Mitigate Risk - iron condor

[OTM-Options]

You could mitigate risk via some type of delta hedging strategy for the condor. This of course is far more difficult in practice than it would seem; however, done right it can really enhance your trading.

Thanks can you provide an example?

In practice this is what happens: you sell 10 of the 85/90/110/115 condors in XYZ. Assume 90/110 are you 15 delta strikes. XYZ moves up to 115, your deltas move up to 30, you panic, you sell 200 shares of XYZ to delta hedge, 20 days later you take the trade off, XYZ is back down to 105, you make money on the condor, you lose money on your hedge.

jonny1lot ........ that makes no sense at all. Once "XYZ" hits $115 the maximum loss has been reached - unrealized. There is no need to panic and micro-manage the position. Best thing to do is wait to expiry and maybe the underlying moves back down.

The long legs provide the hedge and mitigate the risk of a Short Iron Condor. Nothing else needs to be done.

 

[EliteTraderNYC]

OTM in your opinion, how close would you let price get to the underlying short call or put before you cover the position?

 

[OTM-Options]

OTM in your opinion, how close would you let price get to the underlying short call or put before you cover the position?

I wouldn't cover - because the next day you might be back in the green.

 

[longthewings]

OTM in your opinion, how close would you let price get to the underlying short call or put before you cover the position?

The answer to this question depends on what your expectation for vol is over the remaining life of the options. If you're trading SPX, 30 points OTM with 1 day to go in a 15% vol market is very different from 30 points OTM with 5 days to go in a 25% vol market.

Options are all about time value.

 

[jonny1lot]

jonny1lot-
Just because that is what happens in practice with you does not mean that's how it is for others.

EliteTraderNYC-
You can delta hedge with other options. In fact this is better anyway since you can neutralize or at least manage higher moment "greeks" (ie vega) with it. This is a complex topic though. I don't recommend jumping in head first in your live trading. There's a ton of literature out there though. Also, there are some good threads on here where you can pick up bits and pieces from some guys that really know what they're doing.

Quick question - let's say you are short premium so you are short vega and the position is underwater and you are playing defense. Why would you want to neutralize vega?

 

[jonny1lot]

jonny1lot ........ that makes no sense at all. Once "XYZ" hits $115 the maximum loss has been reached - unrealized. There is no need to panic and micro-manage the position. Best thing to do is wait to expiry and maybe the underlying moves back down.

The long legs provide the hedge and mitigate the risk of a Short Iron Condor. Nothing else needs to be done.

That's exactly what I said in my earlier post. Risk is defined on order entry. But you are right, I was probably a bit unclear mixing NYC's trade (iron condor) with my usual trades (strangles / straddles), so thank you for that correction.

In a similar vein, I'm short the weekly AA iron fly right now. Huge earnings miss - my risk is defined and all I do is wait and see what the stock opens up at.

 

[longthewings]

If the position is significantly underwater, I didn't hedge correctly in the first place -- i.e. I was carrying too much short vega risk at the onset of the trade and I hedged at the wrong vol so my delta calculation was way off. As soon as you're way underwater, the mistake has already happened. At that point, hedging or neutralizing is pointless. Your edge is gone (assuming you had one in the first place). Might as well kill it and move on to the next.

 

[i960]

I am unable to purchase stocks in the positions my options are in bc i trade in a risk level that is way beyond the amount of capital needed to cover the position.

This is a sign that said positions are too large. If you need to lever/juice things up this much just to make a reasonable return then you're carrying serious risk vs reward. Ask yourself: what's worse when the trade goes against you when selling 4 ATM options vs selling 40 OTM options?

Gamma is gonna skull fuck you one of these days.

 

[OTM-Options]

I am unable to purchase stocks in the positions my options are in bc i trade in a risk level that is way beyond the amount of capital needed to cover the position.

This is a sign that said positions are too large. If you need to lever/juice things up this much just to make a reasonable return then you're carrying serious risk vs reward. Ask yourself: what's worse when the trade goes against you when selling 4 ATM options vs selling 40 OTM options?

Gamma is gonna skull fuck you one of these days.

• Reality: Most option traders do not have the funds to buy/sell the stock that their option positions cover. It's called leverage.
  
• Solution: Exit before expiry if ITM or ATM.

 

[OTM-Options]

If the position is significantly underwater, I didn't hedge correctly in the first place -- i.e. I was carrying too much short vega risk at the onset of the trade and I hedged at the wrong vol so my delta calculation was way off. As soon as you're way underwater, the mistake has already happened. At that point, hedging or neutralizing is pointless. Your edge is gone (assuming you had one in the first place). Might as well kill it and move on to the next.

It's all about how far apart the strikes are. Try some Iron Condors with a $5.00 spread and $2.00 premium - maximum loss is only $3.00.

Checkout oldnemesis's posts in the option forum for some ideas. Tweak his OTM $0.50 Credit Spreads into $2.00 Iron Condors buy moving the strikes closer to the underlying and selling both call and put spreads.