Delta Neutral Trading - Condors etc.

[jackson8]

hi cutz
in my own basic understanding gamma scalping would relate to the fact that as the sp or index rises to or overtakes the sold strike the higher ratio of longs will start to pick up premium exponentially.

so selling the longs would enable covering the short and possible making some profit on top

i presume this would need to happen in the near term rather than towards ex. when time premium is at its best earlier on.

 

[cutz]

Thanks guys,

The gamma scalping mystery has been revealed.

 

[mazzatelli1000]

so selling the longs would enable covering the short and possible making some profit on top

It's a scalp, so you wouldn't necessarily sell your longs as they are required for the large move
You can neutralise gammas generated via futures/stocks/verticals etc

 

[Beenjammin]

hi beenjammin
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.

You are very correct and thank you for re-inforcing the need to build experience in a planned and conrolled manner.

The reason I'm asking about the number of butterflies/condors is more to do with diversification, rather than sizing. As an equity investor I would maintain a portfolio of 15 - 20 stocks. As an options trader I need to establish if this is a realistic spread to aim for long term or just too ambitious? I realise the answer will lie in my own preferences and abilities, but I would like to get some insight into what other traders are doing and how they manage diversification.

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

Ive done a lot of searching on the web, and most of the sites seem to give you the basics (eg this is a put ratio backspread, this is a short straddle, this is a long synthetic future) but not a lot on the blood & guts of day to day realities, especially in relation to the ASX. The vast majority is from our American friends. ASX ETO's are a lot less liquid than their US equivalent. Ive found it difficult to get reasonable offers accepted the further I move away from the money, and was wondering if others shared that experience and if they had a strategy for dealing with it.

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

Im especially interested when you say you had a defined potential loss of the cost of the shares for your covered calls. Ive been wrestling with developing a stop loss strategy that doesnt whipsaw me in and out.....did you ever try stop loss strategy for covered calls?

Thanks
B

 

[cutz]

The reason I'm asking about the number of butterflies/condors is more to do with diversification, rather than sizing. As an equity investor I would maintain a portfolio of 15 - 20 stocks. As an options trader I need to establish if this is a realistic spread to aim for long term or just too ambitious? I realise the answer will lie in my own preferences and abilities, but I would like to get some insight into what other traders are doing and how they manage diversification.

G'Day Beenjammin,

I also maintain a diversified portfolio of stocks but as far as options trading goes i only stick with the 5 series which isn't to bad to manage and it provides me with reliable income.

ASX ETO's are a lot less liquid than their US equivalent. Ive found it difficult to get reasonable offers accepted the further I move away from the money, and was wondering if others shared that experience and if they had a strategy for dealing with it.

Yeah, i have to agree with you there, I don’t think there’s much that can be done about this, in my experience with XJO out of the money options place your order at a reasonable volatility and you may find that the order will get filled eventually, its worked for me a few times, not the best way of doing business but I guess it’s the price we pay trading on the ASX.
I do dabble on the US exchanges but my positions are extremely light, I’m apprehensive about putting on anything decent because I can’t devote enough screentime overnight.

 

[Grinder]

looks like we have an interesting discussion goin on here. Will have to play alittle catch up quickly.

Your've asked some solid Qs BJ, will do my best to touch on each.

1. As far diversification goes I put my ICs on different months looking to adjust into different species when required. Try and spread as much delta around as possible in different time frames. When positions start to show signs of being threatend I make adjustments to bring them back to my comfort zone.
2. Managing position size is'nt too much of problem as i have the time, so I've got anywhere b/n 4-8 10 lot ICs on at any given time.
3. Choosing strikes is based on S/R, Std dev & greeks set up, difficult to say exactly as all depends on what Im holding at any given time & my perception of the market. Cutz mentioned about the heavier wings (backspread), again depending on how I see things they could be mild or alot heavier, leaning towards a slingshot type set up. Going wider b/n strikes can give you room for adjusting or loading up on wings without foregoing too much premium.Too many factors to list here, think you get the point.
4. No real secrets here(that i know of anyway). Like to get a complete IC on at once, or 2 seperate spreads simultaneously. If I don't get what I want, look to go in on verticals & finally legging in if suits the situation. Try whatever gets you the best fill, sometimes I have to fly fish for half the day & still no bites.

there's so much to it that it's difficult to give a full explanation of trading them, alot of it is what is built up from experience (trial & error) & knowing where & when to make moves for my own comfort zone.

hope it helps.

 

[jackson8]

Hi beenjammin

For myself purchasing some shares and then selling calls over them was my introduction to the options market. I took no insurance eg.covered call collar and took the downside risk of the sp falling. With the recent volatility of the market my approach has now turned to one of trying to create an income without having to bare the cost of carry of owning shares. My shares have now been assigned and I will be happy to have the cash back in the account.

