Real Life Iron Condor Trade

A reader submitted an iron condor trade, along with each of his adjustments – seeking comments.  He gave me permission to anonymously discuss this trade and how he managed risk.  Overall I believe this represents a well-managed position, worthy of discussion.  The trade was still open when I received (Dec 2, 2010) the details.

This trade represents a real-time scenario in which you can evaluate each idea and think about whether you like what was done or would have considered an (unspecified) alternative.  Does the insurance purchase, or each of the adjustments go along with the way you trade?  If not, it's an opportunity to sit over a trader's shoulder and judge his activity.  I offer this as an opportunity to learn how another trader thinks.

Trade data can be seen in the table at the end of this post.

 

(1) Sep 16: Trade 20 RUT Dec 530/540;730/740 Iron Condor. Premium $2.815

(2) and (3) Same date, he bought a strangle for insurance:

a) Buy 1 RUT Dec 720 C @ $7.80
b) Buy 1 RUT Dec 560 P @ $4.00

The initial trade involves buying a December iron condor with the strike prices of the short options being 190 [corrected] points apart.  I know that feels as if it's a pretty safe trade with each option being quite far out of the money.  Cash collected: $5,630

Our trader, taking a conservative point of view (which I would never discourage) adds one December strangle to provide some protection against loss.  Cost: $1,180.  Remaining cash: $4,450

(4) BUY +20 CONDOR RUT 100 DEC 10 730/740;760/770 CALL @1.5075 (cost: $3,015)

Two weeks later, trader buys condor [not to be confused with an iron condor], thereby rolling the short call spread from 730/740 to 760/770.  This trade uses almost all of the original cash credit.  Remaining cash: $1,435.  Please note that I'm keeping a running total of the cash premium because I understand that the vast majority of traders want to see that number.  My perspective is that we should make necessary and desirable trades, ignoring the profitability of the original trade because it's necessary to manage the current position well – not the original – to make money.

(5) and (6) On same date, trader covers the short put spread and sells a new put spread – but he sells only half as many (10 vs. 20).  This time he sells the RUT Dec 590/600 put spread. Net cash in: $225.  Remaining cash: $1,660

This type of trade is worthy of special discussion. The put spread was moved for two reasons:  To collect additional cash and to move the position a bit closer to delta neutral.  For some traders, this is perfectly normal.  If you began with no preconceived notion of where the market was headed, it's likely you still feel that way, despite the big rally.  With that in mind, moving the put portion of the iron condor makes sense.  Other traders, fearing a retracement, may not be willing to move the puts. 

Of course, he sold only half as many puts, so did not collect much cash.  From my perspective, $225 is just not enough incentive to make the trade.  And don't forget, that small sum comes before commissions.

My objection is that he did not collect enough cash for this trade.  If this idea of rolling the puts has appeal, then I think another strike or two (i.e., moving the short put to the 610 or 620level, instead of 600) would have been a good idea.  And this is extra true when selling only half as many puts. If he had collected more cash, he could have moved his insurance put (Dec 560) to a higher strike price.  Nevertheless, this is a risk management decision and he did nothing wrong.

(7) Approximately one month later (Nov 3) the call spread is rolled higher once again.  This time the condor costs $0.96 and moves the strikes of the short call spread to 780/790.  Cost: $1,920.  Remaining cash: $260 in the hole.

(8) At the same time, the trader sells another 10 call Dec 780/790 call spreads, increasing the call position to a 30-lot.  This presents significant extra risk.  I like the fact that he resisted selling extra call spreads until now, but am concerned that risk may be moving beyond his comfort zone.

[I have no details regarding our trader's account size, or tolerance for risk, but he is an experienced trader.  What I don't know is how much experience he has with options]

Cash collected: $1,150.  Remaining cash: $890

(9) and (10)  He sells his extra long Dec 720 call (bought as insurance) and replaces it with one Dec 750 call and one Dec 760 call. Cash collected $440.  Remaining cash: $1,330.

I like this trade. This is a good risk management decision and makes me feel better about the fact that he sold those extra 10 call spreads.  Apparently the plan was to buy extra protection, and this does the trick. 

