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Expiration and iron condors

This question arrived Friday 11/5/2010 and because it was time sensitive, was answered immediately via e-mail. 


I sold [I prefer the term 'buy' – but this is not the time to quibble. MDW] a Nov IC in early Oct which included a RUT 750/770 call spread.

Delta is climbing every day, and with 2 weeks left and 16 points between current and short strike, I'm trying to decide the best route to save this with the least amount of red.

On the potential reversal side, volume is dropping on RUT, A/D line is over 200, and RSI is through the roof. So some professional feedback would be great.

Here are my current thoughts. 1) Close down shop and possibly roll up to higher strikes next week for less credit. 2) Close half the position now, and open additional contracts next week farther out. 3) Roll all 750 shorts up to 760 which is 10 points above April high. 4) Wait it out and pray. Least likely scenario. 5) Move half shorts to 760 and the other half to 780 and keep longs open. 6) Buying back a few shorts. 7) ??????????

Thanks for your feedback.



I can provide feedback on trade ideas, but I have no clue on market direction and have nothing to say about A/D or RSI.  I believe risk must be managed by what we see and how we feel about it. 

A trader who is confident that the market will decline, may feel comfortable with your position.  But lacking a crystal ball, WYSIWYG.  And risk is what we see. 

1) Closing is often, but not always the best choice.  Howeve, it is seldom a poor choice. By closing, you avoid making a poor trade in an attempt to 'keep hope alive.'  And do not ignore the emotional benefits of getting out of, and no longer having to manage, an uncomfortable high-risk position.

I agree with your attitude: looking to minimize losses.  Refusing to acknowledge that you are uncomfortable with this position is not a winning philosophy, in my opinion.

Rolling should be a separate decision.  If you find a Dec (or Jan) trade that suits, then sure – open it after taking care of the Nov trade.  RVX is rather low right now (25), and you may not like the premium available for new iron condors, but there is no reason why IV cannot move much lower. 

2) Reducing position size is very similar to exiting the entire trade. If you cannot quite get yourself to exit, then this is a good compromise.  However, there is one condition: Is holding half (or any other portion) of the position 'comfortable'?  The answer may be 'yes' when half the risk has been removed.  However, if you hate holding this, then don't.  The potential reward is obvious when expiration is near.  However, recent trading tells us that this call spread can be ATM in a single day.  Only you know how queasy that makes you.

This is not 'better' than shutting down the trade.  It is making the same trade in half the size.  In other words, I don't recommend worrying about the difference between these two choices.

If you decide to buy back the Nov call spread, then the next decision is 'how many to buy.'

3) Buying the 750/760 call spread is viable.  If you prefer to hold a position in the front-month options, then this is a good compromise choice.  It reduces risk, and that's the primary objective when making an adjustment.  The problem is that 10 points is not much protection.

How to decide on this alternative:  Cost.  Are you willing to pay the price required to gain 10 points of protection, when you may be forced to close the trade in a few days?  This is a difficult decision. However, it's one that you want to learn to make in a matter that suits your needs – because this situation is going to happen again

4) NO.  There is no praying in options trading. 


One of the problems with exiting when 'pray and hold' was considered and dismissed is deciding how much worse you will feel if this spread moves to it's maximum value. Compare that with how much worse you will feel if you exit and the market reverses.  It may seem foolish to be concerned with this comparison, but psychological factors are important to a trader.  You do not want to destroy your confidence, but neither should you be willing to take more risk than is appropriate.

It's best when you can make your choice and then ignore what might have been.  Not everyone can do that.

I am NOT telling you to exit, but do not shut your eyes.  Make a reasoned decision.  If that decision is to hold, then that is never a final decision.  You will be facing the hold/close decision several times every day – for as long as you hold this position.

5) Once again, if you cover the 750 calls and keep the 770s, you have a choice as to which options to sell.  And how many to sell.  There is nothing special about 'half' other than it's a middle of the road decision.

The specific trade mentioned leaves you short the Nov butterfly. 

6) I like this idea as a general method for reducing risk.  It provides major protection. 

There are two problems. 