When I first entered covered call positions I looked at what it was that I wanted to achieve with the positions
Eg. Passive income whether with or without downside protection (collar) so my loss could be defined with the added possibility of sp appreciation

But with the sp whipsawing up and down so much recently I found myself constantly trying to adjust the calls eg rolling up, rolling down and also rolling out to further months that in the end I am more than happy to accept assignment

Just now I am only trading bull put credit spreads (half of the IC) as this gives me the opportunity of making one of two choices should the position go against me. Accept the loss or take possession of the shares. The latter is a last resort as then I would probably start the covered call procedure all over again. But the overall plan is to make a passive income without ever having to own any shares.

I think that for anyone who has been trading options over the last six months or so with the volatility of the market would have been the best learning experience possible.

On a note of what not to do and this relates to another thread which has been closed

The advocating of throwing your whole trading capital at once into one position there by with the potential of wiping all your capital out in your first trade.

Great returns if the trade goes right but disastrous if it goes against you and these are newbie’s who probably have no experience in the market whatsoever who are being misled by the get rich schemes that some people may or may not be promoting

 

[mazzatelli1000]

BJ

Diversification could be approached on a Greek based basis - i.e. risk instead of underlying

Many like to be exclusively short WOTM gamma e.g. naked short options, credit spreads. Dangerous stuff!!

Having many butterflies on the one underlying will synthetically be having a very wide condor
The wider the condor the crappier the R:R becomes. Trader's choice and personally I don't like those.
You could also save commissions trading the one condor instead of purchasing multiple butterflies especially in the Oz market

Management of trades will come from personal preference. Anything more than 10 would be getting a little too crazy.

In terms of distances between the long and short strikes, the further out your long strikes are, means that there are many more embedded verticals in the position. Looking at some of them individually the R:R would probably turn you off.

 

[cutz]

Condor down into a row of butterflies and selling them off as the underlying vists the various apexes.

G'Day Mazza glad you're back on.

I can't get my head around this one, if it's not to much bother and you've got the time could you show us how this is done.

 

[Beenjammin]

looks like we have an interesting discussion goin on here. Will have to play alittle catch up quickly.

Your've asked some solid Qs BJ, will do my best to touch on each.

1. As far diversification goes I put my ICs on different months looking to adjust into different species when required. Try and spread as much delta around as possible in different time frames. When positions start to show signs of being threatend I make adjustments to bring them back to my comfort zone.
2. Managing position size is'nt too much of problem as i have the time, so I've got anywhere b/n 4-8 10 lot ICs on at any given time.
3. Choosing strikes is based on S/R, Std dev & greeks set up, difficult to say exactly as all depends on what Im holding at any given time & my perception of the market. Cutz mentioned about the heavier wings (backspread), again depending on how I see things they could be mild or alot heavier, leaning towards a slingshot type set up. Going wider b/n strikes can give you room for adjusting or loading up on wings without foregoing too much premium.Too many factors to list here, think you get the point.
4. No real secrets here(that i know of anyway). Like to get a complete IC on at once, or 2 seperate spreads simultaneously. If I don't get what I want, look to go in on verticals & finally legging in if suits the situation. Try whatever gets you the best fill, sometimes I have to fly fish for half the day & still no bites.

there's so much to it that it's difficult to give a full explanation of trading them, alot of it is what is built up from experience (trial & error) & knowing where & when to make moves for my own comfort zone.

hope it helps.

Great stuff Grinder, many thanks.

Can you please explain a little more on "adjust into different sepcies"? Are you referring to different strategies, different underlyings, something else?

Thanks

 

[Beenjammin]

Hi beenjammin

For myself purchasing some shares and then selling calls over them was my introduction to the options market. I took no insurance eg.covered call collar and took the downside risk of the sp falling. With the recent volatility of the market my approach has now turned to one of trying to create an income without having to bare the cost of carry of owning shares. My shares have now been assigned and I will be happy to have the cash back in the account.

When I first entered covered call positions I looked at what it was that I wanted to achieve with the positions
Eg. Passive income whether with or without downside protection (collar) so my loss could be defined with the added possibility of sp appreciation

Thanks Jackson,

This is most helpful, filling in a gap that Im sure many home traders face - the ability to bounce things off more experienced peers, and hear about others experiences, lessons learnt, and descisions made based on those experiences. Very valuable, its helping me validate my experiences.

 

[Beenjammin]

BJ

Diversification could be approached on a Greek based basis - i.e. risk instead of underlying

Many like to be exclusively short WOTM gamma e.g. naked short options, credit spreads. Dangerous stuff!!

Having many butterflies on the one underlying will synthetically be having a very wide condor
The wider the condor the crappier the R:R becomes. Trader's choice and personally I don't like those.
You could also save commissions trading the one condor instead of purchasing multiple butterflies especially in the Oz market

Management of trades will come from personal preference. Anything more than 10 would be getting a little too crazy.

