Getting Back in The Saddle

To my fellow iron condor traders:

Depending on how skillfully you chose your strikes for March expiration, you either had a very bumpy ride, or came out with a very profitable month.  My ride was bumpy.  I don't usually second-guess myself, but this time I lost as a result of a whipsaw, and although a loss is a loss, I hate losing because of a whipsaw.  Earlier, I had closed almost all my short call spreads.  Imagine how that position would have worked out with the huge market rise.  Unfortunately, I decided to sell new call spreads after buying in the others.

It's always a dilemma [do I re-sell call spreads after covering] for me because it's psychologically so upsetting to make the good decision of buying in spreads when they become cheap, and then turning around and converting that good buy into a loss by selling new spreads.

But expiration is over and it's time to get back on that horse for another ride.  The biggest decision is whether to continue to trade iron condors, or if there is another more suitable strategy.  For me, it's iron condors with some extra long Apr options as insurance.  And that was an easy decision because I already own a bunch of RUT May and Jun iron condors.

If you trade with a market bias, as most investors do, then you may be afraid to sell puts for fear that the recent gains are nothing but a bear market rally.  On the other hand, you may fear selling call spreads and that the ultimate bottom has been reached and the markets are going to move significantly higher – and quickly.

That bias may lead you away from iron condors and into the idea of selling only put credit spreads or call credit spreads.  There's some merit to that idea because the risk of incurring a large loss has been cut in half [assuming the chance of a melt-up equals the chance of a melt-down].  Profit potential would also be halved.  Lacking a true market bias [I am a bear, but unwilling to wager on being correct], I cannot choose that route.

The point of mentioning the half-iron condor idea is to remind you that you are not locked into trading iron condors.  There are alternatives and you don't have to be market neutral, you are allowed to trade with a bias – especialy when you have a proven track record of making good stock market calls.

Agreeing with Jared, here's a piece of advice I've discussed previously, and which worked especially well last week.

"we usually close out any positions that are short gamma at least a few days – and often up to a week – before they expire, since the exponential increase in gamma near expiration makes those positions more difficult to manage…For most traders, giving up a smidgen of raw performance in exchange for less psychological stress is a good bargain."


15 Responses to Getting Back in The Saddle

  1. Gil 03/25/2009 at 8:14 AM #

    < For me, it's iron condors with some extra long Apr options < as insurance. And that was an easy decision because < I already own a bunch of RUT May and Jun iron condors Presumably you survive April with the long protections. As insurance, these longs might expire worthless, and on May - as well as on June - you'll need to protect once again, meaningly more payments. These triple protection premiums might eat most your profits, if there are any, and this happens in the "good" scenario, in which your IC are profitabe. Can you please be more specific on how you make money with this extra protections? Thanks, Gil

  2. Mark Wolfinger 03/25/2009 at 1:43 PM #

    I made a lengthy presentation (Chapter 20 in The Rookie’s Guide to Options) of why I think its better to buy short term options, even though they do expire early.
    Basically you pay less per option and get options with much more useful strike prices.
    I DO NOT ‘make money’ with this extra protection. It’s insurance, intending to minimize losses. The more options you buy, the better the protection. And yes, you can make money on a big market move, if you own enough extras. But, the idea is to spend as little as possible to insure against disaster – not to make a profit.
    And it’s never easy to buy those extras. No one likes to spend unnecessary cash. Is it unnecessary?
    As a compromise, you can buy them only when needed. They will cost much more, but you buy them less often. Which is better? Neither. It’s a comfort zone decision. Of course you don’t have to own insurance. It’s just one alternative.

  3. Mark,
    Your posts are errily timely as a previous poster has mentioned, as an IC trader it’s no coincidence we walk the same path.
    You mention the half-IC as a possiblity if one is becomming disheartened with the standard IC. I have contemplated this, weighting the pros & cons only to come to the conclusion that I’m not willing to gamble on direction, as the market can behave in any un predictable manner it sees fit. I will continue trading IC with added protection much like yourself, that way I can keep my emotions out of trading as much as possible and focus on making rational decisions.
    There are many ways to go about buying protection. Mark has explained it well, another way could be to set up your positions with built in ratioed protection on both sides from the beginning. It means you won’t get as much premium from your IC & you would have to manage this carefully but it could prove a useful device if ever overboard at sea.

  4. Robert 03/25/2009 at 8:43 PM #

    Thanks again, Mark, for your excellent blog on ICs and options.
    I have another take on the full- or half-IC dilemma. For me, it’s never an issue because I remind myself that even if one side of my IC goes sour, the other side will pan out and help me mentally offset the bad-side loss. And, as often as not, I find I can close out the good spread for a few nickels at about the very time I’m getting scared into reacting to the bad spread. Additionally, it’s the same margin requirement for a full-IC as it is for a half-IC. So, from that perspective, the 2nd half-IC is actually something of a bargain.

  5. Mark Wolfinger 03/25/2009 at 9:25 PM #

    The full IC works for me also. Not interested in picking market direction with the call spread or put spread.
    If you can make rational decisions, that’s a huge contributor to overall success.
    Thanks for commenting.

  6. Mark Wolfinger 03/25/2009 at 9:28 PM #

    Everything you say is true. And the ‘free’ margin makes it extra attractive.
    But it does double your chances of taking a loss, so the decision is not as obvious as you make it sound. Nevertheless, I’m a full IC trader and plan to remain that way for now.

  7. Russ Abbott 03/25/2009 at 10:57 PM #

    Hi Mark,
    One of the things I like a lot about your blog is that it’s both honest and personal. You had a difficult month and were willing to talk about it. Thank you.
    I have had an image of you as conservatively but steadily harvesting iron condor income while the rest of us won and lost. I suppose that you do harvest a lot of IC income and that you do it is a conservative and steady manner. But it’s nice to see that even an hold hand like you sometimes has a hard time.