  • The first is cost.  Are you willing to pay the cost?  That's why most traders who buy the 750's prefer to sell something against it to reduce cost.  (And if you choose to sell the 770s then you are closing some spreads)
  • Second: Analyze the remaining position.  It's a front-month back spread.  You own more calls than you are short and thus, cannot be hurt with a gigantic upside move.  However, a rising market can kill you when time passes and the value of your 770s disappears.  As 'good' as this trade (buying some 750s) looks, it's vital that you examine the new position and be certain you are happy to hold it.  I prefer making this trade when dealing with options with a longer lifetime.

Right now the 750s don't cost a bundle, and covering some of them makes the risk graph look much better.  But it does give you that back spread.

Future consideration:  Consider a kite spread.  Buy one (or more) 740s or 750s and sell 2 or 3 of a farther OTM call spread.  Perhaps 780/790 – although that is probably too low priced to consider when time is so short.

7) You covered the major possibilities.  Almost any position that picks up positive delta and some gamma is a good idea here.  However, if you plan to hold this position into expiration week (or to the bitter end) be absolutely clear about the fact that the 770s will most likely cease to serve any purpsoe other than to limit losses.  And those losses can be substantial. 


The big decisions remain: 

  • How much are you willing to spend to 'defend' this trade? 
  • Is it worth defending? 

It's a personal decision and I cannot tell you how to play it.  Honest I can't.  I don't know enough about you, your investment goals or how much risk you are willing to take.  I don't know if you are 65, using your retirement money or 25 using extra cash.

I recommend closing if you are seriously considering that possibility. 2nd choice, buy 750/760 spread – but not if price is above $5.  If these were Dec options, I'd recommend buying some 750 calls.

If you choose to hold, monitor closely.

Remember your goal:  You are seeking to earn money over the longer term, not only in the Nov 2010 expiration cycle.



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Adjusting Iron Condors: General Concepts

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When it comes to trading, beginners are especially overconfident.  I have no clue as to why that is, but they often trade before becoming educated, trade too much size, seldom manage risk, and far too often – blow up their accounts, and quickly become ex-traders.

At some point – early in your career as a trader – the importance of managing and controlling risk must be recognized or there is a significant chance you will not survive as a trader.  Today's post is not to argue that point.  Assuming you are convinced (or very soon will be) that it's true, let's discuss how to manage risk when trading one specific option strategy:

If you are unfamiliar with iron condors, here is a very basic description.


  • You own an iron condor on a broad based index (INDX)
  • INDX has rallied (fallen) since the position was opened
  • INDX is trading at the edge of your discomfort level

    • You believe this position can be salvaged and there is no reason to exit
    • You believe now is a good time to adjust the position


Making adjustments

There is no single 'best' strategy to use when adjusting positions.  The primary goal is to reduce risk. You are adjusting because risk has reached an unacceptable level.  At this point there are basically two choices:

  • Reduce size by closing some or all of the position
  • Reduce risk by making a new trade – bur ONLY when the adjusted position is worth owning

The secondary goal is to own a position that has a better chance to earn a profit – from this day forward.  I am not talking about recovering any losses.  Losses are in the past and should play no role in choosing your current trade (or investment).

Earning money in the future is all that counts.  Whether it turns out to be enough to offset earlier losses is not important.  Your goal as a trader should (obviously this is my opinion) be to make money today, tomorrow and for as long as possible.  You have no control over what has already happened.

My goal when choosing an adjustment is to make the position something with a good probability of earning a profit.  A satisfactory reward potential, along with an appropriate level of risk are necessary considerations.  If I cannot meet those, I'll exit instead of adjusting. 

From my perspective, I suggest not owning a position that is already outside your comfort zone when it is opened.  It's common for traders to do just that when making an adjustment.  Why?  Because the adjustment is made with the objective of getting back to even on the trade, rather than focusing on making money today and tomorrow.  Both ideas are similar in that the goal is to earn money, but the 'getting back to even' mindset focuses on earning a specific amount – and that may easily result in your owning a position with too much risk.

Below are some of the adjustment possibilities for an iron condor gone awry.  Each is appropriate under the riight conditions.  I suggest that you consider the list and find one or two that suit your needs.  There is no space to provide detailed descriptions of each strategy, nor is this an attempt to provide a complete list.  It's a group of ideas worth considering.

