Q & A. Following a Specific Trade

Hi Mark,

I have a couple of questions for you.

First of all, I'm having a hard time buying iron condors.  I put in an order with a minimum net credit, but it
rarely gets executed. I imagine that since I'm dealing with 4 options,
it will be the rare instance when the spreads are sufficiently close to
make my desired price. But if one orders an iron condor at the market,
I would expect that one would get killed by the spreads and the market
makers. Yet you talk about buying them all the time. What's the secret?
Do you just ask for a smaller price?

My second question concerns your willingness to discuss actual
trades on this blog. You said that you are planning to buy some RUT Feb
and March iron condors. But you didn't say which ones. I suppose that
if you announced it in advance, you would give up too much, both in
terms of others competing with you and in terms of market makers taking
advantage of knowing your plans. But what about discussing positions
after you take them — along with a rationale for the positions?

Also, how would you feel about discussing trades that your readers
suggest? For example, if I say that I'm considering trade X (or that I
took position X), would you be willing to comment on it? It would have
to be understood that your comments are not to be taken as investment
advice but simply as an academic exercise.

If you would be willing to do either of the preceding, it would then
be interesting to follow those trades and see how they do and whether
the rationale holds up.

— Russ

***

Hi Russ,

1) I do almost all of my iron condors as a single trade.  Do not, under any circumstances try to open a position at the market!

2) I cannot tell you if I ask for a 'smaller price' when I have no idea what price you are asking! 

Here's
what I do, using IB as my broker. I look at the markets for the call
and put spreads separately.  Then I try to sell @ 5 cents less than sum
of the mid point quotes.  Then every 10 seconds (or two minutes), I
drop my price by another nickel – until I am not willing to go lower.

Today,
I find that I must move 15 to 20 cents below the midpoint when seeking
$3 to $3.50 for a spread.  Recently, in more volatile markets, I could
get better prices.

3)
The reason I don't list my trades (I've had this discussion before) is
that a few readers may blindly follow.  I don't like that idea.  A
trade that suits me may be unsuitable for someone else.

Here's
what I will do as a compromise.  I will list some trades, but will NOT
follow them, nor offer any advice on how to adjust or close them.  This
listing is merely in response to your request.  Believe me, there are
no market makers who would go on the defensive if they knew about my
trades. 
They could not care less.  Nor am I concerned about competition.

The
reason I cannot follow-up on these trades is that in my portfolio there
are no single trades.  I manage my portfolio in its entirety, and not
as single iron condors.  The last time I tried to accommodate a reader,
it not only required too much time to keep up with the trades, but I
also lost money needlessly.  I will reply if anyone asks a specific question later, but I may no longer be holding the trade in my portfolio. 


Trades made 12/22 and 12/23
 

I bought (sold the call and put spreads) the following RUT iron condors in small size:

March 340/350 570/580.  Credit $3.30 and $3.40
March 340/350 580/590.  Credit $3.10 (in a different acct)

Feb 360/370 550/560.    Credit $3.10
Feb 380/390 560/570     Credit $3.40

4) Yes, I am willing to comment on other people's trades – from my perspective. 

197

8 Responses to Q & A. Following a Specific Trade

  1. Russ Abbott 12/24/2008 at 4:11 PM #

    Thanks, Mark,
    I apologize for being so dense about this, but I don’t see how you get those numbers. For example, here are today’s closing bid/asked prices according to finance.yahoo.com.
    Mar RUT Bid Asked
    340 put 8.3 9.9
    350 put 9.7 11.6
    570 call 9.5 12.6
    580 call 8.5 10.7
    590 call 7.1 9.2
    By the midpoint, I’m assuming you mean the average of the best possible prices (sell at the asked and buy at the bid) and the worst possible prices (sell at the bid and buy at the asked).
    For the 340/350 570/580 I get 7.4 as the best and -1.4 as the worst, for an average of 3.
    For the 340/350 580/590 I get 6.9 as the best and -0.9 as the worst. The average is 3 (again).
    I realize that today’s prices are not yesterday’s prices. But the time difference should be minor (we are talking about March after all), and the net position difference should also be fairly minor since there wasn’t much movement in the past few days. Yet you are getting more than 3 for both trades (significantly more in two cases) rather than less. How do you do it?
    Thanks.