Those who look at this trade in isolation may feel that it's a bad trade because the trade has negative time decay (theta), and the whole purpose behind trading iron condors is to collect that time premium.  However,  this specific trade is not designed 'to make money' as a standalone trade  It is to own an improved insurance policy.  He now has two calls protecting 30-lots of calls instead of one call protecting 20-lots.  How to manage risk and how much insurance to own (if any) are personal decisions.  All we can do is examine his trades and offer comments.  And hopefully learn something.

(11) (12) (13) This series of trades can be broken into two parts.  First, he bought back his 590/600 put spread and once again moved to higher strikes, selling half as many.  Thus, he is now short only 5 put spreads. Cash collected $115.  He then sold 10 Dec 640/650 spreads, collecting $0.90 for each.  That's another $900 and the remaining cash is: $2,345.

(14) The next day he brought in some cash  by rolling his insurance option to a higher strike (750 to 770).  Cash collected: $665 for a 20-point spread.  I like the idea of taking cash out of insurance by rolling higher.  My experience says that the minimum sale price should be 50% of the maximum value of the spread, and I prefer to collect 60%.  However, the trader may have made this play as a way to get a bit bearish over the short term.  Cash remaining: $3,010

(15) One day later, he sold some of his long insurance and collected $265 for his Dec 770 call.  This is a trade I just don't like.  I understand that we all want to earn good money from our trades, and holding this option to expiration is likely going to cost some cash.  However, once again the cash collected is just too small to justify the risk. He is short a 30-lot call spread, which may be ITM in a day or two. That $265 is too small for the upside risk. Cash remaining: $3,275

To me, this trade is micro management – attempting to achieve the best possible result by taking extra risk. Not a good long-term strategy.

(16) Twelve days later, the market has rallied and the Dec 770 C was repurchased at a price of $730.  I'm pleased he was not stubborn, and did not refuse to bite this bullet.  Good discipline.  Please note that it cost $465 to cover this error in jusgment.  The risk/reward for making that call sale was way out of line.

This was not an expensive lesson, but one worth learning:  Cash remaining: $2,545.

(17) Covered the 5-lot short put spread at $0.25.  I agree with playing it safe for a few dollars. Cash remaining: $2,420.

(18) It's now Dec 1, and theta and gamma are increasing.  He bought a one-lot to reduce his short position.  Don't be afraid to trade a one-lot, if that seems appropriate at the time.   Cost $103. Cash remaining: $2,317

(19) Covered the last of the put spreads at $0.20.  Cost $200.  Cash remaining: $2,117

(20) Sold five dec 690/700 put spreads @ $0.80.  Cash +$400. Remaining cash: $2,517. 

This is the killer trade.  This is the play that can destroy your career.  First, it only adds $400 of profit potential.  Next, it sets up a potential dilemma for the trader.  If the market takes a quick tumble (good for the whole position), it's likely to be too soon (and too expensive) for him to be eager to cover the call spread.  But that little put spread, and the measly $400 it generated threatens to lose a few thousand dollars.  And if he does pay up to cover those puts, then the real dilemma appears: Can he afford to sit by and NOT cover the calls?

Sure, the most likely result is earning part (knowing he will cover prior to expiration) of that $400.  And he will remember how well this worked and may make a similar trade next time.  This is strictly a gambling move.  With so little time prior to expiration, and with a position that already has  negative gamma, it's tempting to collect more and more premium and to move nearer to delta neutral.  However the risk is just too large for the small reward. 

Important note:  He made this trade earlier – and more than once: Selling some OTM puts to collect cash.  The big difference is that this time we are approaching expiration and, as explained above, if this specific trade turns out to be a loser – that would be okay becasue the call portion of the portfolio would earn some decent cash.  But it's much more involved than that.  An increase in imped volatility (due to the market decline) would make it even more difficult for the trader to be willing tp pau u[p to get out of his call position.  And that's the risk.  Taking a loss on the puts and possible still gettting hurt on the calls – that's the worst case scenario.

