OPTIONS/IRON CONDORS/STRANGLES

March 18, 2010 in Ideas & Strategies

SOME BASIC NOTES, THOUGHTS, EXPLORATIONS, AND CONSIDERATIONS I HAVE BEEN MAKING.

1. HIGHEST COLLECTION COMES FROM UTILIZATION OF OPTIONS.

2. ALL OPTIONS CARRY TIME DECAY (THETA).

3. FOR EVERY TRADE THAT YOU BELIEVE YOU CAN MAKE MONEY BY PURCHASING AN OPTION THERE IS AN ANTITHETIC PROPORTIONAL TRADE TO SELL TO COLLECT THE SAME PROFIT.

4. IF YOU NET PURCHASE AN OPTION THETA WORKS AGAINST YOU. IF YOU SELL, THETA WORKS FOR YOU.

5. THETA INCREASES AS YOU APPROACH AN OPTIONS EXPIRATION DATE.

6. OPTION TRANSACTION ORDERS GROW DIFFICULT TO FILL IN THE LAST 2 WEEKS OF AN OPTION CONTRACTS DURATION.

7. ALWAYS EXECUTE NET SELL OF OPTIONS TO COLLECT A PREMIUM AND TRADE WITH THETA IN YOUR FAVOR.

8. STOPS – I AM CURRENTLY UNWILLING TO LOSE MORE THAN I AM TARGETED TO GAIN. WITH A ONE TO ONE RATIO. IF I AM ABLE TO READ CHARTS EFFECTIVELY I SHOULD BE RIGHT MORE OFTEN THEN I AM WRONG AND THIS SHOULD GENERATE CONSISTENT PROFITS.

9. I AM CURRENTLY EXAMINING STRANGLES AS AN ALTERNATIVE TO IRON CONDORS.

10. IRON CONDORS ARE IDEALLY DELTA NEUTRAL STRATEGIES THAT COLLECT DOUBLE PREMIUM ON MARGIN LEVERAGED ON THE HIGH END AND THE LOW END AND BASE THEIR PROFIT ON LIMITED MOVEMENT AND THETA PASSAGE.

11. STRANGLES FUNCTION MUCH THE SAME WAY.

12. I HAVE RECENTLY ENTERED INTO AN IRON CONDOR WITH A DOWNSIDE BIAS. UPSIDE DELTA STARTING AT 16 DOWNSIDE STARTING AT 6. THE POSITION HAS MOVED AGAINST ME BUT HAS NOT YET EXCEEDED ACCEPTABLE LIMITS. DELTAS CURRENTLY WITH AT 23 CALL AND 3 PUT.

13. I COLLECTED 150 ON 1000 LEVERAGED MARGIN WITH UNEVEN DELTAS RISKING HIGHER ON THE UPSIDE WHICH IS CURRENTLY IN JEAPORDY.

14. IRON CONDORS REQUIRE MARGIN EQUAL TO THE OPTION SPREAD. RUT HAS A 10 SPREAD EACH IRON CONDOR REQUIRES 1000 CAPITAL TO LEVERAGE .

15. MIKE DREW SAYS YOU WANT A SPREAD OF 5-10 DOLLARS FOR IRON CONDORS. THIS GRANTS MOVEMENT ROOM FOR PROFIT AND FOR TRACKING LOSS BEFORE IT BECOMES UNMANAGEABLE. SMALLER SPREADS DON’T LEAVE AS MUCH ROOM FOR RECOVERY MANAGEMENT.

16. MIKE DREW SAYS YOU WANT AN IMPLIED VOLATILITY IN THE 30′S. THIS RAISES OVERALL DELTAS AND ALLOWS YOUR STRIKES TO REST FURTHER OUT OF THE MONEY.

17. THE IRON CONDOR I RECENTLY PUT ON WAS PLACED WITH IMPLIED VOLATILITY IN THE LOWER 20′S

18. IRON CONDORS OR STRANGLES WILL FROM NOW ON REQUIRE A SEARCH FOR AN UNDERLYING WITH OPTIONS POSSESSING HIGH IMPLIED VOLATILITY.

19. YOU ALSO WANT VOLUME FOR LIQUIDITY AND DECENT DOLLAR VALUES BEHIND YOUR UNDERLYING AND POSITION.

20. REGARDING UNEVEN DELTAS – THERE IS VALUE IN BIASING A POSITION TO TAKE ADDITIONAL PROFIT IF YOU ARE VERY CONFIDENT IN THE MOVEMENT. HOWEVER THERE IS A PROBLEM/RISK INVOLVED WITH THIS. SHOULD THE POSITION MOVE AGAINST YOU (LIKE THE ONE I AM IN NOW) THE BIAS CAUSES LOSS TO OCCUR MUCH MORE QUICKLY BECAUSE THE PROFITABLE SIDE IS FURTHER OUT OF THE MONEY THAN THE LOSING SIDE. IT GAINS PROFIT SLOWER THAN THE LOSING SIDE LOSES. YOUR WINNING SIDE ISN’T WINNING AT THE SAME RATE YOUR LOSING SIDE IS LOSING. SO YOU ARE LOSING FASTER THAN HAD YOU SOLD EVEN DELTAS.

