Wow – amazing that you put up a video to answer my questions! I really appreciate it and it goes to show your commitment to help us learn ICs.
I’m still trying to absorb what you said in the video – all good stuff which I am noting down.
Some key takeaways:
1. Entry criteria – ok, good to know that we should continue to enter trades regardless of market condition and that we can’t predict the future. And that even if Hillary was elected, markets may have spiked up, etc.
2. Entering trades at High IV Rank. I now understand that with high IV Rank, volatility could also be higher (meaning it is a down market which has a large risk of swinging up and killing our trades). Best to stick to low or falling volatility environments (where volatility is likely lower?). Don’t sell ICs based on fat premium – good rule.
3. If I see a very high VIX, initiate an unbalanced IC with less calls. This is in case the market swings upwards suddenly from its low point.
4. Don’t use stop losses as liquidity is low for ICs and you may incur a lot of slippage. Thanks for clearing that up.
5. Stephen, you mentioned you didn’t quite understand my note on “Am I missing something? I read you need at least 10 lots to have SPX or SPY hedges work effectively – with e.g. 5 lots you end up hedging with long options which are too OTM. Is this true?”
I actually read this concept at the following page:
Which gave me an impression you need to have at least 10 lots to hedge effectively.
6. I read the 2% money management rule from “The New Trading For A Living” by Alexander Elder. You’re right – I think it applies more to equities, as I read that Dr. Elder does not seem to subscribe to options trading so much. I now understand that for ICs, if you suffer a couple of losing trades, the next ones will be likely to be profitable due to “strategy reversion”.
7. I should aim for 1.5x initial credit as my Maximum Allowable Loss (MAL).
Question – this is true regardless of what profit level I take out the IC, right? For you it is 50% profit level and for me I get out at 35% profit. With this 35% profit rule, I still use 1.5x initial credit as my MAL, yes?
8. Another question – do you guys take out profit at 35%? I currently sell my put spreads at 16 delta and call spread at 10 to 12 delta. Given that I get more premium on the put spread side, I try to exit at 35% profit, as opposed to IWO’s approach of 50% profit. What do you think of exiting at 35% (may or may not be good – I get out of the market faster but also end up incurring more commissions).
9. If short call delta side hits 20, I hedge with a long SPX or SPY option. So I will exit if the underlying price ticks up “25 to 30 handles” more? When you say handles you mean SPX points, yes?
Thanks again Stephen for putting this video up. I’m sure it will help this IWO community!