This is one of those 'let's take the extra cash right now' trades that just feels right.  The market shows no immediate signs of crashing and the trader can make another $300 by covering in a few days – so why not?  Because there is ust too little to gain.  In my opinion, it's already time to exit the December position and making it bigger and more risky is not the long-term winning action.

It's okay to continue to trade December options, but the point is that is too late to increase size and/or risk.

The true risk is not making this specific trade.  Instead it's the fact that winning this bet this time only encourages making a similar, but larger bet next time.  And the next time.  This is one trade that is guaranteed to blow up.  The obvious problem of a potental loss in the trade is not THE problem.  It's the overconfidence that gets a trader to the point where selling extra premium become the #1 choice for adjusting positions.  Although that is an acceptable method when the trader can afford to take more risk, the play is not to be made for insignificant sums – especially when time is short.  If the reward is too small, it's just not worth any risk (in my opinion).

He has been very conservative with the put selling.  Covering early, reducing size, covering again.  But this small trade is just to CTM (close to the money) for comfort.   Obviously it's our trader's comfort zone that matters here, however, some trades have a bad risk/reward ratio – and this is one of them.

If I get a further update, I'll let you know.  This is where the position stands as of December 2

 

1 9/16/2010 SELL -20 IRON CONDOR RUT 100 DEC 10 730/740/540/530 CALL/PUT @2.815 LMT
2 9/16/2010 BUY +1 RUT 100 DEC 10 720 CALL @7.80 LMT
3 9/16/2010 BUY +1 RUT 100 DEC 10 460 PUT @4.00 LMT
4 9/30/2010 BUY +20 CONDOR RUT 100 DEC 10 730/740/760/770 CALL @1.5075 LMT
5 9/30/2010 BUY +20 VERTICAL RUT 100 DEC 10 540/530 PUT @.45 LMT
6 9/30/2010 SELL -10 VERTICAL RUT 100 DEC 10 600/590 PUT @1.125 LMT
7 11/3/2010 BUY +20 CONDOR RUT 100 DEC 10 760/770/780/790 CALL @.96 LMT
8 11/3/2010 SELL -10 VERTICAL RUT 100 DEC 10 780/790 CALL @1.15 LMT
9 11/3/2010 SELL -1 VERTICAL RUT 100 DEC 10 720/750 CALL @12.00 LMT
10 11/3/2010 BUY +1 RUT 100 DEC 10 760 CALL @7.60 LMT
11 11/3/2010 SELL -5 VERTICAL RUT 100 DEC 10 620/610 PUT @.89 LMT
12 11/3/2010 BUY +10 VERTICAL RUT 100 DEC 10 600/590 PUT @.33 LMT
13 11/3/2010 SELL -10 VERTICAL RUT 100 DEC 10 650/640 PUT @.90 LMT
14 11/3/2010 SELL -1 VERTICAL RUT 100 DEC 10 750/770 CALL @6.65 LMT
15 11/4/2010 SELL -1 RUT 100 DEC 10 770 CALL @2.65 LMT
16 11/16/2010 BUY +1 RUT 100 DEC 10 770 CALL @7.30 LMT
17 11/22/2010 BUY +5 VERTICAL RUT 100 DEC 10 620/610 PUT @.25 LMT
18 12/1/2010 BUY +1 VERTICAL RUT 100 DEC 10 780/790 CALL @1.03 LMT
19 12/2/2010 BUY +10 VERTICAL RUT 100 DEC 10 650/640 PUT @.20 LMT
20 12/2/2010 SELL -5 VERTICAL RUT 100 DEC 10 700/690 PUT @.80 LM

 Table. List of trades

851


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39 Responses to Real Life Iron Condor Trade

  1. davmp 12/10/2010 at 7:18 AM #

    Thanks to both you and the trader for putting this up! _VERY_ useful for my options education to see how someone else actually managed a position on the same instrument and timing as I’ve been doing.
    I think there’s a typo though, the initial IC only had a 190-point spread between the shorts (540 to 730), right? Not the 260 you say in the text.

  2. Mark Wolfinger 12/10/2010 at 7:29 AM #

    davmp,
    Thanks for correction.
    These are useful posts for Options for Rookies readers. Just time-consuming – especially if I am making the real trades. With our trader’s input, the task or me is easier.

