Noob- Analyzing P/L's

[Rchemo]

Hey, I am just getting the hang of this, if anyone cares to help educate me, I'd appreciate it...Most of the books I read don't seem to be able to answer my questions..
Attached is a the risk profile of an iron condor (AAPL) with a 40 wide body.
I am Long Term bullish, and I understand that this probably isn't really a bullish position. I see that my upside is capped at the 198/contract net credit, and my max loss is $802/contract.

Questions I have:
1) Expiring between my shorts shows a 23% probability, does that mean it's a 77% chance of expiring outside my breakevens? Am I missing something here or does a 24% probability of success seem like a bad trade? How was the 24% calculation derived, from IV?

2)Where would you consider placing stops? Inside your shorts, your breakeven, +/- 10%? How would you improve this position?

3) If it hits your stop, how would you make an adjustment, and at what cost? Say AAPL busts through my 220 short call, do you just trade your 220/230 calls for 230/240 calls and pay the difference, or do you close the whole position, and move the whole condor to the right?

4) And last, delta is -4.72. I know that 4 is close to zero, and delta neutral is a good thing, but why is it good, and how important is it to make adjustments to keep delta close to 0?

I realize these may be rookie questions for most of you guys, but you got to start somewhere.. Thanks in advance for any advice..

TAK

 

[Rchemo]

I didn't see the p/l.. Here it is again just in case..

 

[MTE]

(1) Yes, if the probability of expiring between the strikes is 23% then the probability of expiring outside is 77%. These probabilities are calculated from the probability distribution (usually assumed to be normal or rather log-normal) based on volatility.

(2) There's no set rule on where or how to set stops. Some people don't set them at all as they are comfortable losing the whole amount at risk, others may set at double the net premium received, still others may set them at the short strikes or some other point. It's a matter of preference/comfort. Personally, I would use the double of the net premium. So if I sold the IC for 1.98 then the stop would be at around 4.

(3) If it hits my stop then I'm out. I don't like adjustments to losers as you always end up tying up capital in a trade with a really a bad risk/reward ratio. I'd rather get out and move on to new trades.

(4) Your delta constantly changes so even if you set it exactly to zero it's gonna move away from it as soon as the underlying moves. In a position like this I wouldn't worry about it as long as the position reflects my view of the stock.

 

[spindr0]

Quote from Rchemo:

3) If it hits your stop, how would you make an adjustment, and at what cost? Say AAPL busts through my 220 short call, do you just trade your 220/230 calls for 230/240 calls and pay the difference, or do you close the whole position, and move the whole condor to the right?

I realize these may be rookie questions for most of you guys, but you got to start somewhere.. Thanks in advance for any advice..

Option P&L is a moving target. Premium changes daily due to time decay, change in underlying, change in implied volatility. So stops will also change, maybe daily, maybe weekly. IOW, where the stop is placed and what adjustments you might do will depend on where the P&L lies as well as the time remaining, proximity to strikes and premium available for adjustment striikes.

A possible adjustment if the underlying moves toward a strike is to roll the other side in. For example, if AAPL dropped 10 pts, you could roll the call spread down 10 pts, booking some gains and adding more premium to the position to offset some of the put side's loss.

When the underlying drops is a factor. If immediately, you might do this. If close to expiration, you might not get any premium for the roll and might have to consider going to the next month, something I wouldn't advise until you grasp options very well (diagonalizing components).

I would not wait for AAPL to ""bust through" a short strike. Once ITM, a short leg begins to accumulate intrinsic quickly. So consider adjustment/closing before you get ITM.

Lastly, closing a position is sometimes a better idea than adjusting. Which one you choose should depend on what you believe at that later date. Forget the initial position. Ask yourself, if I had no position at all, woud I take this adjusted position today? If no, shut it down. If yes, adjust.

And with these simulated positions, use the respective bid/ask prices to be closer to reality

 

[Rchemo]

Quote from MTE:



(3) If it hits my stop then I'm out. I don't like adjustments to losers as you always end up tying up capital in a trade with a really a bad risk/reward ratio. I'd rather get out and move on to new trades.

So what is an acceptable range for risk/reward? In the example, it would be 802/198, or 4-ish, right? Is that kinda high, or is this one of those subjective moments, whatever the trader feels comfortable with..

 

[Rchemo]

Quote from spindr0:



A possible adjustment if the underlying moves toward a strike is to roll the other side in.
Ask yourself, if I had no position at all, woud I take this adjusted position today? If no, shut it down. If yes, adjust.

Thanks Spin.. I wish I had asked myself that when SIRI went from 9 to .15.... To this day, I still can't sell it until it recovers or goes bankrupt.. I'm sure there is some cardinal rule broken about that... Some canonical quip with the word hope in it..

TAK

 

[nO0b]

Somehow, the probabilities on your screen do not seem to be correct. Check out how that trade looks in my attachment.

Try hitting reset at the top, and click "Set Slices" to display your breakeven points for DEC. That's what you want it to track.

The right way to analyze this then is you're a 72.21% favorite to win $188, or an expectancy of .7221 x 188.00 = $135.75.... But there's a 27.79% chance you lose 812.00, or an expectancy of .2779 x 812.00 = $225.65.

So right now, you have negative expectancy of $89.89 on this trade, on average, not including commissions.

You could get lucky, but doing trades like this is a good way of donating money to the market.

 

[TheoHornsby]

Quote from nO0b:

Somehow, the probabilities on your screen do not seem to be correct. Check out how that trade looks in my attachment.

It might be more accurate if you used the same imputs (premiums and same net credit) as the OP. Otherwise, youre going to have different charts and stats.