Basic Adjustment types

  • Exit or reduce size
  • Buy extra options for protection.  These options must be less far out of the money than the options being protected.  If your condor is short calls with a strike price of 900, the adjustment is to buy calls with an 890 (or lower) strike price. 

    • Maintain those options unhedged for potentially unlimited gains.  This is often too costly for most traders to consider
    • Hedge the option purchase to reduce cost

      • Convert it into a call (or put) debit spread

        • Sell lower priced option with same expiration date.  For example, buy the 880/890 or 890/900 call spread to adjust a position that is short the 900 calls.  This trade offers good ban for the buck.  Protection is limited, but the cost should be acceptable (unless you waited far too long to adjust)

      • Convert it into a kite spread

        • Sell a few farther OTM call (or put) spreads
        • Example: Buy one 890 call and sell three or four 920/930 call spreads (same expiration date)

      • Convert it into a long strangle by buying puts (or calls).  This is expensive

      • Sell more premium.  This adds to risk and is ONLY appropriate when the current risk level of your account is well below your maximum level

        • Sell OTM put spreads when delta short (INDX rallied)
        • Sell OTM call spreads when delta long (INDX has declined)

        • AVOID selling spreads for small premium.  This is not a risk free trade, and if you are going to take this specific risk, be certain the reward is worthwhile.  It's easy to believe (incorrecty) that a low delta spread is 'safe' to sell.

    • Cover troubled spread, roll farther OTM, sell extra spreads.  Example buy to exit your short 900/910 call spreads and sell a larger quantity of 920/930 spreads (expiration month may be the same or different)

        This trade often usually made for a cash credit

        Warning: The position looks better right now, but those extra short spreads translate into extar risk.  Be certain your portfolio does not become too risky to hold

    • Buy OTM calendar spreads.  These offer limited protection and may lose money when the underlying moves too far.  Choose a strike price that offers profits when you need them the most – and that is near the strike of your current short options


The iron condor strategy is often used by traders who think of it as an income source.  It is not free money, nor it is guaranteed to produce income every month.   Risk must be managed well.  If you take good care of your option positions and limit risk at all times, the chances are good that they will take care of you.


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Hedging a Portfolio of Index Iron Condors


As a way of reducing risk from a downward move, could you recommend the
most appropriate hedge for a portfolio of index iron condors? I have
considered OTM puts, debit spreads, VIX calls & other calls on other
VIX products, even Gold & bond ETFs.




I apologize for the delayed response.

There is no 'most' appropriate method or adjusting iron condors.  For some traders the primary objective is to get rid of that risk.  For them, exiting the trade is often the simplest solution.

For others, finding a good method for keeping the trade alive – and worth owning – is the objective.  To do that, trades must be made that are appropriate for the given situation.

But – here is one piece of advice: To find the best hedge for an IBM position, try to trade IBM options.  For SPX spreads, try to hedge with SPX options.

Let's take a look at your suggestions:

1) OTM options come in two categories: 

a) Those that are farther OTM than the option you are already short.  Those puts help in a black swan dive.  Not otherwise.

Why don't they help 'otherwise?'  When you own any extra OTM options and look at a risk graph, you will see that the tails of the curve point to rapidly increasing profits.

That seems to provide all the risk protection needed. The problem with that scenario is the ticking clock.  Those puts and/or calls do provide great protection.  However, you are buying these options to protect an existing position, not to deliver a huge profit on a huge market move.  Sure, that would be a nice bonus, and if you want to own black swan protection, that's okay.

But here you seek a good hedge for your iron condor portfolio.  With the iron condor, you plan to hold the trade for a while.  When you plan to hold until expiration or plan to exit sooner doesn't matter here.  The point is that as time goes by, the effectiveness of those OTM puts  that you bought or protection decreases.  They still serve as black swan protection, but do almost nothing to cut losses as your short option becomes ATM or moves ITM.

Quick example:  you are short the 900 calls.  If you buy some 920 calls, the upside looks great.  But consider that it's expiration week and the index is 895 to 905.  Your original position is causing pain (if you still own it).  And you may still own it, being mesmerized by the risk graph that shows how well you do on a move to 930.  But a move to the 910 area is a lot more likely than a  move to 930.  And time is short.  Thus, if the market trickles higher, not only does your iron condor threaten to lose the maximum, but the options you own for protection are quickly fading to zero.  The worst possible result:  Insurance is a total loss and so is the original trade.