21. FOR STRANGLES OR IRON CONDORS IMPLIED VOLATILITY OF THE OPTIONS NEEDS TO BE HIGH (INCREASES VALUE OF OPTION SOLD) (INCREASES THETA COLLECTED), UNDERLING TREND MUST BE SIDEWAYS TO MODERATE WITH LOTS OF VOLUME AND STRONG PRICE (AT CURRENT SEE FSLR).

22. FOR NAKED CALLS AND PUTS ALL THE SAME IS STILL TRUE. IMPLIED VOLATILITY NEEDS TO BE HIGH TO INCREASE THE VALUE OF THE OPTIONS BEING SOLD AND YOU NEED A STRONG UNDERLYING. BUT THE TREND NEEDS TO MATCH THE PROFIT DIRECTION OF YOUR SELL.

23. LEGGING INTO AND OUT OF IRON CONDORS OR STRANGLES REQUIRES TWICE THE MARGIN.

24. DELTA IS NEAR TO PROB OF EXPIRING IN THE MONEY

25. DELTA IS NEAR TO THE ACCEPTABLE PREMIUM COLLECTED.

26. WHY I AM CURRENTLY EXPLORING STRANGLES?-

  • PROFIT, TRACKING, AND ADJUSTMENTS FUNCTIONS THE SAME AS IRON CONDORS. DELTA NEUTRAL STRATEGY.
  • MAKES MONEY OFF THE PASSAGE OF TIME WITH SIDEWAYS TO LIMITED MOVEMENT LIKE IRON CONDORS.
  • COLLECTS DOUBLE PREMIUM ON EQUAL MARGIN TO NAKED PUTS OR NAKED CALLS OF PROPORTIONAL STRIKES.
  • ON AN IRON CONDOR WITH A DELTA OFF 10 YOU WOULD EXPECT TO COLLECT 8-11% PREMIUM TO MARGIN LEVERAGED RATIO AND PER CONTRACT SET.
  • ENTRANCE, EXIT, AND ADJUSTMENT OF THE POSITION IS TWICE AS LIQUID (HALF THE NUMBER OF PEOPLE HAVE TO AGREE TO BUY AND SELL WHAT YOU ARE WANTING TO BUY AND SELL AT THE PRICE YOU ARE WILLING TO BUY OR SELL IT).
  • COMMISSION IS CUT IN HALF IN ENTRANCE, EXIT, OR ADJUSTMENT.
  • PREMIUM COLLECTED TO MARGIN LEVERAGED PERCENTAGE CAN BE LESS FAVORABLE WITH A STRANGLE DEPENDING ON THE UNDERLYING.
  • PREMIUM COLLECTED PER CONTRACT IS SLIGHTLY FAVORABLE, PROPORTIONAL TO THE SELL OF A SINGLE NAKED PUT OR NAKED CALL OF EQUAL DELTA. IN MY OBSERVATION STRANGLES PERFORM .5-1.5% BETTER PER CONTRACT SET THAN IRON CONDORS.
  • IN THE EVENT OF A STOP LOSS EXECUTION ALL LEGS OF A POSITION ARE EXITED AT LEAST FAVORABLE BIDS AND ASKS. FOR AN IRON CONDOR THAT MEANS 4 LEGS ARE EXITED WITH LEAST FAVORABLE PRICES. STOP LOSSES ARE A MUST. STRANGLES HAVE ONLY 2 LEGS AND THEREBY REDUCE THE BLOOD LETTING IN THE EVENT OF A STOP LOSS EXECUTION BY HALF.
  • IRON CONDORS REQUIRE $5 OR MORE SPREADS TO BE MANAGEABLE. SO LONG AS THE OPTION IMPLIED VOLATILITY IS GOOD AND THE UNDERLYING IS STRONG, STRIKE SPREAD HAS NO BEARING ON THE EFFICACY OF STRANGLES.
  • 27. DON’T REPRESENT MORE THAN 1-2% OF OPEN INTEREST ON ANY LEG OF A POSITION.

    28. YOU WANT TO NET SELL “OVERPRICED” OPTIONS. REQUIRES VOLATILITY/TREND EXAMINATION OF THE UNDERLYING AND THE OPTION.

    29. MIKE DREW RECOMMENDS 4-8 WEEKS OUT EXITING AT ABOUT THE 2 WEEK MARK DUE TO LIMITED TRANSACTION AVAILABILITY.

    30. INVESTTOOLS RECOMMENDS NET SELLING 20-40 DAYS BEFORE EXPIRATION.

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