1. Last week I traded an iron condor on Apple (January and February expiration) at 350/360 on call side and 290/300 on put side.
Past Monday, the prices of all four options, January expiration, went up for no apparent reason! My January positions started showing big losses. February positions were fine for same company and same strike prices. What happened?
The implied volatility for January options increased. You opened your positions when implied volatility was at its low point. Because iron condors are positions with negative vega, they lose value when IV increases. That's what happened to you. If IV moves downward again, you will recover the losses quickly. Otherwise, it's going to take the passage of time (without a concurrent stock move) to recover.
Today, both January and February iron condor went up in prices, and again I see big losses. I thought time erosion and call spread would help me.
There is more than one greek. Each contributes to the value of an option independently of the others.
Theta is your friend. You earn a small amount each day. However, that is being offset. Gamma is the enemy. If the stock moves too far, then you get short deltas quickly (on a rally) or get too long (on a decline).
Vega is the culprit you right now. Vega measures the dollars earned (or lost) every time the implied volatility moves higher or lower by one point. Right now it is moving higher.
When the market falls and the put spread moves against you, the call spread will NOT decrease in value fast enough to compensate for the loss in the put spread.
It truly upsets me that you thought that selling a call spread for a smallish premium would ever be enough to completely offset the loss on the put side when the market declines. Sure it helps, but never enough, The IC strategy is not designed to have one winner to offset the loser. It is designed to win when the market is not very volatile and doesn't move too far – as time passes. [And there is no need to wait until expiration to grab your profit]
Is it possible for me to calculate option prices, independently?
Independently of what? The market determines the prices. The market determines whether you earn a profit or take a loss. No you cannot calculate option PRICES independently.
What you can do is calculate a theoretical value for any option. You can make an estimate of where you think the options should be trading. That calculation may give you the confidence to hold your trade, but it will be your opinion vs. the collected opinions of the rest of the world.
To make the calculations requires that you input an estimated future volatility for each option (that's all four of them) into an option calculator. Not an easy task for anyone, let alone a rookie trader. Estimating future volatility is very difficult. Dare I say impossible for the vast majority? It is better to allow the marketplace to generate the option values. Then you can make trades that you deem suitable.
You may not have planned it, but you decided it was a good idea to get short AAPL vega at the time you opening the iron condor position.
What happened to you and your trade is that you chose to own negative vega at a bad time. Not much you can do about that now.
2. My broker, thinkorswim, does not charge commission if I buy back short options if they are worth 5 cents or less. Is it a good idea to take this offer?
Yes. I approve of reducing risk whenever possible. Paying 5 cents is cheap insurance. If there is just one day to go prior to expiration, then that's different. There is no urgency to pay the nickel at that time. But I love to pay that price (and more) to exit. I am also happy to pay commissions to eliminate the risk. Free commissions make it a no-brainer for me.
3. How do I know where (in stock, equity or ETF) a pro like you invests in iron condor?
You cannot know. Nor should you care, except perhaps to see it as an example.
There is no 'best' premium to collect and there is no best strike price to sell. Nor is there a best time to enter the trade – unless you are a strict adherent of technical analysis.
You (honestly, I am not making this up) want to own a position that makes you, comfortable. If you try to guess which position makes someone else comfortable, how is that going to do you any good? You would not know when that pro makes an adjustment or exits the trade. You must find trades that please you. Sure you can read about what I do, but there is no good reason for you to attempt to do the same. But think about this: You have no idea whether I am struggling, doing ok, or making a ton. Not am I going to tell you. It is completely irrelevant.
4. [A later follow-up to the original e-mail conversation] I can see that options pricing is lot more complex than I imagined. I thought that earlier I place trade for next month, I get better price. But that is not true.
It is true as far as theta is concerned. However, there are other factors that influence the price of options.
Here is the bottom line for you: You clearly jumped into trading a strategy with no clear understanding of how it works. That's fine when trading in a paper-trading account, because that's one good place to learn all about the trades being made. But when using real money it's just foolish to think you can trade now and learn later.
I find it very sad that you are in this position. What is your hurry? You have the rest of your life to trade and now is the time for learning.