Front Month Iron Condors

Mark,

I am not a very experienced trader and currently trade SPY iron condors. Every week, I read TA reports from Larry McMillan and S&P, so I think I have a rough idea about the possible directions (support and resistance) of the market until next expiration day (I allow enough margin for safety on these ideas).

Based on that, I try to establish one new position, for the front month, roughly once a week (but not in the last 6-10 days before expiration). However, I find that trying to establish a "safe" IC position, reasonably OTM, many times, I can not get a "good" premium for both the call and the put leg.

Therefore, my question is whether it is a better idea NOT to establish both legs of the IC on the same day, but one leg today and the other a few days later, depending on the move of SPY. If SPY moves in one direction only (rather unusual) then I will accept that my portfolio will only have some "good" call (or put) credit spreads and no iron condors for this month, which is not a big problem.

What do you think?

Thank you,

Dimitris

***

This is a good topic for discussion.

1) TA is not easy to master and many people believe it is bogus.  As long as you do not depend on support/resistance as gospel, it is one method for choosing strike prices.

2) My feeling is that front-month credit spreads (including iron condors) are far too risky for me, and – despite the fact that this is the method of choice for most iron condor traders – I do not recommend it for inexperienced traders.

The reward looks tempting; time is short; theta is pretty, but gamma is ugly. These are very difficult positions to defend or adjust.  I'd prefer to see you trade options with a longer lifetime.

It's obvious that I dislike 4-week iron condors, hate 3-week ICs and loathe 2-weekers. 

3) Now that I've expressed my thoughts, I'll reply to your questions.

a) If (and it's really up to you) you are comfortable with owning only one half of an iron condor position, then it is viable to open just one leg of the iron condor, hoping to open the other shortly.

b) But this plan often disappoints. Especially when waiting a 'few days.'  Unless you are selling spreads that are fairly close to being at the money (I know you don't because you would never refer to those as being 'safe'), the call spreads do not widen as expected (on a rally) due to IV declines.

If you happen to sell the call spread first (do not believe I am suggesting that you get short all the time), then you should have a good opportunity to sell the put spread – on a decline, if IV increases.

c) Note: This idea of trading one leg at a time is always a reasonable choice, regardless of time remaining.

d) I prefer selling only the call spread, or only the put spread, to selling the other half of the iron condor at a terrible price.  Although you win most of the time, selling front-month spreads for small credits is a long-term losing strategy. You seem to agree.

e) Although you mention it nowhere, I assume you never cover your shorts and plan to see them expire worthless. That adds to risk.

526

 

9 Responses to Front Month Iron Condors

  1. semuren 11/20/2009 at 7:57 AM #

    Greetings Mark:
    While it was not one of Dimitris’s questions I think his trading plan brings up a very interesting idea. If adjusting, by say taking off losing spreads, in stages is a good idea, shouldn’t putting a position on in stages, as Dimitris does, also be a good idea?
    Spreads added later can then be used to hedge the delta risk of the earlier spreads. And one can still have a plan to get out, in stages, if things keep going against one.
    best,
    semuren

  2. Fortune8 11/20/2009 at 8:06 AM #

    May I ask you if my perception of Option’s Vega is correct for the reason of why price action was both negative for puts and calls? My post is here http://fade-me.blogspot.com/2009/11/options-vega.html Thanks in advance.

  3. Mark Wolfinger 11/20/2009 at 8:37 AM #

    Yes. Opening in stages works as a strategy. You tend to collect less (time decay) each week, but you have less invested at any given time – and that’s less risk/less reward.
    Right. If market has moved and portfolio is not balanced, new IC can have a directional bias to partially offset that imbalance.
    Yes. Nothing changes about exit strategy or risk management. This plan changes entry requirements.
    If you trade longer-term (3 month) IC, you can have a rolling portfolio. Add one every week, close one every week.

  4. Mark Wolfinger 11/20/2009 at 8:43 AM #

    Yes.
    We all expect delta to be the major factor in the pricing of an option when the stock price changes.
    But it is possible that a large change in the option’s implied volatility will result in both calls and puts moving lower (or higher), regarless of stock price. Thus, vega can overwhelm delta.
    This is commonly seen after a company issues a news release – such as an earnings report.

  5. Brad 11/20/2009 at 12:27 PM #

    Mark,
    I wanted to preface my statements with saying you are providing a great site here for us traders that need a little help and (presently) at no cost to us! I just wanted to take a moment to give you some recognition for all your efforts and offer my gratitude. I try and read your blog every day during the work week. Thanks!
    I wanted to get your feedback on trading ICs on multiple underlyings in an attempt to achieve diversification based upon modern portfolio theory (MPT). Do you think this just increases complexity without much benefit to the trader’s portfolio? Basically trying to construct an IC portfolio with underlyings that have no or negative correlation to one another. This has obvious benefits in theory, but I am not sure how this would perform in practice. Your thoughts and maybe a dedicated post if it gets your creative juices flowing.
    Also, I was looking at attempting to hedge large moves in the underlying of my IC positions with options on the VIX, but every strategy just seems too costly to put on as a hedge. Any ideas on this? I thought it would be a good idea since underlying price moving beyond my short strikes means the actual volatility was higher than implied and volatility should have increased. Also when volatility increases, ceteris paribus, IC value decreases. So I was researching some long delta/gamma strategies, but it seems like everything is more like a positional play on volatility and doesn’t justify the cost as a hedge for my IC positions on other underlyings.

  6. Mark Wolfinger 11/20/2009 at 12:53 PM #

    Brad,
    Thank you. I do put in more than a full day’s work on this blog and my other writing.
    Regarding ‘presenly’ at no cost: I have no plans oher than to continue this site at no cost. But I am looking to earn some money for my time. That’s one reason for the advertisements and the possibility of an additional, members only, site.
    You get your request. These questions require a lengthy response. I’ll try for early next week.
    Regards,
    Mark

  7. Brad 11/20/2009 at 1:02 PM #

    Thanks Mark. I expect to get paid for my work too. No objections here.

  8. Fortune8 11/21/2009 at 12:43 AM #

    Thank you. Does your book cover any of the subject matter? How does one pick the correct strike price taken into consideration all the Greeks?

  9. Mark Wolfinger 11/21/2009 at 9:02 AM #

    Yes.
    The book contains a detailed discussion on choosing expiration months and strike prices for specific strategies.
    The Greeks allow you to measure risk. That’s all they do. Thus, when you look at a position, the Greeks will allow you to determine whether the trade lies withing your comfort zone. If the delta of the option you choose ‘feels’ too high, then it’s the wrong option to sell.
    The Greeks also allow you to set parameteres, such as: I don’t want a potion to have more tha $500 risk if implied volatility jumps (or declines) by more than 10% or 20%); I don’t want to have a position with more than X total delta – long or short, etc.
    Take a look at the (http://www.mdwoptions.com/freebook.pdf) sample version of the book. It shows the title of each chapter plus a VERY short excerpt. It allows you to see what the book contains.
    You will not be disappointed with the Rookie’s Guide to Options.