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Protection: Buy puts or sell calls

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I received a very basic question from a reader and decided this is an excellent topic for the options rookie. It may eliminate confusion concerning the difference between puts and calls.


Hi Mark

I own 1,000 shares of AAPL. Do I use puts or calls to protect my position?




Hello Ruth,

The answer is ‘either.’

The protection provided by selling calls is vastly different from that of buying puts. Let’s see if I can help you understand the difference so that you can make an intelligent choice.

My preference is to sell calls – one call for each 100 shares of stock owned. However, it’s a personal preference and not necessarily the better choice for you. Let’s consider your alternatives

Buying puts

If you want good protection – if you want to be certain you don’t get clobbered if the stock takes a big tumble – if you are afraid that such a tumble is possible, then you would probably want to buy puts. I say ‘probably’ because buying puts is often an expensive proposition. In today’s less volatile environment, there’s a good chance that you would be perfectly happy to pay the necessary cost.

You may buy a variety of put options, and as with any insurance, the greater your protection, the higher the cost of that insurance.

As I write, AAPL closed for the day near $350 per share. If you want to buy Apr 340 puts (expiring in 65 days), the cost is approximately $1,000 per put. You need 10 puts to protect 1,000 shares. That’s $10,000.

Paying that sum to protect an investment worth $350,000 seems to be a reasonable cost. If AAPL is lower than $340 per share when the options expire in April, you may exercise your right to sell those shares at $340. That’s true no matter how low AAPL may be trading. You have complete protection (from the moment you buy he puts until they expire) for the sum of $10,000.

You don’t have to sell the shares. For example, if AAPL is trading near $300, you may prefer to sell the puts and collect $4,000 for each (they are 40 points in the money and worth 100 x $40 each). You pocket a profit of $30,000, which cushions most of the loss ($50,000) from owning AAPL shares.

The other good news is that you own the shares as well as the puts. So, if the stock continues its very strong performance, you can participate in every penny of any stock price increase. Do keep in mind that if the stock is not at least 10 points higher in April than it is today, that you will not have made any money on owning the shares. But that’s not so bad. After all, you did purchase insurance and there’s a ton of value in feeling safe.

Bottom line: For $10 per share, you get good protection that lasts for 65 days.

Selling covered calls

If you are willing to settle for less protection (and that means getting clobbered if the stock moves under $300), and if you prefer a higher probability of earning a profit, albeit a limited profit, then selling calls is the right approach.

For example, you can sell the AAPL Apr 365 calls and collect $920 for each option. Collecting $9,250 (for selling 10 calls) is better than paying $10,000, but your protection is much less.

When April expiration arrives, the only ‘protection’ you have is the $9.25 per share that you received as premium when selling the calls. Thus if the stock declines by more than that amount, you would not make any money between now and that day in April.

However, this is important: If AAPL is $340 and you bought the put, you not only lose $10 per share from a decline in the stock price, but the put becomes worthless and you lose the $10 per share paid for that put. Total loss: $20,000. If you sell the call option, you lose the same $10 per share from the change in the stock price, but you keep the $9.25 collected when selling the call. Result: You lose $75.

It’s very attractive to choose the play in which your loss is only $75 instead of $20,000.

But, that misses the bigger picture. If something unlikely occurs and AAPL falls to $250, as a put buyer, your loss is still that $20,000. However, if you were the call seller, you would lose $90,000 when the stock falls by 90 points, and that $9,250 you collected will not feel like much of a consolation.

Similarly, if AAPL does what AAPL does and rises to $420 per share when April expiration arrives, the put buyer earns the full $70,000 as the stock move 70 points higher. Subtracting the cost of the puts, that’s an increase in value of $60,000. On the other hand, the call seller is required to sell shares at the strike price, or $365 per share. That gives her a profit of $15,000. Add to that the call premium and she earns a respectable $24,250. Respectable, but far less than the put buyer earned.

Thus, it comes down to this: Both buying puts and selling calls give you protection.

Buying puts works best when the stock makes a big move. It shields you from the big loss and allows you to prosper on a big gain.

Selling calls works far better when the stock does not take a big move. The truth is that the smaller move is far more likely than the bigger move. that makes the call sale look more attractive.

Ruth, it’s not a simple choice. However, if you want big protection, there is no substitute for owning puts. It you just want a small amount of protection and are not afraid of the downside, then selling calls works. From the tone of your question, I believe that put buying will work better for you. Not cheap, but it is excellent insurance against a disaster.