  3. TylersTrading 12/10/2010 at 10:12 AM #

    Nice post. The length looked a bit daunting, but well worth the read.

  4. Dave 12/10/2010 at 10:36 AM #

    Thanks for yet another wonderful post. Typical morning: 2 cups coffee while TOS fires up, goodbye to wife, then search Twitter for any Wolfinger posts…
    This trade seems very complicated to me. As I read on I kept thinking 1) His broker must really like him, and 2) He seems a bit directional for a “market neutral” trade.
    Great reading though and wouldn’t surprise me in the least if he’s had a better year than I!

  5. Mark Wolfinger 12/10/2010 at 10:49 AM #

    Thanks Tyler.
    I know about the length. It just felt wrong to divide this into two parts.
    Input appreciated.
    Regards

  6. Mark Wolfinger 12/10/2010 at 10:54 AM #

    Dave,
    I found his approach to be reasonable.
    There are really only two choices (with modifications). When the market moves one way and you buy back one side of the iron condor – you can either
    a) do nothing. Exiting one side reduces overall risk
    b) keep rolling (n this case puts) to higher strikes, bringing in cash plus needed delta.
    He struck a compromise by selling fewer puts.
    To the always neutral trader, this feels wrong. To the trader who does not want to get hurt on the downside, after spending cash to reduce risk on the upside, this feels right.
    Choose which ever feels more comfortable or more satisfactory – for your needs. I don’t believe in strict rules that must never be broken (such as ‘stay neutral’).
    Thanks

  7. Dave 12/10/2010 at 2:59 PM #

    Mark-
    With a complete absence of artistic talent (I agree with your assessment that trading ICs is part art/ part science) and being a 100% certified emotional basket-case when it comes to slinging hard-earned cash I personally MUST live by strict rules (I’m a r-e-a-l-l-y shitty trader on the fly).
    So; I look at each position every morning before open as if it’s a brand new fresh proposition (learned from you) and decide if I even want to be there. Next, I n-e-v-e-r let a position (IC) run past a 33% loss/ compared to the profit it could generate. Why that number? Not a clue, pulled it out of thin air one day and it seems to be a decent benchmark. At (or before) that line I simply close the position, I don’t get “cute” trying to time the legs, I just shut ‘er down: Saves commissions, guessing, whipsaws etc etc. Many of the other “strict” rules I follow trading -anything- have been gleaned from you. They’ve made a world of difference in my results. THANK YOU.
    -Dav

  8. Mark Wolfinger 12/10/2010 at 3:33 PM #

    Dave,
    OOPS. If you truly are a 100% emotional basket-case, there is not much to be done. I’ll just assume that’s an overstatement.
    But – you you have the answer. A trade plan with strict rules.
    33% is a decent benchmark – especially when you have lived with it and it has not been discarded.
    I’m very pleased to hear that my suggestions have worked wonders for you. I thank you for that.
    Regards

  9. Dave 12/11/2010 at 12:26 AM #

    Thanks Mark, strict rules doesn’t sound like much fun to a guy/gal eager to quit their job and move on to something more intellectually (and -potentially- financially) satisfying.
    I wonder how many read this blog with that goal.
    Man, have I been there.
    Free advice to them: Slow down.
    Me? I’m 19.52% ytd on $ risked (all that matters imo) at this writing and although I can’t say I couldn’t/wouldn’t have done it (or probably better) without you, I CAN say with absolute resolute– I won’t be giving it back anytime soon… And that’s a -VERY- large part your doing.
    …It’s not how much you make, it’s how much you don’t lose. Say it again; it’s how much you don’t lose… Again…

  10. Fran 12/11/2010 at 2:23 AM #

    Hi Mark,
    have you read this ET discussion about IC trades?
    http://www.elitetrader.com/vb/showthread.php?threadid=211720
    I have found Maverick’s post specially interesting (and clear :-))
    http://ventadeopciones.com/?p=1048
    I’d like to know your opinion about it.
    Thanks.

