Post Expiration: Option Trading Ideas

Today I'll share some of my thoughts as I look at my current portfolio (mostly June with a some July RUT spreads).  Another expiration has passed and it's time to consider new positions.

August RUT options will begin trading today, but I think I'll pass.  Right now I'm not anxious to sell call or put spreads when IV is so much lower than it has been in recent times.  These spreads are short vega, and if I'm going to take a 90-day position and sell vega that expires in August, I need better prices that I anticipate will be available. 

I have no idea if IV will move higher over the near term, but it feels safer to add to my July positions, if I decide to do anything new.


I now own a very well-insured portfolio.  I am in no danger of incurring any significant losses, but because of that insurance, my potential gains are limited.  My gut feeling is that I own this insurance at the wrong time, but I'm not going to sell it out now.  I'm looking for a bit of extra safety these days.  If I find that new July iron condors are attractively priced, I can add several to the portfolio because I already own insurance.  I'm not interested in adding to my short-term (Jun) positions.


There's one decision to be made in the coming weeks.  Because I own so much protection, am I still willing to cover those OTM call and put spreads when they reach my 'one penny per trading day remaining' threshold?  There's no need to cover for risk management, but it's still an inexpensive method for giving myself a chance to have a big win if that unexpected market event occurs.  I plan to compromise.  I want to repurchase those spreads, but I'll hold out for a better price.

Good trading to everyone and may this be a winning expiration for all!


6 Responses to Post Expiration: Option Trading Ideas

  1. JCVictory 05/18/2009 at 7:08 AM #

    With this volatility environment, when do you start to consider adding Double Diagonals?

  2. Mark Wolfinger 05/18/2009 at 7:59 AM #

    A very good question with no simple answer – but I am already considering it. In fact, I’m very near vega neutral right now.
    Over the past few years, I’ve played double diagonals when VIX was near 25. But today’s markets don’t resemble the good old days and it not easy to know when an IV bottom is at hand.
    At one time I was convinced that IV runs in smooth cylcles, line a sine curve. Because we have seen enough black smwan events to last a lifetime, IV changes are less smooth. To me, that means less predictable.
    Thus, my recommendation is to trade both iron condors and double diagonals. Take a look at your total vega position and keep it ‘near’ neutral.
    This does not feel like the right time to get too long vega (double diagonals) because IV has been steadily declining. Nor do I (my comfort zone) want to get short (iron condors) too much vega.
    I don’t see any way out except to mitigate vega risk – until I’m ready to take a stand. You may already feel confident about getting long (or short) vega. If you do, then trade to suit your comfort level. But, I’m not ready to commit to choosing sides.
    An obvious alternative is to open one double diagonal spread (I don’t mean a one-lot, I mean one position). If IV drops to a certain level, add another. Like dollar cost averaging, this would be vega cost averaging. The good news is that if market volatility is declining, then that limited market movement means that your double diagonal spead should be profitable – just not as profitable as an iron condor would have been.
    Double diagonals don’t seem too risky to me here. The question is how much of your porftfolio to dedicate to that method, and I just don’t know what the future holds

  3. Erin 05/18/2009 at 2:18 PM #

    Hi Mark,
    What is your view on using calendar spreads to reduce portfolio vega?

  4. Mark Wolfinger 05/18/2009 at 2:56 PM #

    It’s an excellent method for gaining some positive vega.
    But, obviously it’s only for those who like calendar spreads.
    My personal objection to calendar spreads as a stand-alone trade is the necessity of picking market direction to achieve the best restults. When I add calendars to iron condors, I get double diagonals, and those suit my style better.
    But, as a vega reducng trade, calendars are a relatively inexpensive way to meet your needs.

  5. JCVictory 05/28/2009 at 7:24 AM #

    I have learned (the easy way!) how volatility impacts an iron condor. As you well know, volatility has been declining steadily since the end of April. This has been extremely beneficial to my July RUT iron condor.
    However, with the knowledge of the power of volatility has on a position comes a certain anxiety about opening new positions and wanting to do so in a favorable volatility environment.
    However, if I choose not to predict price right now, I think I’m going to do the same with volatility. Getting more vega neutral feels good to me as well.
    The advice in your book (especially point 3 on p. 211-212) has been very helpful as I evaluate an AUG/SEP double diagonal position that will work in harmony with my AUG iron condor.

  6. Mark Wolfinger 05/28/2009 at 8:49 AM #

    Thanks James.
    Managing risk includes where to take risk, and vega risk doesn’t feel right at this point in time.