Jeff Augen's StdDev Price Change

[eh_geee@gmail]

Quote from BetterBeta:

Thanks for the context.

When deciding whether to sell an iron condor, there are a wide range of possible factors that traders assess. Looking at the deltas of your short strikes are certainly important, as those serve as proxies for probabilities at the time you put the trade on.

There are two main schools of thought re. deltas: many newsletters suggest low delta sales because the win rate is high. The downside is that a bad month can wipe out a year's worth of gains.

For those who feel that the risk/reward ratio of low delta sales is a tragedy waiting to happen tend to sell iron condors with short strike deltas closer to 20. These trades require more frequent adjustments but provide much higher credits.

I'd also suggest looking at support/resistance in the underlying - this will help you define the range and where the asset currently is in that range (similar to what you are using Augen's indicator to measure).

Another key metric is open interest. Large open interest indicates institutional positions and they, more than retail traders, move the markets.

Beyond strike selection, implied volatility relative to historical volatility is a key metric to consider when opening an iron condor position. Keep in mind that iron condors are short vega and a spike in implied volatility, especially as you near expiration, can cause significant problems.

Theta is also something for you to consider. As many options traders know, theta decay is exponential. While theta decay for ATM options is most dramatic in the final 30 days of the contract, OTM decay is most pronounced in the 60-30 days before expiration. This difference allows traders to realize most of their credit without holding the positions through expiration.

Lastly, keep in mind your commissions. Selling a $50 iron condor and paying $10 in commissions puts you 20% down every time you open a trade. High commissions frequently cause traders to hold positions too long in an effort to squeeze every last cent out of their trade which puts you at significant gamma risk.

Hope this helps. There are many ways to successfully trade iron condors but, like most things in life, there are trade-offs.

Your point on vol is valid in my experience -- look at IV and know the range of the given product. For OI and volume -- these are critical measures of liquidity and efficiency. Look for bid-ask spread of a penny or three and volume of at least 1 million in the underlying. Look at something like SPY and AAPL to understand liquid, efficient products.

As for commish, at IB for 75 cents per, or tos at $1.25, or TS at $1.00/contract with no ticket charge, selling a $5 condor one time should bring in say $200 and incur four legs or 4 x $1.00 is $4 for TS or $5 for tos. In simple terms, commish should be considered in terms of the trade price, but even in a four-legged position, it shouldn't be a factor in profitability. Perhaps I've misunderstood your description of selling a $50 IC and paying $10 in commission. In any case, I think it overcomplicates a simple short IC trade to try to understand, let alone manage gamma, just get out by the Wednesday and life is simple -- commish has little if anything to do with a decision to close or roll a position.

 

[dbh21]

Thanks. I'll definitely take a look at those. At the moment I am looking at the ADX indicator. (Actually, I am sidetracked looking at the NYA200R).

I read Benklifa's book. I like it. He's very conservative in his trades. 2-3 months out, looking for a 4% gain.

I'm not necessarily looking for a mechanical system, but to gain confidence in using different parameters or scenarios. This is still a big learning experience for me.

 

[Put_Master]

<<< I read Benklifa's book. I like it. He's very conservative in his trades. 2-3 months out, looking for a 4% gain. >>>

Am I correct in interpreting the goal above as averaging in the area of 20% annualized?

 

[dbh21]

He did not say whether he had a long term goal. Only that he managed large pools of money, and was conservative. He could be doing other trades as well. But I recall him saying he aimed for a 4% profit target on his iron condor trades.

20% annuallized ain't so bad... but not great when he also takes 2/20 off the top.

 

[cdcaveman]

Quote from dbh21:

He did not say whether he had a long term goal. Only that he managed large pools of money, and was conservative. He could be doing other trades as well. But I recall him saying he aimed for a 4% profit target on his iron condor trades.

20% annuallized ain't so bad... but not great when he also takes 2/20 off the top.

getting down to the value at risk in each trade.. and how diversified he is amounts index0s or single names would be a real question.. obviously your better off managing 3 irons in different indicies or single names rather then one name with three times the value..
so if condors with higher premiums/delta 10+ are better.. (althought i think thats to generalized of a statement) where do iron butterflys fit? your selling a short straddle and capping the losses.. ATM's experience most of their loss near expiration.. so is the profile of a iron condor better then a iron condor at different time frames? and if so when..