  11. Mark Wolfinger 12/11/2010 at 9:24 AM #

    Dave,
    The amount you don’t lose is more important that the amount you earn.
    It really is easy to make money with option trades. However, taking that sentence out of context destroys an entire discussion becasue it is also very easy to lose a lot of money when trading options.
    The are very conservative strategies that can very easily limit losses, but the best way to do that is to trade appropriate position size in the first place.
    That’s for sharing your thoughts. ‘Not giving it back’. I’ve got to tell you that’s the winning trader’s mantra.
    As I’ve said, we all have good periods when things go so well that we can get overconfident. It’s vital to remember that a lucky streak is likely to be followed by a not-so-lucky streak and that risk must be under control at all times.

  12. Mark Wolfinger 12/11/2010 at 10:18 AM #

    Fran,
    I was a big fan of Maverick (the TV show starring James Garner that first aired in 1957).
    I also liked the writing of the Maverick, whom you quoted at length in your blog.
    It is difficult to argue with his point of view.
    Nevertheless, I will try to do so in a post next week.
    Thanks for bringing this great topic to our attention.

  13. MC 12/11/2010 at 8:03 PM #

    hi Mark,
    I’m somewhat new to options and I find this post extremely useful. Thank you so much.
    I’ve got something to clarify. For trades (5) and (20), they are basically closing the FOTM puts and selling CTM ones to remain neutral. Granted, you mentioned they were sold for lesser than desired premium. But you seem OK with (5) but not so with (20). Is it because of the time to expiration remaining? In both cases IV increases when RUT drops, so is it the case that gamma is increasing which makes the puts harder to manage (like what you always mention in other posts)?
    Thanks again.

  14. Mark Wolfinger 12/11/2010 at 8:45 PM #

    MC,
    Welcome to OFR.
    These trades represent a few different ideas.
    First, this trader is making no attempt to remain neutral. He is short delta.
    What he is doing is collecting additional cash by closing a less costly put spreads and selling a smaller quantity of a more costly (CTM) put spread. I don’t love this trade because the net cash generated is too small to do him any good on a continued rally. And that’s the purpose: to provide a cushion against loss when the market rallies further.
    Much of this type of trading is art vs. science. There is no set of rules to follow. That’s good. It allows the trader to own a comfortable position.
    He could have chosen to sell 20 put spreads after buying 20. That would have made him nearer to delta neutral. He elected not to do that. I have no objection
    I trade the way he does. I am afraid of a down market. I am not playing for one. I am not betting on it. But I am afraid. So when buying in put spreads (I wait until they are 15 or 20 cents, and usually don’t sell new put spreads. He chooses to downsize by selling fewer than before.
    It’s a personal, comfort zone decision. It’s neither right nor wrong. But it is one of a number of reasonable alternatives.
    The problem with (20) is strictly due to risk. Selling OTM options that are near expiration is something difficult to resist. Traders tend to think of them as ‘free money’ and just ‘know’ that they will be able to exit at a profit.
    But it’s only $400 maximum – and less in reality because he will cover before they expire. To me, that is too much risk. And if you read my explanation above – the part where it says in bold: THIS IS THE KILLER TRADE – you will see the real potential problem. the problem that may cost thousands. The risk/reward is just not there.
    If he want to trade this position into December, that’s his business. But he should not be opening new trades. Just reducing as needed (in my opinion).
    MC, it’s not that the 5-lot of puts may be difficult to manage on their own. It’s that these NEAR TERM puts present a problem he does not need. Not for $300. It’s just a bad trade.
    Here’s the bottom line for you – as a new options trader, please be wary of ‘making money’ by selling extra spreads. The risk/reward is terrible. It is a method that works again and again, until it doesn’t. By that time, the trader will probably be selling too many spreads and take a bit hit. Be very careful when selling new options as an adjustment – even when it comes after buying back the FOTM risk.

  15. MC 12/11/2010 at 10:48 PM #

    Mark,
    Thanks for the prompt and detail reply. I understand the bottom line. I like your way of risk management. Much appreciated.