For this reason, I do not recommend buying options that are farther OTM than your shorts – when your objective is protection. 

b) Those that are less far OTM than your current short options.  These are wonderful options to own, and afford fantastic protection.  But – they are probably more expensive than you are willing to pay.

In the example, if you owned 880 or 890
calls (bought before the market moved near 900), you would own REAL
protection.  It may be insufficient to prevent a loss, but those options
will have real value if and when the iron condor gets into trouble.

The price of these options can be reduced by applying the kite spread.  Before using kites, be absolutely positive that you understand risk as expiration nears.  Study those risk graphs.  This trade can be tricky to handle.

2) Debit spreads – which are less far OTM than your short put – help.  But they offer limited protection.  Many times the cost is too high for limited protection, but it does help.

In the example, you could buy 880/890 call spreads as partial protection.  The obvious limitation of this method is that this spread can only move to 10 points, and that may be far too little protection.  But it is one way to hedge – if it appeals to you. 

Warning:  If you pay a big price for these, then the profit potential is too small to do you any good.  If I buy these, I consider $4 for a 10-point spread to be as far as I am willing to go.

3) When looking for a debit spread to purchase, do not eliminate the spread you are currently short.  Even though that would close the trade, if that is the best spread to buy, then buy that one and lock in the loss.  Don't buy the wrong spread just to keep a poor position alive.

4) Stay away from VIX options unless you are 100% certain you know what they are and how they work.  For example, VIX is not the underlying for these options.  VIX futures are the underlying and I believe you will be best served to stay clear of VIX options.

5) VXX options may be better, but I am have not used them and do not want to offer advice that may not be accurate.  Ask Adam Warner or Bill Luby for advice.

6) Gold and bonds are out of my league.  That type of hedge does not work for me, and truthfully I know ZERO about those products. If that is your plan, you must get advice elsewhere.


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Portfolio Insurance


You mentioned couple of times that you usually hold insurance against
black swan events. I would be interested to know what kind of insurance you carry – straight puts, spreads, expiration time etc. What
percentage of your portfolio per month do you spend on this insurance?

understand that there is no one right answer for this question, but I
would like you to share your view since I find myself agreeing with more
than 90% of your general trading philosophy.

Thanks a lot for your great blog!



Thanks Kim

I don't always hold insurance, and don't have any right now.  The truth is that it is very expensive when IV is elevated.  I manage risk by keeping position sizes a bit smaller and covering OTM spreads when they get to 15 or 20 cents.  This latter move may not seem to be much in the way of risk management, but:

  • When iron condor trading works well, it's like an income miracle.  There is no point in taking extra risk 
  • When this method doesn't work well and the markets are too violent, there is no point in taking extra risk
  • Thus, covering the far OTM, cheap call and put spreads makes sense to me

I own insurance more to protect my position than to profit in a black swan event.

My preferred insurance for protecting an iron condor portfolio involves owning extra options.  I prefer to own protection in the same month as the position being protected, but buying options that expire earlier do a much more effective job of providing protection.  They cost less and that means you can own strikes that are closer to being ATM.  The negative part of that play is that insurance expires before your position. [This idea is covered in detail in The Rookie's Guide to Options]

I have no problem with that because I like to exit my income spreads one month prior to expiration.  However, if you are like most traders and hold longer, it's not pleasant to lose your insurance, ad it will have to be replaced.

a) I want them to be less far OTM than the short options in my main position.  If short the 800/810 call spread, I prefer to own a small quantity of 780 or 790 calls.  Obviously these can get to be very expensive, so a big part of owning them is deciding when to buy.  Buy early when reasonably far OTM and they are cheaper.  Wait until they are needed, and they are more costly.  Of course, by waiting, you may never need to buy them, saving the cost. 

b) Black swan protection is good – if you are willing to spend the money.  I usually am not.  OTM puts are just very expensive, even when far OTM.  However, if you cannot afford the potential loss, it's worth every penny to spend a little money on real insurance.  Almost any puts are good for that – but be realistic when deciding how far OTM to go when buying puts.

