Delta Neutral Trading - Condors etc.

[Grinder]

jackson,

There's so many possible adjustments you could make, none more superior than others, all depends on your view at any given time & your comfort level. Manage your position closely & continue to ask yourself whether you still want to be in the trade as the underlying moves towards your strike. I tend to manage IC as a complete portfolio, looking to stay as delta neutral as possible across many strikes & different months. Run possible scenarios of what the underlying could do to your IC & model how different adjustments can change your R/R payoff then decide how comfortable you are with a new strategy.

Remmember, going wotm might have a higher probability of success but how will it effect your IC when the 'black swan' comes along? Payoff diagrams come in handy for these type of scenarios.

 

[jackson8]

jackson,

There's so many possible adjustments you could make, none more superior than others, all depends on your view at any given time & your comfort level. Manage your position closely & continue to ask yourself whether you still want to be in the trade as the underlying moves towards your strike. I tend to manage IC as a complete portfolio, looking to stay as delta neutral as possible across many strikes & different months. Run possible scenarios of what the underlying could do to your IC & model how different adjustments can change your R/R payoff then decide how comfortable you are with a new strategy.

Remmember, going wotm might have a higher probability of success but how will it effect your IC when the 'black swan' comes along? Payoff diagrams come in handy for these type of scenarios.

okay thanks for that grinder
i realise that there is no magic pill and experience is the best teacher sometimes , so will take all onboard and do as much research as possible
gary

 

[mazzatelli1000]

While your waiting for one of Waynes prolific posts, something to munch on.

Think about how you are going to manage your IC in the environment we are in, they tend to work best when there is little to no movement. Seeing that is not the case at the moment, you might want to think about tighter wings or heavier wings & be ready for adjustments.

Howdy folks
Quick in and out

I also like Cottle's approach of breaking the Condor down into a row of butterflies and selling them off as the underlying vists the various apexes.

Some food for thought
Flying again tomozz
Out!!!! and Good Luck!!!!!

 

[wakk]

Thanks for sharing wayne

look forward to continuation of this

 

[mitchflem]

Hi,

This is my first posting on the forum.

I have been writing naked Calls over the XJO for almost a year now with great success. They are far OTM and to date I have stuck with the direction of the market ...down...thus have not written Puts. The Put premiums are much more tempting but I have tried to be very conservative and not let GREED take over. (Although when I was using condors the income was insufficient!)

My research has shown that the probability of being hit at my strike is low (historically) but I am becoming more concerned that the market may jump up sharply in any given month once sentiment turns.

Does anyone know of a "black swan" that occurred and the market rose dramatically? ie. 1987 type shock

 

[wayneL]

Hi,

This is my first posting on the forum.

I have been writing naked Calls over the XJO for almost a year now with great success. They are far OTM and to date I have stuck with the direction of the market ...down...thus have not written Puts. The Put premiums are much more tempting but I have tried to be very conservative and not let GREED take over. (Although when I was using condors the income was insufficient!)

My research has shown that the probability of being hit at my strike is low (historically) but I am becoming more concerned that the market may jump up sharply in any given month once sentiment turns.

Does anyone know of a "black swan" that occurred and the market rose dramatically? ie. 1987 type shock

That's interesting and a sharp move, but it's not delta neutral.

We need another thread for this type of trading.

****

I've just been in the middle of moving house and whatnot. Assoon as I get that, and some other stuff out of the way, we can crack on with this thread... and perhaps another one as per mitchflems point.

 

[cutz]

Hi All,

What are peoples thoughts on trading iron condors, is it a good idea to re-enter a short position after its been closed out ? (i.e. closing the short put on market surge then re-entering on a reversal ) I’ve been trawling the net and it seems that this strategy is a no-no.

Any comments on this situation?

 

[jackson8]

Hi All,

What are peoples thoughts on trading iron condors, is it a good idea to re-enter a short position after its been closed out ? (i.e. closing the short put on market surge then re-entering on a reversal ) I’ve been trawling the net and it seems that this strategy is a no-no.