  16. sandeep 12/12/2010 at 3:52 PM #

    Hello,
    Brand new here, hope this is an appropriate place to ask a question not directly related to the IC trade discussed above.
    My question regards SPY and SPY options. SPY goes ex-dividend on Friday, Dec. 17, with an expected dividend of around 70 cents. If all things remain equal, would we then expect SPY to open on Friday 70 cents less than it closes on Thursday? What I find confusing is that when I look at back at the last several ex-dividend days, it seems that SPY actually opened up by about the amount of the dividend on the ex-dividend day.
    Regarding the options, I am wondering how this affects the near the money calls – take the DEC 126 call for example. I do not think that the strike price gets adjusted for the dividend, so is the market currently pricing that call with the assumption that SPY will drop by the amount of the dividend before Friday? Thanks for any help, and for this blog, very educational.

  17. sandeep 12/12/2010 at 4:10 PM #

    For example, the previous ex-dividend day for SPY was 9/17, and it payed a dividend of 60 cents. The close on 9/16 was 112.45, so I would have thought that it should open 60 cents lower on 9/17, yet on that day it opened at 113.04, almost exactly 60 cents higher.

  18. Mark Wolfinger 12/12/2010 at 7:26 PM #

    Hello sandeep and a hearty welcome,
    Yes, the most recent blog post is always a good place to ask away.
    1) Yes, it ‘should’ open 70 cents lower than it closed on Thursday – but that is ONLY TRUE when the markets open ‘unchanged.’
    2) A string of such occurrences (opening higher by amount of div) is certainly unusual. Here is one way you can see the truth.
    a) Take Thurs closing price
    b) Any time Friday, take a look at current SPY price AND the ‘net change for the day’
    c) Friday’s price should be Thurs close +/- net change – div.
    Thus if Friday’s price is unchanged, it will (should be) 70 cents less than Thursday close.
    3) Options: The strike price does not get adjusted for the dividend. You are correct
    4) Yes, market makers’ computers ‘know’ that SPY will be that 70 cents lower on Friday morning – and that is taken into consideration when pricing all options. That means calls and puts as well as options that do not expire on Dec 17.
    5) Don’t forget about Dec calls that are ITM. The option owner has to exercise the calls Thursday afternoon in order to get the dividend. That makes him long the stock for Friday – and there is downside risk.
    The person who does not want to exercise should SELL those options before Thursday close. Otherwise they will also open 70 cents lower on Friday. For example, the Dec 120 call is worth parity. When the owner fails to collect the dividend via an exercsie, the dividend disappears from the value of his call.
    SD, where are you getting your SPY prices? You are looking at the adjusted closing prices. In the real world, SPY closed at 113.05. The adjusted (for div) close was 112.45.
    I’ll be honest. I don’t know how to use the adjusted closing price. It appears to represent a steady stream of dividends that have already been paid by the stocks in the SPY portfolio. Apparently the fund managers hold that cash and pay it once per month, on expiration Friday. Note that the adjusted ‘discount’ from the true close increases until it reaches a high at ex-dividend day. Once the dividend is paid, it disappears – i.e., goes back to zero.
    Regards

  19. sandeep 12/12/2010 at 9:47 PM #

    Mark,
    Thank you very much for your detailed reply. I got my SPY prices just by looking at the prices on Prophet charts for those days – I am sure you are correct about the adjusting closing prices.
    This SPY dividend makes things a bit more interesting this week. In my case I sold the Dec 126/127 call spread, so I’m watching the price of SPY very closely and would very much like to see it drop on Friday if I still happen to be in the trade at that time. Thanks again,
    s

  20. Mark Wolfinger 12/13/2010 at 10:29 AM #

    s,
    Yes, when you hold to the end, it does require very close monitoring. Good luck