  2. Mark Wolfinger 12/24/2008 at 4:31 PM #

    Russ,
    Suggestion: NEVER use Yahoo for option data. They are not always wrong; just often enough to be a problem.
    Get prices from your broker or the CBOE:
    http://www.cboe.com/delayedquote/QuoteTable.aspx
    It’s also a bad idea to use closing prices because the bid/ask spreads are wider at the end of the day than during the day. But, that’s of no importance in this example.
    You ask how I did it: I entered the order and it was filled. When I sold for $3.40, the mid-point was $3.60.
    Today’s end of day prices are significantly different from during the day prices of one or two days ago. The markets are closed tomorrow and the market makers have already taken that extra day into consideration when posting bids and offers.
    Implied volatility has decreased, and that makes the biggest difference.
    Add it up and the MMs are simply bidding less for the same spreads right now. If IV pops higher, I’m sure you will be able to get even higher prices, but not today.
    7) Here’s something else to consider. Yes, your definition of midpoint is correct, but that’s not what I use. At IB, I ask for the market in the call spread and the market in the put spread. I use the midpoint of those quotes. When the markets were calmer, the separate spreads were always quoted at a better price – i,e., a tighter market.
    I don’t know what else to tell you.

  3. Russ Abbott 12/24/2008 at 4:57 PM #

    OK. I understand what you are saying about end-of-day prices. But would you explain what you mean by asking for the market in the call and put spreads and then taking the mid point. Aren’t the bid-asked prices the market?
    Thanks.

  4. Mark Wolfinger 12/24/2008 at 8:03 PM #

    Russ,
    I must ask: Have you traded many options, or are you first getting started? I must know to provide a proper response.
    Assume the 30 put is 0.50 to 1.00
    Assume the 35 put is 1.25 to 1.75,
    It looks as if the quote for the 30/35 put spread is .25 to 1.25. But most of the time market makers will give a break on the wide bid ask markets when a combination, or spread order is entered.
    The spread market (called the inside market) could easily be 0.40 to 0.90, instead of 0.25 to 1.25. It may be even narrower than that. To find out, your broker must provide some mechanism by which you can see the market in the spread.
    Thus, ask for the (for example) Mar 30/35 put spread, rather than for the Mar 30 put and the Mar 35 put.
    If your broker offers no way for you to see the market in a spread, then you have an inadequate broker. Call them and ask ‘how can I find the inside market for the RUT Mar 340/350 put spread.’ (or any other spread that interests you.)
    Better yet, ask how to see the market in the complete iron condor. I do that all the time and my broker gives me the quote for the iron condor. then I know at what price to offer the IC.
    Why is this important? Because you don’t have to trade with market makers. Some customer may be trying to buy what you want to sell – and that customer is willing to pay more than the market makers. If you can find that bid, it’s to your advantage.
    Mark

  5. Russ Abbott 12/24/2008 at 9:39 PM #

    I’m probably the typical academic. I’ve traded options and are quite
    familiar with how they work, the option valuation models, what implied and
    historical volatility mean, and the various strategies. But I’m probably
    pretty naive in terms of market street smarts. For example, I didn’t know
    that there were spread bid-asked prices! Also, I don’t want to spend too
    much of my time trading. Ideally, I’d prefer not to think about the market
    during the week. I’d like to make decisions on the weekend, enter orders,
    and then not think about it again until the following weekend. I don’t have
    the stomach, the personality, or the skill to enter orders when the market
    is open. Your strategy of entering an order, revising the order if it isn’t
    filled, etc. isn’t something I want to start doing. So is there hope for
    me?

  6. Mark Wolfinger 12/24/2008 at 10:24 PM #

    Of course there’s hope for you. I was simply wondering about your unfamiliarity about getting quotes and perhaps entering orders.
    Iron condor ownership is a method that you can adopt and then reconsider your position every weekend. Nightly would be better in terms of risk management, but not mandatory.
    Happy holidays,
    Mark

  7. Russ Abbott 12/26/2008 at 2:46 PM #

    Thanks, Mark,
    You also mentioned that you don’t adjust individual positions and instead
    adjust your overall portfolio. That makes a lot of sense. Do you use any
    software tools to help you see the current state of your portfolio and how
    changes in the market will effect it overall?
    Thanks.

  8. Mark Wolfinger 12/26/2008 at 6:02 PM #

    My broker provides a constant picture of my major risk factors (Greeks), along with a graph of how well or poorly the portfolio does if my underlying asset moves significantly.
    That’s enough for me.
    If you own a small number of iron condors, this method is not likely to be helpful.