  8. Mark Wolfinger 03/26/2009 at 7:31 AM #

    I assume you did not mean that exactly as it reads: “It’s nice to see the old guy have a hard time.”
    But I appreciate your sentiment. There is no point in bragging about huge profits when there were none this time. I know no one can see my account and it would be easy to make preposterous claims (a la Bernie Madoff), but who gains from that nonsense?
    The markets just moved too rapidly for me. I kept adjusting and closing, but it was not enough. Do you have any idea how foolish it feels to get whipsawed?
    Love your blue cat image.

  9. Russ Abbott 03/26/2009 at 11:36 AM #

    I certainly wasn’t wishing bad luck for you. Sorry I put it that way. (By
    the way, I’m probably at least as old as you are.)
    I have another question. Is it possible for you to paint a picture of the
    main participants in the options market. That is, what are the primary
    category of participants? What percentages of the market do they make up?
    What are their primary goals and motivations? Etc. For example, do you know
    (or have a reasonable estimate for) the percentage of options contracts that
    are opened by retail traders attempting to use options as leverage to make a
    big killing by going long? Same question for IC and other premium sellers.
    What about institutions: to what extent do they use options in either of the
    two preceding way or as hedges for their positions? What about the market
    makers. Do they take positions of their own or do they function primarily as
    middle men who live off the spread? Are there other major categories of
    participants? For each of these, do you know what approximate percentage of
    the market they make up?
    Thanks also for your comment about my picture.

  10. Mark Wolfinger 03/26/2009 at 12:06 PM #

    The way you ‘put it’ made me chuckle.
    I have no idea where to get the information you seek, but I know much of it is absolutely unavailable.
    I do know that the exchanges (or the OCC) have a method for determining how much of the paper (order flow) comes from institutions and ‘the public.’ I don’t know how much detail that data includes. For example – when buying calls to open, there is no way to determine whether the purchase is a straight play to bet on the upside, or if it’s some sort of hedge. the OCC does not monitor the accounts of traders. It just know who is long and short each open contract. Thus iron condor data is simply nowhere to be found.
    We all know that hedge funds are secretive about strategies. Thus, whatever it is they are doing with the options they buy and sell – the information is not available.
    MMs buy and sell – much of it depending on order flow. The trades are hedged as quickly as possible. In fact, most MMs don’t get involved with that aspect. The trading company that hires them manages the risk from off the trading floor and the MMs job is to trade efficiently. I assume they occasionally get direction, such as: ‘buy June vega, if possible’ – but I’ve been away for 9 years and I don’t know the details of today’s marketplace. Except to say it’s very different than when I was on the floor.
    If you want information on how much order flow comes from the public, try asking the OCC: options (at) theocc (dot) com

  11. Russ Abbott 03/27/2009 at 12:19 AM #

    I’ve decided to post my trades. The About me page explains why I’m doing this. Comments, advice, etc. appreciated.

  12. Mark Wolfinger 03/27/2009 at 7:55 AM #

    I read that the CBOE maintains data on market maker positions. I don’t know if that is true, but you can ask. 312-786-5600

  13. Mark Wolfinger 03/27/2009 at 7:59 AM #

    Sounds good to me.
    When selling naked (shudder), I hope you consider selling fewer options than you do when selling spreads.

  14. Martin 04/06/2009 at 12:09 PM #

    I have to say that, after March, I’m a bit of a skeptic when it comes to condor insurance. In fact, I’d go so far as to say that it got me into trouble.
    In the past, I’ve adjusted my ICs using some basic rules of thumb I learned mainly from Dan Sheridan’s talks: adjust when short leg deltas are in the 20-25 area, watch out if the value of the short leg increases by 1.75-2x, and so on.
    On the other hand, Mark, Dan, and others also talk about adding extra long calls and puts as insurance. Since a wide condor is highly likely to end up being profitable at expiration, the idea is that you can ride out the ups and downs without giving up a large part of your profits to adjustments.
    So I thought I’d give this approach a chance. The bottom half of my March IC was originally a 360-370 put spread, with the RUT at 455. I added a March 320 put as insurance.
    In early March the RUT headed downhill rapidly, closing at 367.80 on March 2nd, just below my short strike. No worries, said I: I have insurance! It’ll be back.
    You know where this is going… It kept heading straight downhill. Overnight the RUT dropped far below my short strike — and far below any support levels we’d seen since, well, the mid-1990s. It was getting closer to expiration, and the insurance was starting to sag a bit. We were looking down at a really big cliff.
    I’ll spare you the rest of the sad story. Let’s just say that, like Mark, I made matters worse by rolling down my call spreads to try to mitigate the losses, and then proceeded to get well and truly beaten up by the subsequent dramatic bounce. (Oh, and of course by March expiration the RUT ended up right back in the middle of my original condor.)
    My point is, had it not been for the insurance I wouldn’t have been nearly as complacent; I wouldn’t have waited nearly so long to make adjustments. I’d probably have either rolled down my put spread much earlier, when adjustments would have been relatively cheap; or simply bailed out of the trade for a while, to get out of the way. As it was, having insurance enabled me to hang in there just long enough to get into real trouble.
    You could argue that I should have spent the extra money for, say, an April put instead of March; or bought a 340 put rather than a 320, etc. Any suggestions are welcome. But please be aware that adding insurance can have its hazards too.

  15. Mark Wolfinger 04/06/2009 at 12:15 PM #

    I am so sorry to hear of your troubles.
    True, insurance doesn’t always work, but I’d like to discuss this is more detail. I’ll prepare a reply post it tomorrow or Wed, Apr 7 or 8, 2009.