  21. Burt 12/14/2010 at 8:43 AM #

    Mark, Great post as always. I know this would be a bit labor intensive, but is there anyway to show a cumulative P&L and risk vs. return for this group of trades?
    For educational purposes this is probably one of the best posts I’ve read. It provides one with a lesson on how complicated from a risk perspective and number of trades to maintain a position one might want to get. It also makes me wonder whether the opportunity cost (not to mention the trading costs) associated with so many adjustments is worth it relative to a risk-adjusted return.
    Even if you don’t go through the P&L, what is your sense of the cumulative risk relative to the after tax and trading cost return?
    Of course, “complicated” is a relative term. As a former market maker, this “trade” may seem rather rudimentary to you. Would you be able to tease out how “advanced” these amount of trades appear to you. What I mean is that a true option rookie would not be likely to handle all the various decisions required. But with experience might approach the amount of adjustments that occurred. Where along the line of rookie to experienced trader would you place this trade?
    Thanks as always,
    Burt

  22. Mark Wolfinger 12/14/2010 at 2:11 PM #

    Burt,
    No can do. I have no access to data. Nor would I spend time doing that. I see zero to gain.
    Risk vs. return does not apply. How can anyone determine how much risk was involved when holding the trade for a few days or weeks?
    Most incorrectly focus on profit/loss instead of risk. If you don’t want to own the position, then don’t own it. Holding just because it would result in a loss to exit is foolish foolish foolish.
    More in a separate post soon.
    Thanks

  23. Burt 12/14/2010 at 4:45 PM #

    Mark,
    Thanks for the response. But I am bewildered by the statement that risk vs. return does not apply. Risk vs. return seems like the most basic premise of trading. Moreover, one knows the maximum amount one can lose on any option trade so I don’t really see how it is difficult to determine risk. True, this trader is not holding positions to expiration so real risk is less than theoretical. But risk is still quantifiable.
    Perhaps I have misunderstood you or you might have misunderstood me. Since the position was adjusted, rolled, incorporated with insurance, etc. to have no semblance to the original trade, I was curious to discern whether the potential risk adjusted returns with all these adjustments were worth the “effort.” It makes sense to go through these adjustments if you’re beating the market. If not, just buy and hold.
    I know one example will not prove anything, but it could illustrative nevertheless.
    I will look forward to your post.
    Thanks,
    Burt

  24. Mark Wolfinger 12/14/2010 at 8:38 PM #

    Burt,
    I wish you had waited to see what I had to say before sharing your bewilderment.
    Risk vs return it a top concept for traders. No argument.
    You don’t see that it’s difficult to determine risk? You asked me to calculate the return at numerous points in time and to evaluate the risk vs. reward for each of them. OK, the first point is two weeks after entry.
    How would you evaluate risk for two weeks so that it can be compared with the actual return for those two weeks?
    If you know the maximum loss for any one trade, what does that have to do with risk? Unless the position is held until expiration.
    It’s virtually impossible for a position to go to its maximum loss overnight, and there’s always an opportunity to exit and salvage something. How can anyone determine how much can be salvaged? And that’s needed to know the risk.
    So I ask again, how do you determine the risk for the two week holding period? I don’t know how to do it. You tell me it’s quantitative. So how would you go about doing the math?
    And after you do all that work, how is the result worth anything? What is it that you propose doing with the numbers, even if it’s only one example? I see no value in the numbers, so am willing to be enlightened.
    I certainly did not understand what you were asking. I took your words at face value. You wanted the “cumulative P&L” for the trades as well as the risk vs. reward. I assumed you wanted the P&L at each and every adjustment point.
    I have no idea how to determine risk adjusted returns. So I cannot reply. But I’ve already written the post and it will appear tomorrow.
    I don’t recall how experienced you are as a trader, but your statement: ‘wondering whether the adjustments were worth the effort.’ Wonder no more. They are worth it. If you attempt your alternative suggestion: ‘just buy and hold instead’
    I can almost guarantee disaster.
    If you become an iron condor trader (and that is what we were talking about, not buy and hold individual stocks) and choose the buy and hold methodology, then your account will blow up sooner or later.
    Regards

  25. Burt 12/15/2010 at 7:05 AM #

    Thanks Mark. I appreciate your lengthy response. Let me get back to you with a more detailed answer to your questions and a better explanation of what I mean.
    Burt

  26. Antonio 12/15/2010 at 4:43 PM #

    Hi Dave,
    The 33% benchmark seems to me really very easy to reach for an IC, surently you have to close he most of your IC in loses or d you have a good winn/loss ratio?.