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Portfolio Insurance


You mentioned couple of times that you usually hold insurance against
black swan events. I would be interested to know what kind of insurance you carry – straight puts, spreads, expiration time etc. What
percentage of your portfolio per month do you spend on this insurance?

understand that there is no one right answer for this question, but I
would like you to share your view since I find myself agreeing with more
than 90% of your general trading philosophy.

Thanks a lot for your great blog!



Thanks Kim

I don't always hold insurance, and don't have any right now.  The truth is that it is very expensive when IV is elevated.  I manage risk by keeping position sizes a bit smaller and covering OTM spreads when they get to 15 or 20 cents.  This latter move may not seem to be much in the way of risk management, but:

  • When iron condor trading works well, it's like an income miracle.  There is no point in taking extra risk 
  • When this method doesn't work well and the markets are too violent, there is no point in taking extra risk
  • Thus, covering the far OTM, cheap call and put spreads makes sense to me

I own insurance more to protect my position than to profit in a black swan event.

My preferred insurance for protecting an iron condor portfolio involves owning extra options.  I prefer to own protection in the same month as the position being protected, but buying options that expire earlier do a much more effective job of providing protection.  They cost less and that means you can own strikes that are closer to being ATM.  The negative part of that play is that insurance expires before your position. [This idea is covered in detail in The Rookie's Guide to Options]

I have no problem with that because I like to exit my income spreads one month prior to expiration.  However, if you are like most traders and hold longer, it's not pleasant to lose your insurance, ad it will have to be replaced.

a) I want them to be less far OTM than the short options in my main position.  If short the 800/810 call spread, I prefer to own a small quantity of 780 or 790 calls.  Obviously these can get to be very expensive, so a big part of owning them is deciding when to buy.  Buy early when reasonably far OTM and they are cheaper.  Wait until they are needed, and they are more costly.  Of course, by waiting, you may never need to buy them, saving the cost. 

b) Black swan protection is good – if you are willing to spend the money.  I usually am not.  OTM puts are just very expensive, even when far OTM.  However, if you cannot afford the potential loss, it's worth every penny to spend a little money on real insurance.  Almost any puts are good for that – but be realistic when deciding how far OTM to go when buying puts.

c) When IV is low and options are cheap, I was willing to spend 20% of the premium collected on insurance.  Now, when IV is high, one gets very little protection for that cash.  I just don't buy protection when IV is as high as it is.

d) My preferred strategy for owning those extra long options is the kite spread.  That's a name I coined for a trade that looks like this (you can do the same thing on the call side):

Buy One Put

Sell three (or four) put spreads.
Strike of short is three (four) strikes below put bought

Pay a cash debit (these are not cheap)


Buy 2 INDX 700 puts
Sell 6 INDX (same month) 670/680 P spreads


Sell 8 INDX 660/670 P spreads

I like these positions because loss is limited to the debit paid for the position.  If you buy a put kite, the worst possible result is seeing all options expire worthless.  If the market declines, this position has value. 

The worst case occurs when expiration arrives INDX settles at the wing (the highest strike put in the kite).  At that point, the loss is limited to the cash paid for the position. 

The best case scenario is a gigantic move (down in this case).  Your credit spreads or iron condors may go to maximum value, but the naked long extras can earn far more than enough to compensate for all those losses.

e) Other trade ideas work, but with limited protection.  Buying call spreads and/or put spreads (less far OTM than your position being protected) costs far less and affords far less protection than buying naked options or kites.  But they do offer a decent chance to earn profits, depending on settlement price.

Kim, once you decide how much you can afford to spend, there are reasonable alternatives. 

An apology.  What a bomb.  I received zero entries for the crossword puzzle contest
I was trying to do something different, but will stick with what I do
best, and that's providing options education. If anyone cares, the
puzzle answer is below.



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Learning to use Insurance to Protect Iron Condors


for Trade King

Rolling a
Position: From a Different Perspective

Register (free)

The following (condensed version) question provides an opportunity to discuss the idea of owning extra options as insurance
against a catastrophe – when trading iron condors.

Hi Mark,

I made the following paper trade after studying Chapter 20 of your book (The Rookie's Guide to Options):

Sold 10 RUT Aug 720/730 C spreads and  BOT 1 RUT Jul 700 call as insurance.  Collected $1,391 for the spread and paid $611 for insurance;  net credit: $780.

