Managing of long puts/calls in vertical spreads

M

Matache

Greetings,

Usually I am trading vertical (credit) spreads and long iron condors (that will put me in the intermediate options trader's bracket I guess :) ).

Usually 15-11 deltas.
So, now for the question: I have a max loss (usually with a stop loss order) of 200% credits received and I only Trade options that are very liquid (big etfs, sometimes "big" stocks).
How do you mange the long puts/calls? With 15-11 deltas there is not too much gain per contract. Commission eat up 5-10% (Roundway). So is it viable to lower the long put/call (to maybe 5 deltas?) or just trade naked short puts/calls? I mean I have the stop loss in place and I can't think of a situation in which spy f.e. goes up/down (well realistically down) so fast my stop loss wouldn't safe me from losing 1 trillion usd.

Where is my systematic error?
 
Last edited:
newwurldmn said:
If the market sells off 10percent, your short puts will be worth 10x. Your stop won’t get executed and you have no idea if the market will sell off another 10percent or rally back
More...

Thank you for clarifying. You mean the short puts will lose 10x value? The stop loss limit will be triggered.
but your saying if the market drops sharply, the stop loss won't be executed because the drop happens to fast? Is this really the case even with very liquid and actively traded options like spx or spy?
 
Matache said:
Thank you for clarifying. You mean the short puts will lose 10x value? The stop loss limit will be triggered.
but your saying if the market drops sharply, the stop loss won't be executed because the drop happens to fast? Is this really the case even with very liquid and actively traded options like spx or spy?
More...

yes. because the option price can gap and your stop is really a conditional limit order (if price = x, then i pay x+y to exit)
 
newwurldmn said:
yes. because the option price can gap and your stop is really a conditional limit order (if price = x, then i pay x+y to exit)
More...

I see. Thank you again. That would require a significantly sharp drop though. Extraordinary large losses could be avoided by buying a lower delta put instead of naked, I guess. In case of a black Swan event the lower delta put saves the portfolio.

Maybe you can just buy units (an article I read recommended 4 months out (rolling every two month) and 30% otm) and sell monthly naked (not really due to the units) puts against)
Is this something someone does? ^^


The risk you describes shouldn't be there on the upside? I can't imagine spx rocketing high so fast that a stop loss wouldn't work
 
1. a lower strike put will reduce your risk. But it comes at a greater cost statistically (since you are paying the skew). But really, your biggest issue is that you will now have to trade more size to make the same amount of money so your risk/reward profile will change. You have to make that determination.

2. I don't know if this works or doesn't. It will depend on the vol surface and your forecast for vol. It's a very different trade.

3. In certain environments this can happen but generally not. I would say that you could find that we are 10% higher than now in 20 days if certain economic indicators workout. Your stop might not hit if you approach it and then gap past it.

In general, you will have to take a view on spot price or future vol (realized or implied) to profit on options. If you can't do that, then trading DOTM options because "the probability of being in the money is low" is a very low return/high stress endeavor.

Matache said:
I see. Thank you again. That would require a significantly sharp drop though. Extraordinary large losses could be avoided by buying a lower delta put instead of naked, I guess. In case of a black Swan event the lower delta put saves the portfolio.

Maybe you can just buy units (an article I read recommended 4 months out (rolling every two month) and 30% otm) and sell monthly naked (not really due to the units) puts against)
Is this something someone does? ^^


The risk you describes shouldn't be there on the upside? I can't imagine spx rocketing high so fast that a stop loss wouldn't work
More...
 
newwurldmn said:
1. a lower strike put will reduce your risk. But it comes at a greater cost statistically (since you are paying the skew). But really, your biggest issue is that you will now have to trade more size to make the same amount of money so your risk/reward profile will change. You have to make that determination.

2. I don't know if this works or doesn't. It will depend on the vol surface and your forecast for vol. It's a very different trade.

3. In certain environments this can happen but generally not. I would say that you could find that we are 10% higher than now in 20 days if certain economic indicators workout. Your stop might not hit if you approach it and then gap past it.

In general, you will have to take a view on spot price or future vol (realized or implied) to profit on options. If you can't do that, then trading DOTM options because "the probability of being in the money is low" is a very low return/high stress endeavor.
More...


Thank you! That helped me. Usually I go by "feel" (and a few macro indicators), but what do people do to get a grasp of future price/vol movements?
 
Matache said:
Thank you! That helped me. Usually I go by "feel" (and a few macro indicators), but what do people do to get a grasp of future price/vol movements?
More...


Imagine Russia hitting Kyiv with a tactical nuke. Vols would open at 150 and you'd be debit. Defining how much you've lost will come by way of a demand letter from your clearing firm.

If you have to cover you're already dead.
 
You must log in or register to reply here.
Back
Top