Options Strategy - Iron Condor

[RazzaDazzla]

With a belief Markets in the near/mid future will trade with in a broad range; could it be a good opportunity to make use of an Iron Condor strategy?

Use a risk/position sizing of ~2% of capital for each position.
Do a call credit spread above the share. Do a put credit spread below the share.
Profit from the time decay.

Do this over say 4 or more ASX stocks with liquid Options; (I'd love some suggestions on ASX stocks to consider for this).

Trade using IB to keep costs low.

The details of the strategy would of course need to take into consideration the minimum credit one would be happy to accept. What levels one should write the call/put spreads. What dates into the future the spreads should be written. Some method of calculating the probability of call/put expiring worthless.

I'd love to know some success/failure stories of iron condor strategies.

Thanks.

 

[RazzaDazzla]

I thought they might be a bit more interest in trading Iron Condors (IC).

Or any other Option strategy aimed at producing small, yet reliable income stream.

 

[wayneL]

Generally, IC's are more common on the indexes. There has already been a lot of discussion, try a search and you should get heaps.

 

[RazzaDazzla]

Thanks WayneL.

Had a bit of a search, only a few mentions of ICs here and there.

found these "rules" on http://www.sfomag.com/article.aspx?ID=1260
CONDOR TRADING RULES

To increase your chances of trading a condor to profit, follow Dan Harvey’s rules:

• Place your short strikes correctly, low deltas, about five to seven.

• Keep an eye on current market psychology.

• Study your position Greeks, charts and graphs every night.

• Have contingent orders in place to protect from unpleasant surprises (optional).

• Make timely adjustments when necessary (not optional!).

• Make certain that you are 2.5 to three standard deviations out of the money to avoid delta and gamma risk when you are in the trade during the last week of expiration.

I think I have a LOT to learn about ICs.
I think I'm going to becoming intimate with the greeks!

 

[Grinder]

found these "rules" on http://www.sfomag.com/article.aspx?ID=1260
CONDOR TRADING RULES

To increase your chances of trading a condor to profit, follow Dan Harvey’s rules:

• Place your short strikes correctly, low deltas, about five to seven.

• Keep an eye on current market psychology.

• Study your position Greeks, charts and graphs every night.

• Have contingent orders in place to protect from unpleasant surprises (optional).

• Make timely adjustments when necessary (not optional!).

• Make certain that you are 2.5 to three standard deviations out of the money to avoid delta and gamma risk when you are in the trade during the last week of expiration.

I think I have a LOT to learn about ICs.
I think I'm going to becoming intimate with the greeks!

Good idea! You'll be glad you did in the long run. ICs have been discussed loads here, just pose some specific questions and I'm sure a few us will chime in with feedback.

 

[CascadeX]

With condors, if there are huge swings in volatility, I like to pick off the legs one by one.

 

[RazzaDazzla]

Thanks Grinder...

Some Questions.
Is it a viable strategy to do ICs over ASX stocks? Or are you better off sticking to ASX Indices and US options?

What sort of 'Numbers' make for a good strategy? Example...
Minimum credits you want to receive on your Call and put spreads?
How far into the future? (1 month, 2 months?)
How many strike prices out from the current price?
What is the minimum Delta you would write? (Correct me if I am wrong, but I believe Delta can be used to determine the probability of an option expiring worthless)

 

[Grinder]

RD,

Is it a viable strategy to do ICs over ASX stocks? Or are you better off sticking to ASX Indices and US options?
Better off sticking with US if you can, if not only indicies in Oz, forget stocks.

What sort of 'Numbers' make for a good strategy? Example...
Minimum credits you want to receive on your Call and put spreads?
Hard to say, depends on vol & how far you go out. I use a yard stick of $1 per month, so if I'm 3 months out I'll aim for $3 & so on. It's deffinetly not a rule but I do like to be rewarded for the risk I take.
How far into the future? (1 month, 2 months?)
If I think IV is high I'll go up to 3 months out, if not 1 & half to 2 months out
How many strike prices out from the current price?
This is'nt a factor
What is the minimum Delta you would write? (Correct me if I am wrong, but I believe Delta can be used to determine the probability of an option expiring worthless)
Again no hard & fast rules, but like 10-15 delta. If I have an unbalanced portfolio, have no qualms in going CTM to square things up

These are all just a rough guide as I don't work of any rigid plans or stick to numbers, prefer to analyze my portfolio as a whole using the greeks. You'll find alot of traders may have simmilar guidelines when setting up positions, it's how the positions are dealt with that differs.

 

[wayneL]

RD

It's one of those "how long is a piece if string" scenarios. Everybody likes to do something a bit different, depending on time available, psychology etc.

One strategy, but a host of ways to approach it.

Some like to write as wide as possible and avoid adjusting like the bubonic plague. Others will write very close in... or even right on top of the strike (iron butterfly) and adjust and morph as time goes by.

You have to figure out what suits you.

 

[RazzaDazzla]

RD,

Is it a viable strategy to do ICs over ASX stocks? Or are you better off sticking to ASX Indices and US options?
Better off sticking with US if you can, if not only indicies in Oz, forget stocks.

