Size matters. Except when it doesn’t.


I really enjoy your blog and your book is excellent as well.  Yours is the voice of reason in the forums.  🙂

I've been trading front-month RUT iron condors for about 3
years with position size in the 30-50 range.  Typically, I place the
order as one iron condor (I don't leg in), and I get filled 10 to 15
cents off mid prices. 

I would like to continue increasing the size of
the positions as the account grows, but I am curious how large I can go
before size begins to affect things.  If I entered an order for a 100
contract iron condor, would I still get filled 10-15 cents from the
mid?  Would it be better to spread these over several strikes and enter
orders over several days? 

 I may not be anywhere close to the point I need to worry about this, but I just wanted to get your take on the matter.



Thanks for the kind words.

1) If you are trading SPX, GOOG, APPL or any other very actively traded options – and especially if trading the front month – size makes no difference, unless it's far more than you are likely to trade.  With these underlyings,100 lots is no more than a speck of dust.  It would be gobbled up as quickly as your current orders.

Here's a hint:  If you begin to get partial fills on a consistent basis, then you can deduce that your order size is beginning to be too large for the specific options you are trading.

2) Better to split the order over more than one day?  Only if you want to add time diversification to your trading.  If you wait a day or two, a market move would allow you to open a new iron condor with different strike prices.  That may appeal to you as spreading the risk.  Or you may find it inconvenient to have a slightly more complicated position to handle.

3) As far as getting filled a specific number of nickels off the midpoints is concerned, that's not going to remain constant.  Sometimes the market makers will be anxious to grab your offers and at other times they may have to be coaxed by a better price.

Don't forget that what works for one stock or index may not be viable for another.  When we had live market makers in the pits, each crowd had its own personality and trading habits.  With electronic trading, I don't know how much one stock differs from another regarding fills.  Except that high volume makes it easier to trade.

4) My take is that over-confidence is a
killer, so be careful.  The simplest method for managing risk when trading options is to pay attention to position size.  If you are trading 30-50, I believe your next level should be 40-60. 

I also think you should begin to remove cash from your account
every month, quarter, or year. DO NOT try to continuously compound earnings.  There will be a losing streak. 



2 Responses to Size matters. Except when it doesn’t.

  1. soemardi 01/30/2010 at 6:31 PM #

    hai dan,excuse me, do you trade only RUT? and i think youhave good probability of winning for this three years..
    and mark,i cant compound earning?
    thats many of traders used to be calculate the income
    if we have 10% per month we will have X in the next five years…
    thanx two of you..

  2. Mark Wolfinger 01/30/2010 at 11:53 PM #

    Yes, you can compound earnings. Did I say you couldn’t? I said it’s not smart to do so.
    It is added risk. You WILL have a losing streak. Your account will lose value.
    I cannot tell you when, but you CANNOT make money every month.
    Here is something you MUST understand.
    If you compound your money at your number: that’s 10% per month, the account grows much larger.
    It’s important to withdraw some of that money and invest is safely. Otherwise the day will come when you lose more than you plan to lose.