Any comments on this situation?

as a novice i have done what you have mentioned a number of times . in particular sto twice last month and also occasionally with lgl as well.

i think it boils down to your analysis at the time and whether you still hold the long as protection which would save on having to repurchase that extra insurance leg again

maybe also time left to expiration as premium may not be worth the risk if the is period is too short till exp

gary

added to this i sometimes question if i should just hold the short till exp as the doubleling up of fees to close then reopen another position in the same month can chew up the profits. i have procrastinated over this a number of times

 

[Grinder]

Hi All,

What are peoples thoughts on trading iron condors, is it a good idea to re-enter a short position after its been closed out ? (i.e. closing the short put on market surge then re-entering on a reversal ) I’ve been trawling the net and it seems that this strategy is a no-no.

Any comments on this situation?

If you mean closing just the short put & holding the long, so then you can open a short again upon reversal I would say I don't like it.

The position is left open at the mercy of the market. eg: might not get the reversal & end up eroding your long thus reducing your original profit or taking a loss overall.

Market might reverse but not enough or quick enough, to snap up sufficient extra premium for the risk involved. Would leave a descent size gap in between strikes & still erode the long with a larger risk.

Overall, too many uncertainties for my liking. Would prefer to just close out the winning bull put spread & not re-enter a new spread but instead take profits off the table then work on defending the other side if need be.

Taking risk off & locking in profits whenever I can.

as a novice i have done what you have mentioned a number of times . in particular sto twice last month and also occasionally with lgl as well.

i think it boils down to your analysis at the time and whether you still hold the long as protection which would save on having to repurchase that extra insurance leg again

maybe also time left to expiration as premium may not be worth the risk if the is period is too short till exp

gary

added to this i sometimes question if i should just hold the short till exp as the doubleling up of fees to close then reopen another position in the same month can chew up the profits. i have procrastinated over this a number of times

Word of advice Gary, holding till expiration is a recipe for disaster in my opinion. Sure the fees eat into the profits, but if you get hit by the menacing black swan you won't be thinking about that anymore or much of anything else. Risk management is the key, the profits will come if you manage the risk.

 

[cutz]

Thanks for the inputs guys,

I see your point Grinder, I actually re-entered the short put leg but at a higher strike to make it worthwhile, but of course the original long wings are too far away so I had to buy wings into the next month, so I guess end result, diagonal spread.

As you suggested I should have also closed out the original long puts as i think they were still worth something last week.

 

[Grinder]

like the diagonals... they're harder to manage but can be worthwhile, and now you have some lottery tics (longs) up your sleeve.

 

[Beenjammin]

Good on you Wanel for taking the time to deliver such a well thought out and expressed series of posts. Having read a lot of texts on the subject your explanations are probably the clearest I have seen. I think you should reconsider your John Waters signature tag!

OK, four questions here, each of them sure to elicit a range of viewpoints so I hope this doesnt obscure the intent of this tread by sidetracking it...if it does Im happy for a moderator to move it to a separate thread. Here goes:

1. Im curious how people employing a butterflies/condors strategy try to displerse risk - both horizontally (ie writing multiple butterflies on the same underlying with the same expiration date as the price moves through strike points) and vertically (across multiple underlying equities/indicies).
   
2. Considering the above, how many butterflies/condors do people feel comfortable managing at at any given time? Obviously this depends on if you are trading FT or PT - what is the general view on how any positions for a single human being are manageable? (mind you I dont think PT options trading would be easy if you have a FT job! More power to you if you are game enough to do this!)
   
3. Im also interested in how others set the distance between the long and short positions on each wing. Modelling these two strategies in excel shows the further the long position is form the short, the greater the max profit, however the breakeven is always a bit further still behind the long position and the max loss if it runs through the breakeven can get big.
   
4. Finally, any tips for legging in to a Butterfly or Condor? Im always worried about getting stuck without finding a reasonable price (or any sellers at all) for one (or both) of the OTM long positions. Im interested if others have similar experience or if anyone has a strategy they are happy with for managing this.

Thanks in advance!

 

[cutz]

Hi Beenjammin,

I’ll have a go at answering a couple of your questions, I only feel comfortable managing 2 condors at once, I now manage my risk by being heavier on the wings (thanks grinder), I prefer to leg in, i.e. last week I set up the call leg of a May ex. position, and a partial put leg which will be finished of when the correction back to 3400 occurs.

Word of warning, I’m still on L plates.

P.S. i manage 2 condors because i use commsec to manage one which keeps my iress access, otherwise i would only manage one larger condor.

 

[jackson8]

hi beenjammin

As a broad answer it is probably important to dissect and fully understand each strategy completely to help try and understand its intrinsics

Your position sizing could be based on your experience and how comfortable you are with the risk you have on the table at any one time; also knowing how to adjust positions when they go against you is a major education to have to feel more confident with position size.