c) When IV is low and options are cheap, I was willing to spend 20% of the premium collected on insurance.  Now, when IV is high, one gets very little protection for that cash.  I just don't buy protection when IV is as high as it is.

d) My preferred strategy for owning those extra long options is the kite spread.  That's a name I coined for a trade that looks like this (you can do the same thing on the call side):

Buy One Put

Sell three (or four) put spreads.
Strike of short is three (four) strikes below put bought

Pay a cash debit (these are not cheap)


Buy 2 INDX 700 puts
Sell 6 INDX (same month) 670/680 P spreads


Sell 8 INDX 660/670 P spreads

I like these positions because loss is limited to the debit paid for the position.  If you buy a put kite, the worst possible result is seeing all options expire worthless.  If the market declines, this position has value. 

The worst case occurs when expiration arrives INDX settles at the wing (the highest strike put in the kite).  At that point, the loss is limited to the cash paid for the position. 

The best case scenario is a gigantic move (down in this case).  Your credit spreads or iron condors may go to maximum value, but the naked long extras can earn far more than enough to compensate for all those losses.

e) Other trade ideas work, but with limited protection.  Buying call spreads and/or put spreads (less far OTM than your position being protected) costs far less and affords far less protection than buying naked options or kites.  But they do offer a decent chance to earn profits, depending on settlement price.

Kim, once you decide how much you can afford to spend, there are reasonable alternatives. 

An apology.  What a bomb.  I received zero entries for the crossword puzzle contest
I was trying to do something different, but will stick with what I do
best, and that's providing options education. If anyone cares, the
puzzle answer is below.



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Zero Risk with Iron Condors: Can I Have my Cake and Eat it Too?

The following question is slightly edited.  The original question is elsewhere.

To provide a meaningful reply, I
requested more information.  Norm has been trading iron condors (with
real money) for five months.

Hi Mark,

"I am trying to come up with a strategy that involves zero risk of a
sudden downswing in the market because of a terrorist act or other
negative developments. You mention in previous blogs that one strategy
is to reduce your overall iron condor position size, but this would
still leave me with the possibility of losing the maximum for outstanding trades."

Hello Norm,

I'm sure you
understand that risk and reward go together.  If you truly want zero
risk for a specific market event, the best play is not to have any
position that loses in the unlikely event that your scenario comes to
pass. This means you will be out of the market (or part of the market)
with no potential losses, but that comes with zero reward potential.  Thus, this is not an easy decision – but
apparently you have made yours.

"Insurance for the downside is, as you have pointed out, too expensive
now, and it creates the risk of having to close a position at
unfavorable prices when the insurance expires."

Every trade you make has the possibility
of your being forced (prudently) to cover at unfavorable prices.

There are
trades that profit on a market collapse – the event you fear.  Those
plays are not iron condors, nor are they plays in which you have theta
(time decay) on your side.  As mentioned, IV is relatively high right
now, although it has been falling in recent days.

I don't know whether insurance is too expensive right now.  It's more than I want to pay, but my current positions are much less risky that they have been at other times.  For me, and the fact that I do not need insurance, I can state that it's too costly.

However, you are much more worried than I and perhaps insurance would be cheap with your mindset.  Let me clarify: I believe there is a realistic chance that the market may fall from its own weight.  It's the terrorist attack that I am forced to ignore.  Otherwise I would be unable to trade.

The very best play to
protect your portfolio is to buy some out of the money puts (yes, at what appears
to be exorbitant prices).

The most likely outcome is that the puts will
expire worthless (as does most insurance).  However, by investing
whatever amount of cash you are willing to place at risk, you can
prosper on a huge decline.  Is it worth it?  That's a personal decision.  Do you believe you can afford to own some puts and still earn a reasonable return?  If yes, go for it.  But it will be difficult, and you don't have enough of a track record to begin to make a reasonable (or otherwise) guess as to how well you would do.

"Consequently, I am considering limiting my trades to call credit spreads
which would have a bearish basis. My concern here is that if I try to
limit my losses to 1.5 times my average monthly earnings, this limit
could be reached fairly quickly with an upswing in the market because I
would not have the put spread income initially offsetting some of the
loss on the call spreads."