Had I not been paper trading and able to pick up some of the bid-ask spread, I would likely have received a $1,430 credit. 

I am puzzled by the current negative theta (-2) for the position.  If RUT remains unchanged, theta would be zero on June 22 and increase to 37 by July 13, when my long call expires.

Insurance provides protection on the upside, and enables a profit on the downside, but eliminates profits from theta for 11 days.  Then theta profits are low until near the Jul expiry date. 

Is this what you would expect, or should I have increased theta on the overall transaction by selling about 13 credit spreads, rather than 10?

Do you think that this transaction represents a reasonable risk/reward if I had been able to receive that $1,430 credit? 



1) If
your paper trading account requires that you pay offers and sell bids,
it's not worthless, but it's pretty bad.  Ask the broker how are
you supposed to gain any useful experience trading when you cannot get
realistic prices for the trades.  I assume you enter spread orders and do not trade the options separately.

It's a good
question to ask.  If they cannot help you, find a free online site to practice.  I have no idea whether the CBOE paper trading is any good. 

2) If the Jul calls expire and if you cannot close the Aug position at favorable
prices, then you are left with a one-month iron condor and no
insurance.  Not the ideal situation.  That is the worst case scenario when using insurance.

You must decide – and yes, I know experience
makes these decisions easier – if the insurance is worth the cost.  Or
if this is the right insurance to own.  Or if this is the right iron
condor (or call spread) to own. 

Consider this scenario: It's expiration week for July and the market takes a big tumble.  Do you own enough insurance? 

Norm, insurance can be helpful.  But it is expensive and not everyone likes paying top dollar and still not being completely protected.  Remember that the least expensive insurance is to cut position size.

3) You
have two ways to make money with iron condors.  Theta.  IV decrease.  

Theta is not the end-all be-all of trading.  If theta is that important
to you, I strongly suggest you avoid buying extra
options.  There are alternatives. 

To learn to handle risk better, you want to experience a number of situations in which you incur problems.  This is my suggestion:

a bunch of trades over several months and see how they play out.  It's best if you have access to a realistic paper-trading account. 

By 'play out,' I am not suggesting that only the P/L results are important.  You want to pay attention to the positions on a daily basis. 

Decisions: Are you
comfortable with (pretend) owning these positions?  Does the long option (bought as insurance) lose time value too
quickly?  Do you feel the insurance is worth the cost? 

To do
this effectively, keep a trade diary.  Write down your thoughts every
trading day. You may like the idea of owning insurance now, but change your opinion later.  Insurance is expensive when IV is elevated.

Track positions with and without insurance.  Discover your comfort zone.  Take your time and collect useful data.


will have many data points and observations.  Record when insurance seems to be worthwhile due to protection.  Record when insurance feels
too costly.  Write in detail.  When you have worked through a bunch of
trades, you will have a valuable book to read.  With YOUR thoughts and
ideas that suit YOUR comfort zone. 

Manage risk – owning insurance does not suggest that you can ignore risk.  Record all thoughts
about your trades.  I can give opinions, but they will not help you in
the long run.  Develop your own.

Does this require an effort?  Yes indeed it is.  I
believe it's very worthwhile.  You gain a lot of good experience
you have good data and the ability to come to reasonable conclusion
about what you are seeing happen on a daily basis. Please avoid the trap of believing that winning every month means you have discovered the ideal.  When profitable, recognize if it was good fortune, or whether you did something to earn the profit.  Same with losses – truly unlucky, or did you neglect to take prudent action?

4) Iron condors have positive theta and negative gamma.  Insurance
comes with just the opposite – positive gamma and negative theta.  At
various times and RUT prices, you can expect to see theta and gamma
change.  That's because the nearer-term option are more theta and gamma
sensitive.  A change in stock price or time – affects these options more
than those in the iron condor (or half of an iron condor). Don't forget that with elevated IV, option prices are higher.  That means your naked long calls erodes much faster than it would if the premium were lower.

If owning positive theta is an essential part of
the strategy for you, then take that into consideration when choosing which option to buy as insurance. 

'Insurance' is just one idea.  Buying it when IV is
elevated, as it is now, makes that idea costly.  I don't own any
insurance at today's prices.  With high IV, I prefer to either trade
fewer iron condors, or move a bit farther OTM – reducing my need for

5) Do I think this trade has reasonable risk/reward prospects?

is not the right question to ask, although I do understand why you do ask.

