Opinion: New option strategy needed?

It's after Labor Day and for many people (in the Northern Hemisphere) summer is over.  Many times, that means the summer doldrums are behind us and September, traditionally the worst-performing month, and October, the scariest month – lie ahead.

There is so much bad news in the air, that it amazes me that anyone is making bullish market predictions.  There are too many bears out there, and I'm not going to wager on direction.  Nevertheless, the bulls, and especially the bears are noisy. For the past several months, VIX futures have been predicting more volatile times are coming, and soon. 

Should we take any action based on the above, or conduct business as usual?  Do we continue to use our favorite methods, or is this the time to minimize negative gamma?  Or do we take a different path and pay to own positive gamma?

As regular readers know, I'm a premium-selling (always with limited risk and never naked short any options) iron condor trader.  At least most of the time.

I usually ignore anyone's prediction of future stock market activity, and go about my business.  That includes paying careful attention to sizing trades correctly (good money management) and keeping portfolio risk at acceptable levels (good risk management).

I see no reason to abandon that philosophy now.  However, every once in awhile complacency sets in and it's easy to broaden the limits of one's comfort zone – just by getting lazy.  The point of this post is to be certain everyone is aware that overconfidence is a portfolio killer.  If you have been doing well by trading iron condors over the past several months, please be alert to the possibility that the markets may stop being so kind. 

Yes, I know there have been big up and down movements, but they have not been sustainable in recent times and the market has traded within a range.  If your iron condors were chosen with strikes that never became threatened, and you collected your time decay day after day, you are on a nice winning streak, and it's time for a big decision.

Scenario I

We get so few periods in which iron condors do well month after month, that we must milk them for the increased profitability as long as it lasts.  That means sizing trades near the maximum that your comfort zone allows.  It means holding trades a bit longer (NOT to expiration) and collecting a few extra nickels of profit when exiting the trade.  [It does not mean going nuts and taking outlandish risk – but I assume you already know that.]

If the market has been 'behaving' then we should continue to go for small extra gains because the opportunity to do that is likely to disappear at any time. But even one additional month of increased profitability is worth seeking.

Scenario II

Say 'thank you' for the good times and prepare for more volatile markets.  That may suggest owning insurance for your positions or merely saving more cash.  Cash can be used to make adjustments or for opportunities that appear after market volatility increases. 

The choice: prepare for dangerous September and October by playing it safer – or not.

It's really a choice, but I make it a point of recognizing that I cannot predict the future.  Others may see increased volatility ahead, but I don't have any opinion (that I care to back with cash) on that coming true.  Thus, I'm choosing business as usual.  However, I will not be extra aggressive.  I'll respect the possibility that VIX futures traders have a good reason for bidding those futures to high levels.  But, I will not be afraid either.  I want to make the attempt to take advantage of what has been for me, an ideal iron condor environment (for only 3+ months).

What about you?  Heading into Sep/Oct with guns blazing, or are you prepared for a full retreat?



The September 2010 issue of Expiring Monthly will be published in two weeks (Sep 20, 2010).  The major theme of this issue is 'directional trading – a discussion.'

Most traders have a directional bias and act on it.  Others don't.  This months issue tackles the topic from different vantage points.

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8 Responses to Opinion: New option strategy needed?

  1. dave 09/07/2010 at 6:58 AM #

    I completely agree with you on this. I beleive we will soon move out of this range up or down and it is time to reasses the way we have traded condors. I know this is an individual decesion because we all trade them differently . This is the time to re think the way we will handle a break because from this trading range this cant go on forever. Great post !!

  2. Mark Wolfinger 09/07/2010 at 9:18 AM #

    Thanks Dave,
    We KNOW it cannot last forever – but how long do we try to milk this special opportunity? That’s the unanswerable question.

  3. Jason 09/07/2010 at 2:03 PM #

    Hi Mark,
    I think of IC’s on the index as a high probability trade, and as such, is something I throw on every month. There appears to be a slight edge on selling volatility on indices, so taking advantage of that is something I think you just need the law of large numbers for. With IV’s still elevated, I still think they’re attractive, and I don’t really have a strong urge to be long volatility. That being said, I generally use some sort of money management formula (I prefer a variant of the Kelly Criterion) to determine how much to put in each trade, since it applies at least some sort of objective measure as to how I’m trading.
    Until such time as volatility gets stupidly low, or the skew flattens considerably, I still think IC’s will be my bread and butter. All the other trades I put on will be small cute trades or stuff I use to manage delta/vega/gamma risk. So basically, I guess I’ll stick with what I know (until I find something else that works I guess).

  4. Mark Wolfinger 09/07/2010 at 3:20 PM #

    It’s a high probability trade ONLY when you sell options with a reasonably low delta. Not everyone does that.
    Going long gamma (or vega) is merely a possibility. I have no plans to do that, but this is an educational blog, not my personal trading history. Mentioning alternatives is what I do.
    Good trading

  5. Kyle 09/09/2010 at 11:30 AM #

    Thanks so much for your site and your book. Both have been invaluable to me as I’ve learned IC trading over the past few months.
    My question is to see if you would offer any guidance on when to close a profitable position. I’m getting familiar with my comfort zone and when to get out when my shorts are being threatened but I’m not quite sure when to exit a position when things are going well. I tend to be too quick on the trigger to exit a good position because I want to lock in my profit that I think I’m missing the really valuable time decay from weeks 6 to 3 (till expiration). (I am not comfortable holding any closer to expiration than about 3 weeks)
    As an example, I have an SPX IC open for Oct 1000/1010 puts 1180/1190 calls. I opened it 8/18 for a credit of 3.20. Both sides are still open and it’s currently got a mid price of 1.65. So I could close now for a profit of 1.55 (or a bit less depending on where I can get filled). However, I’m 72 points (6%) from the short call and nearly 100 points (10%) from the short put, so I’m still well within my comfort zone. How long would you let a trade like this ride.

  6. Mark Wolfinger 09/09/2010 at 11:52 AM #

    Hey Kyle,
    Thanks for the kind words.
    My basic philosophy does not coincide with yours, but I’ll give my best answer:
    1) It does not matter when you made the trade
    2) It does not matter how much you collected making the trade
    3) It does not matter how much profit you have now
    What matters is that you own this specific iron condor at today’s price.
    Are you comfortable holding this position TODAY at this price? Does the risk and reward still fit within your comfort zone?
    If yes, sit tight for today.
    I’ll have much more to say on this question in a blog post tomorrow.

  7. Kyle 09/10/2010 at 12:49 AM #

    Thanks for the response. I’ll look forward to more tomorrow.
    It’s tough to break out of the mentality of viewing a position in light of the original purchase price, current profit, etc.
    Looking at only the present position, I am comfortable holding at this price with 4 or 5 weeks to go and think there is still a good risk/reward to be had.

  8. Mark Wolfinger 09/10/2010 at 7:22 AM #

    It’s my OPINION, not a proven fact, that ignoring P/L and focusing on the position as it is today is the ‘better’ way to manage a portfolio.
    If a position is too risky to hold, many traders are willing to exit when they have a small profit, but want to hold – in order to get even – when they have a loss. Does that really make sense to you?
    This is a personal decision. Just consider the alternatives and decide which feels right for you.
    I agree that your example position feels right to hold – for now.
    Good trading