settlement procedure in iron condors.
- Thread starter osho67
- Start date
You can't just cash-settle stuff at whim. The reason why these options are priced the way they are is because they are, in fact, physically settled, with everything it entails.
There's normally an important difference between physically settled securities and the cash settled ones. Physically settled options are normally American style exercise, while the cash settled types are generally European (OEX is cash-settled, American style, however). Make sure you're aware of the difference; see the CBOE's product specifications before you jump in...
Yes. Your max loss can increase above the 200 depending upon what underlying positions are liquidated by the broker. For example, if your portfolio includes Apple and it is sitting on a gain right now of 10 bux and it also includes Priceline which just happened to incur a 15 dollar drop that day, the broker could sell your Priceline stock at that 15 bux loss. Not nice expecially when you expect it to rebound.
It is best that you control your own destiny. Sell the option at a loss if necessary or sell what you want to find the cash. You can usually close an ITM leg of an IC for less than the strike spread if you don't wait until the last minute so it is best to close out of a losing spread instead of letting the broker take the max. Make sure you always save enough buying power to close out a trade as the Iron Condor only uses half the buying power because of the opposite positions.
Like these guys are saying, don't even let one side go in the money. I tend to set up SPX ICs with short strikes at about 10 delta. I adjust when one side goes above about 30 delta.
Not a recommendation of how to trade, but just saying how I do it. Risk/reward isn't great, but if you wait for an IV spike you can get good credit with wide strikes. With proper management you shouldn't even come close to going ITM and risking the max loss. Sometimes (with a sharp rise in IV following a downward market move), an adjustment can be made for a credit. That's not always the case, but at the very least (if you have to make an adjustment for a debit that doesn't eat up all of your initial credit), you're still in a profitable position post-adjustment. Trade defensively and make adjustments well before you're facing liquidation or a large loss.