I don't know if you will exit
at a specific profit (or loss) level.  I don't know how aggressive you
will be when making adjustments.  I don't know how you will treat this
trade if the market moves lower. 

Thus, I  have no idea what the
risk/reward is.  The position looks reasonable.  Personally, I'd prefer
to be short (a little) more vega at these levels.  Thus,to maintain risk at a reasonable level, I'd not buy insurance and I
would trade fewer than 10 iron condors.  But that's my comfort

To answer an earlier question: no I would not sell extra call spreads just to gain positive theta.  Theta is not a good reason to accept extra risk.



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Nightmare on Put Street


I have 20 may 640/630 and 20 may 620/610 rut put spreads that were placed prior
to Thursdays doomsday. Felt fine at the time. Now showing big potential
loss and fear of gap or heavy drawdown prior to expiration.
I'm past the point of shutting down and walking away due to heavy debit.

Trying to find if there is a way for insurance now in this late stage.
To close to the money for kite; correct?
If so looking at either rolling down which still makes me nervous or
selling call spread to bring in some extra premium, or simply buying a lower
number of puts to at least help negate some of the potential.

Is it too late to protect? Is combination of rolling, selling call
spread, and purchasing puts a good "option". What would you recommend?
Any advice is appreciated.



Hi Tim,

Very sorry to hear of your problems. I'll tell you what I think and hope it helps.  First, it's never too late to protect. Keep in mind that anything that reduces risk is good.  So if you elect to try a combination of trades, that is ok,  As long as the resulting position is not too complicated to handle.

1) "I'm past the point of shutting down and walking away due to heavy debit."

I am not advising you to shut down.  But, you still have more to lose than gain – if the market tanks.  It's okay to decide to hold – I know how painful it is to exit here – but try to decide if you can afford to take the risk of holding.

2) It is late for the kite.  It loses effectiveness as expiration nears.  But you can do a more expensive kite.  Buy one 640 put and sell only 2 put spreads at a lower strike – perhaps 590/600 or 600/610 or even more 610/620s.  This costs cash, but wins in a huge downside move. Check the risk graph to see.

3) Many traders choose to collect extra premium by selling calls. I believe this is the worst possible choice.  If the market reverses, you can incur the same devastating loss on the upside. And for what?  You probably can't collect enough cash to do you much good on a market drop.

4) Rolling down means closing one spread and selling another May Put spread with lower strike prices.  But it also means NOT selling extra spreads.  It means paying a debit for some immediate comfort – but in these volatile conditions, that comfort can disappear immediately.  This does not feel right to me – especially if it makes you uncomfortable.

5) As a compromise you can cover 5 of each spread, or perhaps 10 of the 630/640 spreads.  Obviously, there is nothing magical about the quantity.  You may feel better doing 2 at a time on any rally.

6) You can roll this way:  Cover the 630/640 put spread and replace it with Jul iron condors.  I say Jul because that month allows you to be farther OTM than Jun and it gets you short extra vega.  If selling vega does not appeal to you right now, that's fine.  Do Junes instead. 

Yes, you sell calls, but this way it's a fresh position, is farther OTM, and depending on how you choose your strike prices, will not cost much cash.  By the way, that last part is a side comment.  I believe it's very wrong to choose your new position based on the total debit for the roll.  You must like that new IC – or else this is a very bad idea.  No sense opening a July position when it is already outside your comfort zone.

DO NOT trade extras just to bring in more

Obviously if you trade put spreads and not iron condors, then just roll the puts.  Don't force a trade you don't want in your portfolio.

7) Sure you can buy 600 or 610 puts, but those are no longer cheap.  Here's the main reason I dislike that idea:  Owning protection in the form of farther OTM options is fine.   They do a decent job.  But, if the plan is to hold them to a point near expiration, then it's no longer a good idea.  You can't sell them because they are still needed.  Thus, the most likely result is that they will expire worthless.  If you were planning to exit your put spread early, then these OTM options can work (because you get to sell them early).  But I think it's too late for that.

If you want insurance against a complete market collapse – that's another story.  Then owning any options will help.  But as to using them to protect this specific trade, (again – and not as black swan protection), there are better choices.

