January 28, 2016 at 11:57 am #4651
It sure doesn’t “feel” right to enter into a new income trade here, does it?
After all, the market basically had a slow motion crash lower, where the S&P moved over 200 points in the course of a month.
However, from my experience… after large trending volatility movements that is often the best time to enter into new iron condors.
My opinion is that the biggest risk is to the upside on an iron condor trade. This is because of the option skew as it allows us to select further out of the money strikes compared to the call side.
Because of this, we will be going half size on the call side.
Here is the trade:
Sell to Open March 1690/1680 Bull Put Spread @1.10 or higher
Sell to open HALF SIZE March 2000/2010 Call Spread @1.75 or higher
Initial credit will be 3.95, for every 2 put spreads and 1 call spread. Anything down to 3.70 is a good price.
The alternative trade would be to simply put on the 2000/2005 as it would give you the equivalent trade.
Here is the game plan:
If the SPX breaks under 1780, then buy some put spreads to cut delta. Specifically, it will be the SPX April 40 delta / 20 delta put spread. I’m not sure what the strikes will be but that is the structure. If the market sells off, then close the hedge for a profit and roll the put spread down, then sell another round of call spreads.
If the SPX moves above 1960, then roll the call spread higher by 30 handles and double size. If the market continues to squeeze back above 2000, then buy some calls as a hedge to cut delta. Then if the market squeezes any more, close the call hedge and use those profits to roll the call spread higher, and then roll the put spread higher as well.
Attachments:You must be logged in to view attached files.January 30, 2016 at 12:49 am #4671Donna zhao ZhaoParticipant
I entered the above Iron Condor trade today after messaging you by splitting the Iron Condor up with the call spread entry first, thinking I would get a bigger premium with my call side when the stock is moving up and enter the Put Spread later when the market drops/crashes for a better credit in a week or so. However now I felt out of control because I didn’t actually understand the situation I am in. Please forgive me for my stupid behavior which will cause you extra time and attention.
What had happened today was that I was carried away by the market surge and bought more contracts of calls than I should have, by chasing the market and adding more shares when the price moved up, until I felt I couldn’t afford to chase anymore. As a result I am negative $1700 by now, with the first set of calls with only 2.10 credit. (without buying put spread). My original thought was that by buying more high premium calls I could sell my premium calls on the way down (when market goes down in a week or two). Now I am at loss for not really understanding the concept and am really worried that if I had screwed the trade up. Can you please help me get out this sticky situation?
Currently I own 25 shares of SPX (cost $2.59 per share, $25000 margin, with a market value -$1700.) Please let me know what I should do next…
“If the SPX moves above 1960: then roll the call spread higher by 30 handles and double size. If the market continues to squeeze back above 2000, then buy some calls as a hedge to cut delta. Then if the market squeezes any more, close the call hedge and use those profits to roll the call spread higher, and then roll the put spread higher as well.” I have to admit I didn’t study this note very well until when I felt I was out of control…What a pain I am!!
1: If SPX moves above 1960 on Monday, which can very well happen, what should I do? Should I buy more calls when I have already bought too many shares? Also what is 30 handles?)
2: Should I add my put spread when market goes down on Monday? Or When and in what condition should I add on my put spread? The put spread now has little premium if I am to put on now.
3: What is the longest time frame I can wait to add the Put side of the Iron Condor? (Maybe I had the wrong assumption that the market is going to crash in a week or so like last few weeks, and its better I put the put spread on then for more premium. Also I believed since we have a long expiration until April, therefore I have time to wait to enter the Put Spread. (I understand time eats up the premium)
4: You mentioned the following “also if you do separate it you can use a “blast all” order basically you want to be really, really quick”. May I know what you meant by this? Is it too late to do it on Monday?
5: I have to admit I understand very little Iron Condor strategy and the videos are too technical for me to understand. To me, the call spread (Bear Call Spread) will bring us more profit when the market goes down and the Put spread will bring more profit when the market goes up, if this is true, shouldn’t we buy more call shares of call spread when the market is more likely to head down down instead of up by expiration? (so we collect more premium from the call spread (when the market drops ) then put spread?
Again I am terribly sorry I don’t understand the technical terms about Theta and Gema, etc. and your videos. I thought I could do the learning through trading..But this tells me that I do have to spend more time learning before I become aggressive in trading. Sorry for the trouble I caused you…and sorry for the long email..
Looking forward to your response!February 24, 2016 at 11:05 am #4742
Thanks for your feedback Donna, here are my responses.
My first advice is to never, ever end the day with only one side of the iron condor. If you want to split the orders up that’s fine but iron condors are meant to be more of a non-directional bet. You ended up in a position where you thought if you started with the call side you could profit more because you thought the market would go lower… and then the market ripped up to 1950. The market eventually reverted but if it hadn’t, it could have been worse.
Also I’m a little confused by your “lingo.” With iron condors we are *selling* spreads, so when you say you bought more contracts of calls, I’m guessing you mean that you sold more call spreads than you had wished.
To answer your questions:
1. This is in hindsight of course, but your best action plan would be to get some short put spreads on the table to make it look like an actual iron condor. Also, a “handle” refers to a point in the SPX. 1 handle = 1 point.
2. You don’t want to second guess yourself. Iron condors are non-directional trades so you want to have both sides on at the same time.
3. Point here still stands… if you’re going to leg into an iron condor it should all be done on the same day. You were expecting the market to crash so you chose instead to put on an aggressively bearish bet.
4. A “blast all” order is a kind of order ticket you can use on the option exchanges.
5. With income trades we don’t really try to guess where the market is headed. Our goal here is to expect the profits to come through the time decay of the short options. Because of some voodoo in the options market, the call spread side will tend to be closer to price and carry more premium, which is why I unbalance the call side.
Hope this helps!February 24, 2016 at 11:07 am #4743
This position has captured 60% of max premium with a month to go. It’s time to take the position off.
Buy to close SPX March 1690/1680 put spread @0.40
Buy to close SPX March 2000/2010 call spread @0.80
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