We talk about theory a great deal here, but we never seem to discuss mechanics of entering our spreads/combos. When I started out trading naked puts in 2004 ( i know how lucky I was until August 2007 hit), I would enter all of my intended short put trades on the Friday of expiration week for the next month or on the following Monday, not caring if the underlying was dipping or continuing its upward trend. Then, after a while, I began to only enter these trades when the market was down at the close (4:00 to 4:15pm). {BTW, who is trading from 4-4:15 anyway? MM's, institutions, hedge funds?} Now, my thinking is: only enter bull put spreads/bear call spreads when the market is down/up, and I now stagger my entries instead of entering them all at once. I do the same for my IC's now. I enter my short straddles and my Iron butterflies in a staggered fashion based on underlying changes. Anyone care to comment on their mechancs of entering trades? Lastly, how do you determine your strikes (bodies and wings)? Do you decide by using resistance and support levels? Do you decided based on amount of credit received? I have used both as well as gut (OTM or deep OTM).
Mechanics of trade entry
- Thread starter jwcapital
- Start date
I try to leg in with iron condors and double diagonals, but I find it difficult to track my success.
I know the market usually hits my price target, but sometimes it moves against me and I end up paying a little more. Without keeping a journal with exact details of the price when entering a multi leg trade and when entering the legs separately, I don't know if this strategy improves my gains by a small percentage, breaks even or hurts me in the long run.
My gut feeling is this strategy helps my returns. It may only be a small percentage, but small percentages add up to large percentages, right?
I know the market usually hits my price target, but sometimes it moves against me and I end up paying a little more. Without keeping a journal with exact details of the price when entering a multi leg trade and when entering the legs separately, I don't know if this strategy improves my gains by a small percentage, breaks even or hurts me in the long run.
My gut feeling is this strategy helps my returns. It may only be a small percentage, but small percentages add up to large percentages, right?
Like most (I think), I place positions when I have an opinion of the underlying. I tend to leg in because more often than not, I get better fills than accepting market prices. When right, I can get 10, 20, 30 cts more, or better. When wrong, I don't allow the last leg to hurt me for more than 10 cts. Don't leg in unless you are disciplined and quick.
For positions that have synthetic equivalents, set them all up in your trading platform. In the case of the iron condor, set it up as a pair of spreads as well as a pair of strangles. Sometimes someone will want one of the components, they will bid more aggressively for it and you can get a much better fill going in one way rather than the other. Use price alarms to bracket all components so that anything that pops up will alert you to a potentially better fill.
For positions that have synthetic equivalents, set them all up in your trading platform. In the case of the iron condor, set it up as a pair of spreads as well as a pair of strangles. Sometimes someone will want one of the components, they will bid more aggressively for it and you can get a much better fill going in one way rather than the other. Use price alarms to bracket all components so that anything that pops up will alert you to a potentially better fill.
I did an experiment yesterday. I entered a limit bid to purchase a short IC and placed the limit between the bid and ask (fair value). I left it working for a few hours, and it was never executed. It kept moving it so it was at fair value..no bites. In the past, if I hit the ask, it would execute. If I came within .05 of the ask it didn't execute. The problem with hitting the ask is giving up a ton of spread to the MM--anywhere for 1.00 to 1.50 points. Now, if I leg in, I got superior executions. If I place the limit order at fair value (between the bid and ask) for the bull put spreads or the bear call spreads, it would generally be filled there. Nobody mentioned how they determine the strike prices of the short options. Nobody mentioned what time of day the trades are entered (at the open, some time during the day, at the close (3:50-4:15PM). Nobody mentioned where in the option cycle front-month spreads (legged-in or not) one begins to enter their trades. How about exiting the spreads (leg-out or all-at-once)? What day in relation to expiration Friday do you exit? How about premature exit (stop-loss)? The mechanics are important. I have experimented with all combinations, some with success, others with utter failure. Anyone have a method with consistence positive results? I just like to see and compare my methods with others.
Sometimes a good tactic for getting filled between the bid and ask is to let the order work for three or four hours and then, if not filled, have your broker call down to the floor and Cancel the order. More often than not the MM will say, umm, wait a sec, umm, oh yeah, you are filled at your price. I guess the Cancellation sort of "jogs their memory" 
You determine the strike prices based on your risk/reward tolerance, each of which go hand in hand. Closer strikes means more risk (and reward). And vice versa for further strikes.
There's no magic pattern for taking positions at some time of the day or some time of the month, eg. "consistence positive results." Or some magic day for exiting the position. Trading is dynamic not static. In fact, I think you're focused on the wrong details. The key to a good position is getting the underlying right and when wrong, keeping it from eating your account value alive.