NOTE:  Buying Jun farther OTM puts works very nicely.  A down move explodes volatility and these can pay off big time.  Unfortunately the time to buy them was before the IV explosion.   But look to owning some extra Jun puts.  Choose your own strike.  600 is better than 580 etc, but even 560s may help.

8) It is not too late.  But anything you do is going to cost cash.  You can walk away and end the nightmare, or you can try to salvage the position.

The best trades are the ones that buy net puts.  That's black swan protection.  To minimize the cost, you can sell puts (this is buying put spreads) or put spreads (kite).

Have you considered buying the 640/600 (or 640/610) put spread?  Lots of cash, but good protection.

Tim, the bottom line is that anything may work.  It's just that we cannot know in advance.  If you exit, the agony ends.  If you work with this you may lose more, or have a very successful trade.  In either event, unless you close your eyes and come back in two weeks (I could never make that choice), some cash must be invested.  You have the rest of the day to work on this, consider alternatives, use risk graphs and devise a plan.

That plan should include a small gap opening (say 10 points) – both up or down.

Best of luck.  If you choose to follow up with what happens, I'd be interested.  But I also know that it's personal information that's best kept to yourself.

I wish you well.


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I want my investment portfolio to be insured. Which type of insurance best?


I hope all is going well for you.

busy; feeling good.  Thank

I have been following your recent posts regarding the kite strategy. Interesting, but appears to hold
more risk than the pre-insurance model.

as you choose any strike price for the option you buy – whether
it's pre insurance or purchased only when needed – you can do the same
for the kite.  Thus, you can invest fewer dollars, thereby cutting one aspect of risk.  

easiest method for doing that is to choose a (call) kite with higher strike
prices.  This assumes the trade will leave the original
credit spread intact.

NOTE:  There is no valid reason for leaving it intact – but it's easier for traders to manage a portfolio
when each specific trade is visible.

I also recognize that there is a price range for which the kite is less
effective.  But, I willingly trade that for gaining protection over a
likely price range
.  I also do not have to forfeit protection
against a black swan event.  

So when you say it holds more risk –
that depends on your point of view  You choose insurance to give protection that you want. Do not accept extra risk for protection you don't want. 
That's why the kite may not work for you.

So, I went back and reread your
chapter on how to setup the insurance. You make it clear that while an
individual trader might not fully understand how the insurance works,
it does work.

it's not that he/she wouldn't understand
so much as inexperience may make it difficult to be able to evaluate
the benefits.  After all, this is not a method I'd recommend to
everyone.  And it certainly is not for 'rookies.'  I included it for
the reasons stated:  you will not always be a rookie, and if you find
this to be a good book, it will be re-read.  More than once. At those
times, some non-rookie ideas will be far more meaningful.

 I used the model and can see that
speaking, it seems to work.

Two things
are true:  Insurance may not be needed.  Insurance may be too costly.
There are benefits – and that's why we insure our homes and cars.  But
not everyone does (unless mandated by law) buy insurance.

What I would like to find out is how it
works. If you are willing to share I am very interested in the math
behind the scenes.

There's no math behind the scenes.  Using profit and loss graphs does give you a good picture of
current risk.  And if you play with (FREE VERSION) Hoadley's software, you can change the date and see what your P/L
profile looks like.  An effort, to be sure, but probably worth it for
someone who wants to better understand the choices.  I don't want you to
take my word for the benefits of insurance – because it may not be a
benefit for you.

Also, it appeared that when you presented the
pre-insurance model on the blog you used a 30-point spread between your
sold put/call and the purchased insurance put/call.

I chose a reasonable example and used it repeatedly. 

In your book it
looks like you used a 20-point spread. Is there a better option? 

I don't have a specific recommendation for how many points should separate the insurance from the spread being protected.
It depends on the price of the underlying (20 points in the $600 RUT is not the same as 20 points in the $1100 SPX).  It depends on implied volatility.  It depends on how much you want to pay for protection.

Truthfully, I make these decisions using graphs of the position.  Those provide a decent approximation of my exposure to loss.  When the risk/reward is acceptable, I know I have a position that's suitable for me.  You would probably prefer a position that differed in some aspect – perhaps subtle, perhaps significant.

how do you determine the correct ratios for the insurance e.g 40
verticals to 3 protective puts? 

These are excellent questions.  With no
simple reply.