  27. Mark Wolfinger 12/15/2010 at 7:22 PM #

    Antonio,
    If you believe that 33% per year is a reasonable return for an iron condor trader, then you do not have enough information.
    Yes, some earn more, but that is a remarkable profit for >99% of traders.

  28. Antonio 12/16/2010 at 4:44 AM #

    Sorry for my english lenguage comprehension Mark, but I understood, Dave cuts loses when IC value 33% more than the original given credit, so that´s a number seems to me easy to reach many of IC done along the year so difficult to earn money if the most of his IC are closed in loses.

  29. Mark Wolfinger 12/16/2010 at 8:14 AM #

    Antonio,
    Yes, I see what you were saying. My fault, not yours.
    He does not exit when the IC loses more than 33% of the original credit. That would be covering a $300 IC when it reaches $400.
    What he does is cover when the loss is 33% of his maximum profit. That means he is willing to loss 33% of $700, not 33% of $300.
    That gives him a lot more room and a lot more time for his trade to become a winner.
    Regards

  30. Paul Seifert 12/16/2010 at 10:07 AM #

    Mark It sounds very interesting. I will be very interested in looking at this. Thanks Paul

  31. Antonio 12/16/2010 at 2:23 PM #

    Sorri Mark, I really don´t understand the 700$ number, the maximun profit of the IC is the credit: 300$…

  32. Mark Wolfinger 12/16/2010 at 4:48 PM #

    Antonio,
    It is I who must apologize.
    The cash collected is $300
    The maximum loss is $700 for a 10-point iron condor.
    I made a mistake. You are correct. Dave exits when the loss is one third of the profit potential, or $100.
    I don’t know how that method can generate profits, put he never takes a big loss, and that is good enough for him.
    Perhaps when he takes that $100 early enough in the expiration cycle he opens a new iron condor and earns more enough to cover the early loss.
    Whatever it is that he does, it works for him.
    I doubt I could convince myself to limit losses to $100.

  33. Mark Wolfinger 12/16/2010 at 4:48 PM #

    Paul,
    Thanks for letting me know
    Regards

  34. Dave 12/17/2010 at 10:28 AM #

    lol, no….. maybe I should apologize…
    I shut the trade down when losses reach 33% of total possible loss ($231 in the 7/10 example).
    Sorry, thought that’s what I said the first time… Was lost in another thread… Email alerts to comments might be good…
    I’m (obviously) not a quant. I just picked that number– for a few reasons I’d be happy to explain but believe this thread is probably dead by now…
    …Sorry for the neglect…

  35. Mark Wolfinger 12/17/2010 at 11:38 AM #

    Dave,
    I am not aware:
    Do you get email alerts when I respond?
    Do you get email alerts when anyone continues the thread?
    I thought that was what you said in the first place also. No reason to take the time to find it now.
    Thanks

  36. Dave 12/20/2010 at 12:38 AM #

    I don’t receive email alerts from your blog on responses to my post. I’ve interacted at blogs that had that feature– very, v-e-r-y nice convenience.
    Yhese days I don’t get many stock market emails, having given on all market related/ time burning blogs except for yours and centrificaldeforest.com (they absolutely couldn’t be more different lol).
    I also threw CNBC out the window and enjoy a lowered blood pressure and marked improvement in my trading.
    🙂

  37. Mark Wolfinger 12/20/2010 at 8:03 AM #

    Dave,
    Yes, It’s a big convenience. I may have to move to another blogging arrangement if I cannot get this feature. I’ve inquired via e-mail.
    Yes CNBC is easy to love/hate. I choose the latter.
    Thanks for the information.

  38. Dave 12/20/2010 at 6:40 PM #

    I’d suggest WordPress… Very easy. I’m starting a local rag; this represents an evening’s work so far: (link broken)
    I host w/ GoDaddy and the whole project could not be any simpler/ easier.
    …fwiw…

  39. Mark Wolfinger 12/20/2010 at 6:56 PM #

    Dave,
    I’m also using WordPress for the new Premium site.
    But I have too much to learn to make the transfer now.
    I do expect to move this blog to WP.
    Nice photo
    Thanks