In terms of distances between the long and short strikes, the further out your long strikes are, means that there are many more embedded verticals in the position. Looking at some of them individually the R:R would probably turn you off.

Thanks Mazza!

Thanks for the note on diversifying based on Gamma. Out of intererst, do you ever consider the industry verticals you are exposed to as well? What about the beta of the underlying, do you bother or just assume its priced into the vega?

Appreciate the input re number of trades. Just for clarity, is that 10 condors or 10 contracts?

Looks like Im off to do some more research on diagonals so I can better understand your comments on the embedded verticals - im with Cutz here, a little unsure on what you are referring to so if you've got some time to give a little more detail it would really be appreciated.

Thanks!
B

 

[mazzatelli1000]

G'Day Mazza glad you're back on.

I can't get my head around this one, if it's not to much bother and you've got the time could you show us how this is done.

Hey Cutz,
Just back for Easter

E.g. 170/175/185/190 Condor
Assume 5pt strike increments

Strikes
170      175     180    185    190
+1      -2      +1                      Butterfly 1: 170/175/180  
          +1     -2      +1              Butterfly 2: 175/180/185  
                 +1     -2      +1      Butterfly 3: 180/185/190  

+1        -1      0      -1      +1     Total: Add down = 110/115/125/130 Condor

Butterflies have maximum profit at middle strikes/apex with very little time to expiration
If the prices are attractive enough, you could sell off a butterfly and take money off the table/lock in profits
E.g. hits XYZ $175 sell off the 170/175/180 fly

XYZ could tank from here, but you have reduced the loss/or book a small profit
If it moves back up to $180, you could sell off the 175/180/185 fly

In hindsight it would be better to leave the condor untouched if it comes back into the 180 range

Just another way to manage

 

[cutz]

Thanks mazza,

I'll study it in detail when i can get some quiet time tonight.

 

[sails]

Hey Cutz,
Just back for Easter

E.g. 170/175/185/190 Condor
Assume 5pt strike increments

Strikes
170      175     180    185    190
+1      -2      +1                      Butterfly 1: 170/175/180  
          +1     -2      +1              Butterfly 2: 175/180/185  
                 +1     -2      +1      Butterfly 3: 180/185/190  

+1        -1      0      -1      +1     Total: Add down = 110/115/125/130 Condor

Butterflies have maximum profit at middle strikes/apex with very little time to expiration
If the prices are attractive enough, you could sell off a butterfly and take money off the table/lock in profits
E.g. hits XYZ $175 sell off the 170/175/180 fly

XYZ could tank from here, but you have reduced the loss/or book a small profit
If it moves back up to $180, you could sell off the 175/180/185 fly

In hindsight it would be better to leave the condor untouched if it comes back into the 180 range

Just another way to manage

Hi Mazza - good to see you back even it's only for Easter

It looks like your butterflies are overlapping rather than sharing long strikes? I have done multi strike butterflies, but they only shared long strikes - otherwise did not overlap as in your illustration. If you took your butterfly No. 2 out and just used Nos. 1 & 3. I then finished off with cheap debit spreads at each end. Technically, it could otherwise be described as a row of sold flies. However, the entire creature is vega positive.

The set up works best when the markets are volatile and IVs holding up to rising. It works specially well when the market comes screaming down, one can sell more flies at the lower end and keep taking in more credit. As expiry approaches s begin to collapse in OTMs, it is possible to buy to close any winning bear spreads above (and leaving in cheap bull spreads alone) in the event that the market would turn and run the other way into expiry (which often happens). In fact, if the market is below the lowest put debit spread and you have good reason for a reversal, one can add a put credit for a very healthy credit (or cheap bull call) to complete the lower fly and often completely remove all risk and/or lock in profit. Still leaves some cheap bull spreads above for extra profit.

EDIT - hope the above makes sense - I typed it out fairly quickly!

Cutz, the way Mazza has carded up those positions in his illustration is similar to what I learned from Cottle's book.

 

[mazzatelli1000]

Hi Mazza - good to see you back even it's only for Easter

It looks like your butterflies are overlapping rather than sharing long strikes? I have done multi strike butterflies, but they only shared long strikes - otherwise did not overlap as in your illustration. If you took your butterfly No. 2 out and just used Nos. 1 & 3. I then finished off with cheap debit spreads at each end. Technically, it could otherwise be described as a row of sold flies. However, the entire creature is vega positive.

The set up works best when the markets are volatile and IVs holding up to rising. It works specially well when the market comes screaming down, one can sell more flies at the lower end and keep taking in more credit. As expiry approaches s begin to collapse in OTMs, it is possible to buy to close any winning bear spreads above (and leaving in cheap bull spreads alone) in the event that the market would turn and run the other way into expiry (which often happens). In fact, if the market is below the lowest put debit spread and you have good reason for a reversal, one can add a put credit for a very healthy credit (or cheap bull call) to complete the lower fly and often completely remove all risk and/or lock in profit. Still leaves some cheap bull spreads above for extra profit.