There is no 'best ratio.'  I chose my ratio based strictly on the
appearance of the P/L graph and my willingness to accept the loss
levels depicted.  This graph can be constructed to suit any needs

One warning: Owning far OTM options may be okay
in some scenarios, but NEVER when buying insurance.  the nature of
insurance is that you intend to hold – at least as long as you own the
position being insured.  As time passes, if your insurance options are
farther OTM than your iron condor – they will fade away and be
unhelpful.  For insurance, I strongly recommend (I'd insist, but how
can I do that when it's your money) that insurance options must be at
least ONE strike closer to the money than your short position.  And two
is better than one – if the cost is okay.  That's why I like the kite. 
It gives you better strikes at reduced cost.  And if willing to pay a
bit more, you can sell fewer spreads as part of the kite.  1 x 2 x 2 provides better portfolio protection than 1 x 3 x 3, but is more costly.

To me the 'better' option is the one with the better strike price; i.e.,
less far out of the money.  But those cost more than more distant
strikes.  It's a mental trade-off:  How much are you willing to
spend?  Think of your auto insurance.  Do you have a $250 deductible or
a $2,000 deductible?  You chose insurance based on protection wanted and
the cost of that protection.  This truly is similar.  You can get
'better' insurance but it costs more.

Also consider why you want insurance:  To prosper in a market
surprise?  To survive a market surprise?  Somewhere in-between?  Those
answers go into deciding whether to spend more dollars or fewer
dollars; whether to buy fewer close-to-the-money options, or a larger
number of cheaper options (but not too cheap).  There is no
one-size-fits all.

I'm not evading the question.  Much of this 'insurance' is art, not
science.  Part of the decision process is what 'makes you feel good and
secure.'  You know, the easiest type of insurance, and by far the least
expensive, is to own smaller positions (control position size).  That
way, even the maximum loss becomes a number with which you can live.

One reason I prefer the kite (in today's environment) is that the
markets are less volatile; the cost of owning same-month protection –
as opposed to front-month protection is much lower than it was several
months ago; and especially for rookies, it's easier to 'see what you
have' when all options expire at the same time. 

hidden risk is also avoided: front month options
can expire at the worst possible time: when they are not far OTM; when
they were costly options just a few days ago and are now worthless;
when the position they were protecting is too near to being ATM and the
(now) unprotected position must be adjusted or re-insured (costly),

Thank you in advance. 


You are quite welcome.  Best regards.


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Options Risk Management: When to Buy Insurance

Hi Mark,

Nice Post on this Kite Spread Strategy and I have one question about
these adjustments.

When to open the Insurance/Adjustment?
Which option do you prefer?

1) Buy the insurance (Call and Put) when opening the Iron Condor?
Will be cheaper, but you spend this money on every trade.

2) Buy the insurance when RUT reach a pre-determined point?

3) Buy the insurance when the overall portfolio reach X% Loss (not
realized loss), Like 15%,20%,25% of the maximum profit of the

4) Buy the insurance when one of the IC reach X% Loss? Will be really
hard to manage 5-10 different Iron condors in separate, right?

5) To use the pre-insurance when you open the IC with 75-90 days left you
have the risk that it will be useless if you need it only on the last
30-45 days of the IC, right?

Thank you



Hello Fabiano,

There is no 'best' time to buy insurance.  It is one of the difficult decisions made by a trader.  No one wants to spend money unnecessarily, but taking too much risk is something to avoid.

Responses correspond with your numbers:

1) I suggest pre-insurance in two scenarios: when you trade bigger size than prudence dictates – in other words, when risk is already too high at the time iron condors (or credit spreads) are opened; and when you are very conservative and preventing losses is your primary investing mantra.

2) Predetermined point(s).  I believe adjusting in stages, rather than all at once, is effective.  And yes, those adjustments can be at pre-determined points.

3) I hate the idea of X% loss.  To me that is a meaningless number.  If your portfolio reaches the point at which you are uncomfortable with current risk, that's the time to do something to reduce that risk.  And it is 100% independent of original cash collected or maximum profit potential.

I make a move when delta (or any other Greek) exceeds my comfort zone.

4) Not % loss.  Comfort zone decision.  Yes, too difficult to manage each separately.  I suggest:

a) buy an adjustment that suits the risk of your portfolio, but

b) Don't ignore individual positions when it comes time to exit.  Your overall Greeks may be fine.  Your risk/reward graph may look good.  But if one of your short credit spreads have moved into the money, there's no good reason to hold onto it.