Thanks Grinder and WayneL.

I might start paper trading IC over the ASX indices and see how it goes.

Is the reason for avoiding ASX stocks because of the lack of liquidity?

Is this because ASX options are 1000 share contracts while US are only 100? Wouldn't it be in ASX interest to decrease their contract size to 100 to make it more liquid and more attractive to investors/traders?

I'm a bit unsure about trading IC over US stocks...
a)I've never traded anyhting US before
b)Currency exposure, this worries me a little
c)Tax; I suppose my accountat will get his head around it when I give him a summary of US options trades and a P/L statement each year.

Wayne; with regard to the strategy. I guess if commisions are low, you can change your strategy as the position develops. Is there any suggested reading on this? It sounds like it can get complicated very quickly when you go changing positions, adding new ones, closing others. You'd have to be ontop of your game and make sure you weren't holding naked puts or the synthetic equivalent

I can think of nothing worse than being happy a stock has gone one way; but then realising your option strategy was flawed and you longed instead of shorted a contract

 

[wayneL]

Wayne; with regard to the strategy. I guess if commisions are low, you can change your strategy as the position develops. Is there any suggested reading on this? It sounds like it can get complicated very quickly when you go changing positions, adding new ones, closing others. You'd have to be ontop of your game and make sure you weren't holding naked puts or the synthetic equivalent

There is no book that says if x happens, do y (as far as I know) that anywhere approaches reality.

But the idea is to get your thinking in the right place. I reckon Cottle is best for this. You can get his book The Hidden Reality at his site ==> www.riskdoctor.com or you might be able to get it on Amazon.

But you need to be au fait with options theory otherwise your head will explode.

You should at least read McMillan and probably Natenberg first.

If your brain is still intact, move on to Cottle.

 

[Grinder]

RD,

BTW: Don't get too hung up on creating IC rules, like wayne said "you have to figure out what suits you". Options are multifaceted for lack of a better word, it will take some time and effort to fully comprehend their complexity. Well worth it though imo.

 

[cutz]

Hi RD,

Can't really comment on ICs as i don't really put them on anymore, just not enough juice in them, prefer iron flys, harder to manage but more rewarding.

As far as XJO's go, good contract, heaps of action and the market makers put on very tight quotes for front month verticals.

Back months are OK, much better than stock options with the added bonus of no prickly surprises.

 

[hooikk]

RD,

Hard to say, depends on vol & how far you go out. I use a yard stick of $1 per month, so if I'm 3 months out I'll aim for $3 & so on. It's deffinetly not a rule but I do like to be rewarded for the risk I take.

Grinder,

Is this per call/put spread? i.e. total $2 for an Iron Condor that is 1 month to expiry. How many points do you have in between your spreads? (based on US market btw)

I'm just starting out myself, and have been trying to get a feel for much I can/should ask for when sellling the call/put spreads. I seem to be getting an average of $0.3 for a $2.50 spread (~3 weeks remaining) - and about $2 when I did a 10 point Iron Condor on RUT recently (Jan expiry)


NK

 

[CascadeX]

Quick question.

When we are spread trading, is it better to have a large spread, initiate a position on that spread and then watch the spread fall in value to zero?

Or the other way around? I would presume that with credit spreads this should be the case, because you are wanting the options to expire worthless and keep the premium.

 

[RazzaDazzla]

There is no book that says if x happens, do y (as far as I know) that anywhere approaches reality.

But the idea is to get your thinking in the right place. I reckon Cottle is best for this. You can get his book The Hidden Reality at his site ==> www.riskdoctor.com or you might be able to get it on Amazon.

But you need to be au fait with options theory otherwise your head will explode.

You should at least read McMillan and probably Natenberg first.

If your brain is still intact, move on to Cottle.

thanks Wayne;

these books look a bit more 'serious' than any junk I read years ago by Louise Bedford! "...just write calls, you'll make money!..."

I found a copy of McMillan - On Options (second edition, 2004). Worth the read? Or the other McMillan book more worthwhile? Must be something in these 674 pages

 

[mazzatelli]

getting an average of $0.3 for a $2.50 spread (~3 weeks remaining) - and about $2 when I did a 10 point Iron Condor on RUT recently (Jan expiry)

That's a very poor r/r, not good for the long run.

 

[Grinder]

Grinder,

Is this per call/put spread? i.e. total $2 for an Iron Condor that is 1 month to expiry. How many points do you have in between your spreads? (based on US market btw)

I'm just starting out myself, and have been trying to get a feel for much I can/should ask for when sellling the call/put spreads. I seem to be getting an average of $0.3 for a $2.50 spread (~3 weeks remaining) - and about $2 when I did a 10 point Iron Condor on RUT recently (Jan expiry)

NK

All depends on your own personal comfort level and how active you want to get, there are so many ways to trade them. I don't slap on high prob ICs for pennies nor do I open front month. May have mentioned it before, no set rules as to what I ask for, just keep evaulating my portfolio of positions via the greeks to determine what gets put on and what gets taken off.