I don’t think there are any definitive answers to each of your questions as there are so many variables involved

As for legging in I generally use support and resistance levels for my trades and always purchase the protective call or put at the same time as selling the short.

There are a multitude of good educational options trading sites with information on every strategy anyone could possibly devise.

When I first started out I sold covered calls over stock that I owned. I had a defined potential loss of cost of shares only which was $12000...have since moved on to naked puts but always only selling an amount of contracts that I could or would be willing to purchase the shares if I needed to.

Now that I have a few dollars in the kitty am selling spreads only putting a certain $ risk in at any one month. If my profit increases then will start looking at other more complicated strategies but always containing my $ risk to what is comfortable
It only takes one trade to go badly against you to wipe out all your previous profits and this is where knowing how to make adjustments and money managment comes into play

My thoughts would be to trade one or two low risk strategies with a defined loss and learn along the way as your confidence and experience progress then take on extra positions always defining and knowing what your max loss could be

i figure that the market will always be there so have plenty of time to learn yet

 

[Beenjammin]

I now manage my risk by being heavier on the wings (thanks grinder), .

Thanks Cutz,

When you say "heavier on the wings" do you mean writing them further away from the strike?

I prefer to leg in, i.e. last week I set up the call leg of a May ex. position, and a partial put leg which will be finished of when the correction back to 3400 occurs..

Or 2700 as probably unlikely as the case may be. Race you to the bottom.

So hypothetically speaking you'd buy the low put and high call, and write the mid call but wait for the price to drop before writing the mid put because you are predicting some downward movement?

Thanks again.

 

[cutz]

G'Day Beenjammin,

In my case heavier on the wings i was referring to more contracts on the wings, it allows me to roll up in the same month if I have to.

Regarding the put leg I was referring to, I purchased 3/4 the amount of puts I normally have on but sold 1/4. I’m still feeling pretty bearish (in the short term) so I’ll complete the spread later next week if the correction happens.

What I’m doing seems unconventional, I’m open to criticism or hints.

 

[mazzatelli1000]

G'Day Beenjammin,

In my case heavier on the wings i was referring to more contracts on the wings, it allows me to roll up in the same month if I have to.

Regarding the put leg I was referring to, I purchased 3/4 the amount of puts I normally have on but sold 1/4. I’m still feeling pretty bearish (in the short term) so I’ll complete the spread later next week if the correction happens.

What I’m doing seems unconventional, I’m open to criticism or hints.

suggestion if I may
You pretty much have a backspread on, so learn to gamma scalp if it hits your valley of death.

 

[jackson8]

G'Day Beenjammin,

In my case heavier on the wings i was referring to more contracts on the wings, it allows me to roll up in the same month if I have to.

Regarding the put leg I was referring to, I purchased 3/4 the amount of puts I normally have on but sold 1/4. I’m still feeling pretty bearish (in the short term) so I’ll complete the spread later next week if the correction happens.

What I’m doing seems unconventional, I’m open to criticism or hints.

hi cutz
hope you dont mind me joining in the conversation
what your describing above sounds similiar to a ratio backspread of sorts
would this be right
so you are recieving less premium but in the case of a large move you will have more downside protection and possibly some extra profit if sp drops below the longs strike ( in the case of puts )
gary

edit :looks like m got in first

 

[cutz]

G'Day Gary,

I purchase more longs in case the underlying moves to my danger zone, this allows me to close out the shorts and move them closer to the wings with a higher number of contracts, so the backspread turns into a conventional credit spread. BTW, i only do this on XJO.

Mazza, I assume the valley of death is the trough of a backspread (looking at a risk graph), what would be an example of gamma scalping?

 

[mazzatelli1000]

G'Day Gary,

I purchase more longs in case the underlying moves to my danger zone, this allows me to close out the shorts and move them closer to the wings with a higher number of contracts, so the backspread turns into a conventional credit spread. BTW, i only do this on XJO.

Mazza, I assume the valley of death is the trough of a backspread (looking at a risk graph), what would be an example of gamma scalping?

Basically you are taking profits on deltas manufactured on your position as the underlying moves, but it mainly helps to offset the negative theta.

Ill post a video by Ron Ianeri, which I think explains it pretty well, saves me typing outhttp://www.options-university.com/Videos/GammaTrading/