stock. Plus my position size is small. So, if Im keeping only 20K in an option accoung, I'll only sell up to 10-14k of margin use so I have margin to sell more/buy back.
Again, the whole trade is risk management. It is not about locking in a loss. In fact, the fear of locking in a loss is the number one killer of traders. Been there and done that. Lock in that loss and love it. Your job is not to avoid locking in the loss, it is survive so that the edge you have does not rest on one coin flip, but five hundred coin flips in which you win 300 of them.
First of all, we have to get rid of the ideal of locking in a loss. Trading IS a losing game. Absolutely. Assume all trades are losers the minute you put them on. Now, try to minimize the loss so you can survive to make money.
I specifically do the short QQQ straddle in order to do nothing BUT handle risk. The trade (selling at the money calls and puts) is non directional. I use this trade to keep me mentally sharp on risk, because the the whole trade IS risk management. Nothing else.
So, if I sell the calls and puts, I look at my computer and it says im delta neutral. Good. Im also short some Gamma. Bad (to revue, the short gamma means that your deltas move OPPOSITE the underlying. So if QQQ goes higher, you are getting more Delta negative, or shorter.)
So, I start Delta neutral. Now, there is a big rally. The QQQs go higher. My short calls are going against me, but my short puts are working for me, so it should be no problem. Right? Wrong. This is the effect of gamma. The deltas on the calls are increasing at a faster rate than the deltas on the puts are decreasing. So, now I have to get to Delta Neutral. Remember - that is my job. To stay neutral. The deltas on the short calls are getting greater, so I am getting more delta negative away from neutral. So I sell puts. This is a delta positive trade. I sell enough puts to even me up.
I check the position once in the mid morning and once in the afternoon. I probably adjust it one to three times a week.
Now, to alleviate Mavs fear of the negative gamma piling up. As I try to stay delta neutral, if I see the gamma is getting too high, then instead of selling the puts, I'll start buying back the calls.
I would never do this on a stock. Only an index. One big move could blow you out in a stock. Plus my position size is small. So, if Im keeping only 20K in an option accoung, I'll only sell up to 10-14k of margin use so I have margin to sell more/buy back.
Again, the whole trade is risk management. It is not about locking in a loss. In fact, the fear of locking in a loss is the number one killer of traders. Been there and done that. Lock in that loss and love it. Your job is not to avoid locking in the loss, it is survive so that the edge you have does not rest on one coin flip, but five hundred coin flips in which you win 300 of them.
Quote from mbradley:
Eldrige, I would hate to present myself as a guru, but here goes an example.
First of all, we have to get rid of the ideal of locking in a loss. Trading IS a losing game. Absolutely. Assume all trades are losers the minute you put them on. Now, try to minimize the loss so you can survive to make money.
I specifically do the short QQQ straddle in order to do nothing BUT handle risk. The trade (selling at the money calls and puts) is non directional. I use this trade to keep me mentally sharp on risk, because the the whole trade IS risk management. Nothing else.
So, if I sell the calls and puts, I look at my computer and it says im delta neutral. Good. Im also short some Gamma. Bad (to revue, the short gamma means that your deltas move OPPOSITE the underlying. So if QQQ goes higher, you are getting more Delta negative, or shorter.)
So, I start Delta neutral. Now, there is a big rally. The QQQs go higher. My short calls are going against me, but my short puts are working for me, so it should be no problem. Right? Wrong. This is the effect of gamma. The deltas on the calls are increasing at a faster rate than the deltas on the puts are decreasing. So, now I have to get to Delta Neutral. Remember - that is my job. To stay neutral. The deltas on the short calls are getting greater, so I am getting more delta negative away from neutral. So I sell puts. This is a delta positive trade. I sell enough puts to even me up.
I check the position once in the mid morning and once in the afternoon. I probably adjust it one to three times a week.
Now, to alleviate Mavs fear of the negative gamma piling up. As I try to stay delta neutral, if I see the gamma is getting too high, then instead of selling the puts, I'll start buying back the calls.
I would never do this on a stock. Only an index. One big move could blow you out in a stock. Plus my position size is small. So, if Im keeping only 20K in an option accoung, I'll only sell up to 10-14k of margin use so I have margin to sell more/buy back.
Again, the whole trade is risk management. It is not about locking in a loss. In fact, the fear of locking in a loss is the number one killer of traders. Been there and done that. Lock in that loss and love it. Your job is not to avoid locking in the loss, it is survive so that the edge you have does not rest on one coin flip, but five hundred coin flips in which you win 300 of them.
I am actually working on a QQQ strategy involving selling ATM straddles but I want to trade the QQQ's in front of the gamma. I don't like the idea of adding gamma to an already gamma loaded position. I'm not saying that this won't work because obviously if you keep your risk tight you can make it work. But I want to make short term trades and trade ahead of the gamma and let my negative gamma scale out of my position for me while at the same time earning the premium on the straddle. I'm a little more risk averse when holding negative gamma.
mbradley,
Thanks for the explanation. I would like to trade that way, my concern would be a little like Maverick's, in regard to adding to the gamma. I am in the process of closing out a stock pair trade that I got myself stuck in for a number of months. I rode it to a 26k loss and back up to a 3-4k profit. I followed my rules the best I could, and it worked out, but I have decided not to take that kind of risk any more! I am afraid I might end up with a similar problem by adding to the puts as the market goes up. I guess it comes down to starting to buy the calls at the right time, that might be hard for me.
Would you consider adding and removing delta with another position to keep your portfolio neutral, or have you found that it is better to deal with each trade individually? Thanks for your help, I really appreciate you taking the time to share your knowledge.
Thanks for the explanation. I would like to trade that way, my concern would be a little like Maverick's, in regard to adding to the gamma. I am in the process of closing out a stock pair trade that I got myself stuck in for a number of months. I rode it to a 26k loss and back up to a 3-4k profit. I followed my rules the best I could, and it worked out, but I have decided not to take that kind of risk any more! I am afraid I might end up with a similar problem by adding to the puts as the market goes up. I guess it comes down to starting to buy the calls at the right time, that might be hard for me.
Would you consider adding and removing delta with another position to keep your portfolio neutral, or have you found that it is better to deal with each trade individually? Thanks for your help, I really appreciate you taking the time to share your knowledge.
Quote from Maverick74:
I am actually working on a QQQ strategy involving selling ATM straddles but I want to trade the QQQ's in front of the gamma. I don't like the idea of adding gamma to an already gamma loaded position. I'm not saying that this won't work because obviously if you keep your risk tight you can make it work. But I want to make short term trades and trade ahead of the gamma and let my negative gamma scale out of my position for me while at the same time earning the premium on the straddle. I'm a little more risk averse when holding negative gamma.
Maverick,
I would be interested in hearing more about this strategy if you feel like sharing. I would love to have that theta working for me if possible. I might start a thread for some feedback on a very simple strategy I am considering that starts with buying an ATM straddle, but I would rather sell them if I had the right strategy.