 

[Put_Master]

Quote from dbh21:

He did not say whether he had a long term goal. Only that he managed large pools of money, and was conservative. He could be doing other trades as well. But I recall him saying he aimed for a 4% profit target on his iron condor trades.

20% annuallized ain't so bad... but not great when he also takes 2/20 off the top.

If your average contract is 2 - 3 months out, and you are earning 4% on the average trade, then it sounds like his L-T goal was in the area of 20% annualized.
My question is, what was the VIX during that time?
If the VIX was in the 30's that would be a very conservative goal.
If it were in the low teens, then perhaps not as conservative.
Just looking for a bit of context.

Personally, given the low VIX environment we are currently in, my current annual goal is 13 - 16% annualized.
Back when the VIX was in the 30's, my annualized goal was in the 20 - 25% range, via a strategy of selling naked puts.

 

[ktm]

Quote from eh_geee@gmail:

As for commish, at IB for 75 cents per, or tos at $1.25, or TS at $1.00/contract with no ticket charge, selling a $5 condor one time should bring in say $200 and incur four legs or 4 x $1.00 is $4 for TS or $5 for tos. In simple terms, commish should be considered in terms of the trade price, but even in a four-legged position, it shouldn't be a factor in profitability. Perhaps I've misunderstood your description of selling a $50 IC and paying $10 in commission. In any case, I think it overcomplicates a simple short IC trade to try to understand, let alone manage gamma, just get out by the Wednesday and life is simple -- commish has little if anything to do with a decision to close or roll a position.

Commish can be a significant factor. It depends on how safe you want to be - how far you are outta the money. With Benklifa's strategy of opening contracts 60 days out at 8-10 delta, I think the average opening premium is around 13% of the spread for one side.

So... let's say he has a 10 point spread and gets 1.30 total credit. He also takes it off very quickly. At 5 contracts (1.25 commish per X 4 legs) you are getting $325 initial credit. Your total commish to get in and out is $50. If he gets HALF of his deterioration in a few weeks and removes it, he gets $162.50 minus $50. Commish is taking a third of the profit.

That's been part of my continued reluctance to really deploy ICs far OTM. If you are getting $5 credit, as in your example then the commish is much less of a factor, but you are going to have your feet a bit closer to the fire.

 

[cdcaveman]

Quote from ktm:

Commish can be a significant factor. It depends on how safe you want to be - how far you are outta the money. With Benklifa's strategy of opening contracts 60 days out at 8-10 delta, I think the average opening premium is around 13% of the spread for one side.

So... let's say he has a 10 point spread and gets 1.30 total credit. He also takes it off very quickly. At 5 contracts (1.25 commish per X 4 legs) you are getting $325 initial credit. Your total commish to get in and out is $50. If he gets HALF of his deterioration in a few weeks and removes it, he gets $162.50 minus $50. Commish is taking a third of the profit.

That's been part of my continued reluctance to really deploy ICs far OTM. If you are getting $5 credit, as in your example then the commish is much less of a factor, but you are going to have your feet a bit closer to the fire.

My commissions at IB are .70/contract. That's 7.20 round trip on 130.00 dollar credit... 5 condors would be 650.00 credit minus 36 dollar round trip commission.. commissions go down significantly with penny options... so 36 is max..that means commissions are max 5.5%

Using spx instead of spy, bigger notionals require less condors saving commissions.. not closing long legs that are so far out of the money they aren't even quoted is a thought for those people not holding until expire..

I can not see how your doing your math but at first glance its wrong

 

[dbh21]

Also, in Benklifa's case, he uses 25 point spreads. So that would lower his commission as well.

 

[ktm]

Quote from cdcaveman:

My commissions at IB are .70/contract. That's 7.20 round trip on 130.00 dollar credit... 5 condors would be 650.00 credit minus 36 dollar round trip commission.. commissions go down significantly with penny options... so 36 is max..that means commissions are max 5.5%

Using spx instead of spy, bigger notionals require less condors saving commissions.. not closing long legs that are so far out of the money they aren't even quoted is a thought for those people not holding until expire..

I can not see how your doing your math but at first glance its wrong

My math is correct. I can see that the commissions are half the percentage by using 100 multiplier contracts instead of $50 (ES).