I prefer to exit that trade – and perhaps sell out some of my insurance at the same time.  Why? Two reasons:

i) The insurance (or a portion of it) may no longer be needed because of the trade you are closing.

ii) The profit from the adjustment can be used to offset some of the pain involved when closing a trade that has not worked out well.

The key is to have a good portfolio, AFTER, the high risk trade has been closed.

5) Most of the time, you don't need all the insurance you own.  Most houses are not destroyed; most cars are not demolished etc.  There is no way to know if you will need insurance.

It's fine to refuse to pay for insurance before it's needed.  That's reasonable.  As noted, you pay more for that insurance, but many times, you save money, and not only win on the credit spread (or iron condor), but you have a double win because you pay no insurance premium.

But, then you have no black swan protection.  There is no right answer.  However, you and your risk manager personna can determine what is best for you.

The kite is far from useless as time passes.  Sure, if the market has been dull and the credit spreads are fading away quickly, then all insurance has turned out to be unnecessary.  But you could not know that in advance.

However, a late market move, even if not too large, may keep those credit spreads OTM and allow the kite to move ITM.  You could exit everything at a nice profit.

If that does not happen, then you do what people who buy insurance do:  They eat the cost of the insurance, knowing they were protected.  Insurance is not bought to collect.  It's bought to minimize/eliminate risk, and allow you to sleep at night.


There is an alternative not mentioned, and can be thought of as 'delayed pre-insurance':  Add to insurance at opportune times.  By that I am referring to the idea of adding a call kite when the market dips (and when call protection is not needed and is less expensive) and adding a put kite on rallies.


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Proper Position Size When Trading Collars


You suggest not trading too many collars. However, in using your
insurance method of 2nd month OTM put credit spreads and front month
insurance, I noticed that the profit/loss charts are similar to
the ones in "Rookies" in the chapter on insurance. The insurance works!

If you have a number of spread contracts and use insurance to cover
them and are willing to risk a pre-estimated loss while expecting a
profit, would you still recommend only having a few contracts?




Hi Greg,

Good point.

I make the assumption that most individual investors who are new to options will not be interested in owning insurance.  The truth is, that it's not necessary to buy insurance when you own an appropriate (for you) number of collars.

Often, when writing about collars, I am trying to reach two audiences:  those who are regular visitors to Options for Rookies and those who found my writings elsewhere.

It is to that latter group that I am speaking when I issue the warning not to trade too much size.  It's easy to feel so safe with a collar position, and it's limited risk, that an investor can own more collars than prudence dictates.

The warning not to buy too many collars is easier to understand when you look at the equivalent sale of a put spread. The possibility of a loss (with a put spread) is more obvious to those who are unfamiliar with the concept of equivalent positions. I know you understand that there is a limit to how many of those you can afford to sell.

If you decide to own insurance (I assume it's downside insurance only) for collars, then yes, you can afford to trade more size.  As long as you recognize how much risk you are taking and remain within your comfort zone.

One further warning:  Collars allow for limited profits.  I know you 'expect' to earn a profit, but is that realistic?  Be certain that the cost of insurance does not eliminate all chance to earn money from the trade.  It's easier to buy insurance when the profit potential is sufficient to cover the cost of  that insurance – with enough left over to give you a high probability of earning a profit.


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Kite Spread: Protection for Credit Spreads


In "Rookies" you have a chapter on insurance. You suggest using a
front month long put to cover 2nd or 3rd month put credit spreads. The
Kite appears to be using the same month long put along with the credit
spread. I don't see how the credit spreads can pay for the long put
using the 4×1 ratio? What am I missing?




You are not missing anything.

1) I do believe owning front month insurance is more effective than owning same month insurance – except when IV is low and you want to be long vega.

2) It is still uncomfortable for many traders to own options that expire before positions they are supposed to be protecting.  The kite overcomes that problem.

3) The credit spreads DO NOT pay for the long option in the kite spread. 

The idea is to sell the credit spreads to enable the investor to purchase an option with a very useful strike price – at a reduced cost.

4) One drawback for kites – I have not yet discussed it (but it's all in the eBook that I'm writing) – is that they are not designed to be held through expiration.

For traders who prefer to own iron condors to the bitter (or not so bitter) end, kites are not the best adjustment vehicle.

But for those who plan to exit early (two to four weeks early), this is an ideal insurance policy.

I'll post more on kites, but have no specific schedule.


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