Iron Condors Set Up Rules
- Thread starter Kpetrey
- Start date
I don't believe you can successfully trade these type of strategies without understanding the greeks & vol. I prefer to predit vol than market direction and try not to put much weight on S/R. I know S/R & sdv are commonly taught as methods of strike selection, however putting too much emphasis on this makes your trading quite rigid.
One of a handfull of people (among all option people world including the pros/gurus/etc) who seem to have the right insight about ICs! I would add this: There are mathematical explanations for was described intuitively. They do not exist in any book I have across.
I would pose another question: when does ICs run into you strike on average?
HINTs: if delta is "large", do not be surprised if it were happened T/F, where T is time left and F a number greater than 1. I refer to this number as F, for various reasons one of which is because F corresponds to the time when IC writers freak and adjust twice than they need to.
riskfreetrading-- My answer to the question " When do your short strikes get hit?" is... hardly ever, and my goal is ...never ever. I do not wait for the market to smash my short strike. I adjust away from the current market price and try to keep a reasonable spread between my put and call prices at all times. I have my own rules which are definitely intuitive, but soundly based on experience and tied to the greeks, time to expiry, and spread distance (ie. there is a mathematical basis to the thinking--it's not random at all).
This occasionally costs me money, but I'd rather have a small loss occasionally than a catastrophic one once. I also realize that sometimes I wind up making an adjustment that turns out to be unnecessary, but that is a price of doing business and staying in the game.
Some months are tougher than others. The October expiry period was fairly easy for me for example, but November is looking quite a bit trickier. If the SPX bounces a lot it becomes more exciting, but also less profitable because there will be more adjustments that are necessary. Don't interpret this to mean that I adjust every 5 points, because that would be silly and costly.
The fear factor comes into play often, although sometimes it is general market fear and not my own specifically that makes it difficult. A rising VIX is usually not a good thing for IC's!
This occasionally costs me money, but I'd rather have a small loss occasionally than a catastrophic one once. I also realize that sometimes I wind up making an adjustment that turns out to be unnecessary, but that is a price of doing business and staying in the game.
Some months are tougher than others. The October expiry period was fairly easy for me for example, but November is looking quite a bit trickier. If the SPX bounces a lot it becomes more exciting, but also less profitable because there will be more adjustments that are necessary. Don't interpret this to mean that I adjust every 5 points, because that would be silly and costly.
The fear factor comes into play often, although sometimes it is general market fear and not my own specifically that makes it difficult. A rising VIX is usually not a good thing for IC's!
matador,
I usually start each cycle with about 35-40% of my dedicated option capital in play. Depending on the market action, I may increase a bit as time goes along. I prefer to always keep some powder dry. I also won't hesitate to use up some of my monthly credits to adjust away and increase my breathing space and rebalance my portfolio deltas somewhat. In fact, I keep close track of the net credit for each month in a spreadsheet, and don't consider that extra cash as mine until all the IC's for that month are closed. For me, it is a defence fund to protect my capital, and if I wind up using it all, I'll close the IC for that month, take a short breather, and then set up for the following month. That way, typically my losses will be minimal when they occur.
Like many other experienced players, I much prefer to avoid expiry and I personally like to set up my new IC during the last week of the old month. I know that Mark W. likes to buy back the old IC for 15 cents to 25 cents per side whenever possible. I am quite happy to do that, as well. After all, the next month IC will be worth more with a week extra to go anyway. Some, usually about 1/3 of the last few cents, can be recouped in the new month IC's additional value, and the risks are significantly less.
Adjusting an IC with 5 weeks to go is a lot easier than one with 2 or less weeks to go. In fact, early in the life of the IC, if the market movement is reasonably orderly, and the vol does not substantially increase, many times the adjustments can be done without incurring any additional costs. Later in the life of the IC, this becomes more and more unlikely unless market conditions have been quite favorable.
I usually start each cycle with about 35-40% of my dedicated option capital in play. Depending on the market action, I may increase a bit as time goes along. I prefer to always keep some powder dry. I also won't hesitate to use up some of my monthly credits to adjust away and increase my breathing space and rebalance my portfolio deltas somewhat. In fact, I keep close track of the net credit for each month in a spreadsheet, and don't consider that extra cash as mine until all the IC's for that month are closed. For me, it is a defence fund to protect my capital, and if I wind up using it all, I'll close the IC for that month, take a short breather, and then set up for the following month. That way, typically my losses will be minimal when they occur.
Like many other experienced players, I much prefer to avoid expiry and I personally like to set up my new IC during the last week of the old month. I know that Mark W. likes to buy back the old IC for 15 cents to 25 cents per side whenever possible. I am quite happy to do that, as well. After all, the next month IC will be worth more with a week extra to go anyway. Some, usually about 1/3 of the last few cents, can be recouped in the new month IC's additional value, and the risks are significantly less.
Adjusting an IC with 5 weeks to go is a lot easier than one with 2 or less weeks to go. In fact, early in the life of the IC, if the market movement is reasonably orderly, and the vol does not substantially increase, many times the adjustments can be done without incurring any additional costs. Later in the life of the IC, this becomes more and more unlikely unless market conditions have been quite favorable.
what percentage of capital do you guys risk? If vol spikes, do you increase your position if your view on vol hasn't changed or do you take small losses by reducing your position...or sit still and wait for expiration
I never use all my capital on ICs, it's more like 60% with a futher 20% on other strategies that offset the risk with the remaining 20% sitting in the hanger waiting.
Difficult to explain how I would play as there are many factors under consideration all the time. I like to go in light & increase as I go, adjusting early well before the heat arrives. I look to minimize losses depending on my risk analysis at the time and prefer to get out once my profit targets are hit. Essentially I'm evaluating R/R all the time.
I never use all my capital on ICs, it's more like 60% with a futher 20% on other strategies that offset the risk with the remaining 20% sitting in the hanger waiting.
Difficult to explain how I would play as there are many factors under consideration all the time. I like to go in light & increase as I go, adjusting early well before the heat arrives. I look to minimize losses depending on my risk analysis at the time and prefer to get out once my profit targets are hit. Essentially I'm evaluating R/R all the time.
I just use the TOS platform and manage my IC's by the profit graph and greeks. I like to build them as wide as possible because of course no adjustment is always best, but when an adjustment is necessary I think the difference between success and failure with the strategy is how you adjust. To just try and pick up and move some strikes is cost prohibit most of the time with the accept of your higher priced etf's. So in reality adjustments are where you make a break this strat., and I like to look at my holdings as a portfollio and hedge or adjust from that perspective. Make sense?