EDIT - hope the above makes sense - I typed it out fairly quickly!

Cutz, the way Mazza has carded up those positions in his illustration is similar to what I learned from Cottle's book.

Btw post should read Total:Add down 175/180/185/190 Condor
Yep, this is Cottles baby. He likes to dissect the embedded flies from positions

Hey sails,the position you describe - does it look like this roughly
Using numbers above
1) Short 175/180/185 fly
2) 170/175 spread
3) 185/190 spread

 

[mazzatelli1000]

Thanks Mazza!

Thanks for the note on diversifying based on Gamma. Out of intererst, do you ever consider the industry verticals you are exposed to as well? What about the beta of the underlying, do you bother or just assume its priced into the vega?

Appreciate the input re number of trades. Just for clarity, is that 10 condors or 10 contracts?

Looks like Im off to do some more research on diagonals so I can better understand your comments on the embedded verticals - im with Cutz here, a little unsure on what you are referring to so if you've got some time to give a little more detail it would really be appreciated.

Thanks!
B

I do consider the industry, but indirectly through filters I use to select candidates.

Beta is not involved in Vega calculations. It is more a correlation measure. I think you are trying to mention volatility here?

Yes I was referring to 10 positions e.g. 10 condors.

Embedded verticals
E.g. You considered widening long strikes
so instead of say a 120/121 bear call spread
You are considering a 120/125 bear call spread
You will see there is more profit because the 125c is cheaper than 121c - BUT you're risk has now increased also

the 120/125 spread has the following embedded verticals
1) -120/+121 Bear Call spread
2) -121/+122 Bear Call Spread
3) -122/+123 Bear Call Spread
4) -123/+124 Bear Call Spread
5) -124/+125 Bear Call Spread

All the strikes in between cancel each other out and you are left with 120/125spread.

 

[sails]

Btw post should read Total:Add down 175/180/185/190 Condor
Yep, this is Cottles baby. He likes to dissect the embedded flies from positions

Hey sails,the position you describe - does it look like this roughly
Using numbers above
1) Short 175/180/185 fly
2) 170/175 spread
3) 185/190 spread

Yes, something like that - and it had to be cheap. It does need strong moves to work well. I'm not completely convinced it is a good way to go, but it was fun trying it out. Certainly way too expensive in the Oz market with fees. It's not a set and forget as one needs to be watching to make adjustments.

 

[cutz]

Thanks mazza and sails,

Position dissection and carding up described nicely.

Mazza, do you only use manual methods to check out total position or have you got software that accepts numerous/unlimited legs.

 

[mazzatelli1000]

Hi Mazza - good to see you back even it's only for Easter

It looks like your butterflies are overlapping rather than sharing long strikes? I have done multi strike butterflies, but they only shared long strikes - otherwise did not overlap as in your illustration. If you took your butterfly No. 2 out and just used Nos. 1 & 3. I then finished off with cheap debit spreads at each end. Technically, it could otherwise be described as a row of sold flies. However, the entire creature is vega positive.

The set up works best when the markets are volatile and IVs holding up to rising. It works specially well when the market comes screaming down, one can sell more flies at the lower end and keep taking in more credit. As expiry approaches s begin to collapse in OTMs, it is possible to buy to close any winning bear spreads above (and leaving in cheap bull spreads alone) in the event that the market would turn and run the other way into expiry (which often happens). In fact, if the market is below the lowest put debit spread and you have good reason for a reversal, one can add a put credit for a very healthy credit (or cheap bull call) to complete the lower fly and often completely remove all risk and/or lock in profit. Still leaves some cheap bull spreads above for extra profit.

EDIT - hope the above makes sense - I typed it out fairly quickly!

Cutz, the way Mazza has carded up those positions in his illustration is similar to what I learned from Cottle's book.

Thanks for sharing your management of that position with us!!!

I especially like the bit about selling the flies in between when the market is tanking.

I have been running a few simulations of it and I seem to be getting a negative vega, positive theta creature which is fairly delta neutral at the start. The position I suggested above seems to favour drops in IV All of which is the opposite of what you have described LOL
The only thing that seems to reconcile is that skew to the downside is favourable

I think I am looking at a different configuration to yours!!

Have you ever come across skip striking the flies to have yet another configuration of the "M" spread (hehe)

e.g. 170/175/180 put fly --- +2/-3/+1
180/185/190 call fly --- +1/-3/+2

The characteristics are like that of a condor.

Cutz
I have software that accepts numerous legs and products. But the software is catered towards other markets.

I think Hoadley has the Open Positions module that lets you enter numerous legs.