Tag Archives | front-month options

Common Misconceptions when Trading Options


think the newsletters know that to justify the monthly fee they have to
come out with monthly trades. What fun would a monthly fee be for a
service that did 90 to 120 day condors and adjusted periodically? Turtle
vs. the hare from an excitement standpoint.

I think everyone starts with front month until they either realize it
takes too much time and stress to monitor or they get sideswiped.

I now would rather place a 100-point RUT spread and adjust
around the halfway mark
[MDW: I have no idea what that means], rather than riding it all the way up to the cliff.
Not to mention a few better nights of sleep and lunches without having
to update my quote screen on the mobile.

I understand your point of not chasing loss prevention thru additional
spreads. However I do like ratio trades during adjustment even though I
have heard both sides of the argument. If I can readjust a position from
say a 35 delta to an 11 on a far out spread and keep full profit intact by selling a few extra contracts, it seems to work well.



This is a good comment Jason, and offers points that should be discussed.

Newsletters can recommend a new 90-day condor every month, along with commentary on how the two open positions are doing.  What's wrong with that? Investing is not supposed to be exciting.  But unless it's exciting, they may not sell subscriptions.

Jason, IMHO you have some misconceptions. Please let me know what you think.

1) Traders begin with what they know.  If they are true novices, then front-month becomes the obvious choice.  It's the most actively traded and offers rapid time decay. 

If they take the time to learn before they trade, they become educated enough to make a rational choice.  For most traders, choosing front-month is both a reasonable and rational choice.  But that is not true for you or me.

2) When you roll to a new position (for example, your 35-delta spread to an 11-delta spread) – you have zero profit to keep intact.  What you are trying to do is roll the position without paying any out of pocket cash.  That's why you are willing to sell a few additional spreads. 

That convinces you to believe that the original profit is intact.  In reality, you exited the original trade – probably at a loss.  It's gone. 

You also opened a new position – one that has the same profit potential as the original trade – plus enough extra profit potential to recover the loss incurred when rolling.  Profit potential is not profit. At least not yet.

To clarify, I believe that you hope to earn just as much on the new trade as you hoped to earn on the original, and you are keeping the hope intact when rolling.  The good news is that current risk is reduced, giving you a better chance to earn that profit. However, it's going to take additional time and reduce your annualized ROI.  And don't ignore the extra trading expenses incurred to roll the position.

3) Here's something I don't understand:

a) Perhaps you have a 100-point wide RUT iron condor, and the adjustment point occurs when RUT moves halfway up the cliff.  That means your short is now 50 points ITM.  I cannot imagine that is how you trade. 

b) Perhaps I completely misunderstood and you really mean that you would adjust when your short option is 50 points OTM.  Thus, if an index is trading at 1,000 and you sold the 800/900 put spread, you would adjust at 950 (half of the 100 points from 1,000 to 900).

I find this baffling.  Your adjustment point – the place at which you get uncomfortable with risk – depends on the FOTM option bought?  When you own 800 puts, 950 becomes the adjustment point?

That does not feel right either.

Something is very unusual here.  Neither of these adjustment ideas seem reasonable.

c) When you have a different position (which I assume is the low-premium, front-month iron condor), you 'ride it up all the way to the cliff.

I don't understand this philosophy either..

If being 50 points OTM makes you uncomfortable for your longer-term iron condor, why is there no similar discomfort point with the front-month trade?  If 50 points seems too far OTM to trigger an adjustment for front-month condors, then 20, or 10 points ought to trigger an adjustment.  There should be some spot to adjust.

The fact that you have no adjustment and just let it ride makes me believe that you are using the cash originally collected to determine your comfort zone boundaries and adjustment strategy.  I have written about this many times, and I believe that is a big mistake.

When managing risk, you own a position, and you own it right now at its current price.  Only one thing matters:  Is this a position you want to hold?   It makes no difference when the trade was opened.  Do you want to own it today?  It makes no difference how much premium you collected.  You either want to own this position, as it exists right now, with the current risk and reward potential – or you don't. 

If you don't, then don't hold it.  If you refuse to make an adjustment because it would result in a loss, you are going to take the maximum loss on many such positions.  There is no way to survive over the long term if you ignore risk.  Solution:  adjust by reducing size, closing the whole position, or making an adjustment that gives you a spread that YOU WANT TO OWN.The feeling that locking in a loss is a bad thing – that's a misconception.  One that will do you harm over the years.  Taking a big loss by refusing to actively keep risk under control – that's a bad thing.  That's to be avoided.

Advice:  When you make a trade, write the price in your trade journal and then forget it.  Manage risk for the future.  It has nothing to do with the past.

I understand that many traders have the mindset that tells them that profits are good and must be sought at all times.  That means never taking a loss willingly.  It's a loser's mindset. 

Try this mindset instead: Large losses must be avoided. Period.


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