I have an iron condor trade in SPX August calls at 980/990 and puts at 755/745 with a net credit of 1.55. I feel pretty safe that i will make a profit but am always worried that something could happen that plunges the market. Would buying deep otm puts around the 400-500 level for .05 be sufficient risk management? Im not too worried about upside risk.
SPX iron condor trade
- Thread starter shainadir
- Start date
I think that the puts that you are thinking about are way too far away to do you any good under 99.5%+ of any situations you may encounter.
I suggest that you try the following: buy a debit spread of the 700-685 in the same amounts as your credit put spread (if you sold 5 spreads of the 745-755, buy 5 spreads of the 700-685). This gives you complete protection on the downside below 685. Your cost for these spreads will be about 0.40-0.45 based on current midpoints.
Please note: according to TOS, your chance of the SPX reaching 700 is about 4%, although my intuition says the real risk is probably about 6%. This means that this debit spread has about a 95% chance of expiring worthless. This is the price of insurance!!
Also: realize that your primary spread is the 745-755. If you do nothing to protect yourself, and the SPX is 744.99 on expiry, you will lose the complete value of the spread or 10.00 for every 1.55 in credit you have received. The insurance that I suggested is simply "CRASH" insurance, and a bit expensive at that.
In my position, I use debit spreads a little closer to the money than my credit spreads for some protection. Some also just buy a single put--not a spread-- to cover about 10 or more spreads.
I also strongly recommend that you don't use all your margin on IC's !!!
I suggest that you try the following: buy a debit spread of the 700-685 in the same amounts as your credit put spread (if you sold 5 spreads of the 745-755, buy 5 spreads of the 700-685). This gives you complete protection on the downside below 685. Your cost for these spreads will be about 0.40-0.45 based on current midpoints.
Please note: according to TOS, your chance of the SPX reaching 700 is about 4%, although my intuition says the real risk is probably about 6%. This means that this debit spread has about a 95% chance of expiring worthless. This is the price of insurance!!
Also: realize that your primary spread is the 745-755. If you do nothing to protect yourself, and the SPX is 744.99 on expiry, you will lose the complete value of the spread or 10.00 for every 1.55 in credit you have received. The insurance that I suggested is simply "CRASH" insurance, and a bit expensive at that.
In my position, I use debit spreads a little closer to the money than my credit spreads for some protection. Some also just buy a single put--not a spread-- to cover about 10 or more spreads.
I also strongly recommend that you don't use all your margin on IC's !!!
Well there really is not point in buying a put that would be lower than 745...
Right now you have a combination of a short put spread and a short call spread, there is nothing complicated about that.
Now you sold some 755 but bought 745's so (unless you didn't buy as many as you sold and that would not be an iron condor btw) the max you can loose is 10*100*Number of contracts on the downside.
Buying some more puts at whatever level below that does NOT make a spec of a difference on that. It will not free margin, will not protect a single penny of that trade.
Right now you have a combination of a short put spread and a short call spread, there is nothing complicated about that.
Now you sold some 755 but bought 745's so (unless you didn't buy as many as you sold and that would not be an iron condor btw) the max you can loose is 10*100*Number of contracts on the downside.
Buying some more puts at whatever level below that does NOT make a spec of a difference on that. It will not free margin, will not protect a single penny of that trade.
I almost always buy insurance, so agree with the concept.
The puts you want to buy will do you no good a all - as insurance. If you want to make a bet that a crash is coming, then that's another story. But a 500 put will not protect your shorts.
Suggestions:
1) As insurance, begin to buy in your position - 10 to 20% every day. But, I suggest accepting the fact that you have a winner, and with only one week to go, you don't want to take the risk for the tiny reward that you can still earn. Pay 10 or 15 cents for that put spread and be done with it.
2) Buy a few naked puts - with a strike above 755. Decide how much you want to spend and choose an appropriate strike.
Mark
Actually, he is referring to a complete Black Swan situation where the market collapses. In that case, the spreads WILL actually be profitable. As I explained above, I would do something quite different because I would much rather have protection above the spread which is several times more likely to be beneficial.
Also-- in some situations, the spreads below his IC will still provide some benefit. In the event of a sharp (over 100 points) move down immediately, the deep OTM spreads will gain substantially providing some hedging power against the increase in the put spreads.
Also-- in some situations, the spreads below his IC will still provide some benefit. In the event of a sharp (over 100 points) move down immediately, the deep OTM spreads will gain substantially providing some hedging power against the increase in the put spreads.
He's got 6 weeks to go until AUG expiration, not just one week, and he's nervous. Adjust that OTM put side of he condor until you can sleep with the risk.
If you wake up tomorrow and the S&P is 666 (again) and you take the full hit, will that ruin your morning or your whole month (or worse)? Trade down or adjust until it's just your morning.
Check out buying 1 Sep 755 put to insure every 10 credit spreads you have on. If you are truly concerned about a black swan event, then this adjustment will protect you nicely throughout the duration of the August expiration cycle, theta decay will not destroy your potential profit, and you should have liquidity to sell the insurance for a credit after the Aug expiration.
[hijack]
I'm surprised you got a fill on an SPX IC. I've had an order placed for 2 days and although it's passed through, sat above for a while, and come back through my price it has yet to get filled.
I figured to get back into SPX ICs again after a while for some longer-term trades....I see the fills are just as quirky now as ever, eh?
Back to your thread....good luck with your spread!
[end hijack]
I'm surprised you got a fill on an SPX IC. I've had an order placed for 2 days and although it's passed through, sat above for a while, and come back through my price it has yet to get filled.
I figured to get back into SPX ICs again after a while for some longer-term trades....I see the fills are just as quirky now as ever, eh?
Back to your thread....good luck with your spread!
[end hijack]
Excellent advice. I hope OP listens (and disregards some of the other advice).
Your spreads are too wide. Narrow them and/or reduce # of contracts. Worth the sleep. Don't overthink it and don't make your position more complicated.
Next time, try to be this worried BEFORE putting on the trade.
Svg-- his spreads are definitely not too wide. A 10 point spread in SPX is perfectly appropriate. Spreads in the SPX can easily be as wide as 20 or 25 points and function very well. In fact, with the SPX boys in Chicago and their quirky fills (see rickf above), it's usually better to be a bit wider than 10 in order to cut through some of the bid-ask spread issues. It also gives the writer or buyer the flexibility to narrow the spread if necessary. One of the most important advantages of the SPX is the availability of plenty of 5 point spreads. This makes adjusting your position easier, and you can choose to fine tune the adjustments to suit your risk preferences closely.
In terms of not being comfortable with the risk, your point is very good. If you can't sleep with it, reduce your size until it doesn't bother you at night, or buy insurance puts or spreads, using some of your credits until you are comfortable.
By the way, please don't make blanket statements like "disregard some of the advice above", because it tars everyone without being specific about what you don't like.
In terms of not being comfortable with the risk, your point is very good. If you can't sleep with it, reduce your size until it doesn't bother you at night, or buy insurance puts or spreads, using some of your credits until you are comfortable.
By the way, please don't make blanket statements like "disregard some of the advice above", because it tars everyone without being specific about what you don't like.