Also, my not having received the premium from
both the call and put side of the iron condor could limit my ability to
make a kite adjustment." 

Here is my
major problem with your questions/comments:  You jump form one example to another with no consistency.  You are worried about everything that occurs to you.  I understand that you want to be certain that major risk is covered, and you don't want to be trading in the blind.  Truly, the best way to cover your bases is to trade small while you are learning.  I understand that you do not want to trade small and that you want to earn money.  However, there are three truths that must be faced:

  • Trading with little risk is an excellent investing choice.  But accept the fact that it goes hand in hand with modest (at best) profits
  • You are moving too quickly.  You can learn and I can reply to questions.  However, there is just so much information that cannot be put into simple answers.  You want some experience trading and making decisions.  And that takes time.
  • You are trying to accumulate a large amount of data – and then base future trade decisions on those data. You must keep a detailed journal/diary of your trades, your thoughts, your decisions (even when the decision is to 'do nothing'), and the results.  Reread those journal entries often and see if they speak to you.  See if you can get some nuggets out of the data

I acknowledge that the more you can
understand the better trader you will be.  However, there is a limit as
to how quickly you can gain meaningful experience, but five months is not enough.  Not even close. Why? 

You must experience all kinds of trading decisions before you can know how well you handle them.  It's easy to trade an iron condor and then cover at a big profit.  It's easy to make a minor adjustment when a trade makes you slightly uncomfortable.  It's more difficult to see a big move in one direction – make a trade to account for that, and then have the market make another good-sized move.  That second move can be in either direction.  How well will you handle that?  Or are you willing to take your chances and make the discovery at the time it happens?

You write of average monthly earnings.  You have no idea what your average monthly earnings are going to look like over the longer term.  You don't yet know whether you can earn anything as an iron condor trader.  I am NOT being negative.  I am telling you that you are worrying about minute details when the big picture is an untouched canvas. 

Keep in mind that you plan to sell call credit spreads.  It may be similar, but it is not trading iron condors.  Thus, you have ZERO months of earnings from which to determine your 'average.'

Data from a
few months is worse than meaningless.  Yes, worse.  You have not
experienced enough different market types to know what that average is. 
Have you made enough adjustment/hold/exit decisions to have a good feel
for how skillful you are going to be in that area?

Norm – you are at the beginner stage
and no
amount of data that has been collected to date is any more than a hint
of what you can do.  You do not have any 'useful' average monthly

If you want to
establish a maximum monthly loss – and you should do so – then base it
on the size of your bankroll and the probability (as best you can guess
it) of taking the loss.  Don't base it on how much you earned when
trading iron condors – especially when you now plan to trade half iron condors.  the entire strategy is different – similar, yes – but
it's different.  You have different rules in place.  Rallies with
shrinking IV are less frightening than declines with expanding IV.  You
will have to use a different adjustment plan.  The point is your average
IC earnings are meaningless.

Yes, you can
avoid selling put spreads and sell only calls.  That does what you
seem to have established as your primary objective: No significant loss
if the rare event occurs.  My question to you is:  Which of the
following is going to produce more money in your account with an
acceptable risk level?

  • Sell a reduced number of put spreads,
    presumably earning a small sum, on average, on a continuing basis – but ever fearful
  • Avoiding puts altogether – until
    after the disaster.  Earning less, but without worry

This is a question, and you should take the time to figure out the answer: 
If you are that afraid of the loss, have you considered how much that
loss would be?  Have you taken an option calculator and determined the
value of a typical spread that you would sell – if the market gapped lower by
(perhaps) 25% one morning?  Assume IV triples, or make some other
assumption.  What would that spread be worth?  How much real cash would
you lose?

Do the same for the calls spreads and remember to subtract these gains (if any) from the put losses.

You may be surprised at just
how little of your portfolio is at risk.  What I am asking is: 
You are afraid of a specific scenario.  Do you know how much you would
lose in that scenario?  If you don't – and you clearly do not – how can you fear the scenario?  How can you make intelligent trade decisions when you don't know how much is at risk?  Your assumption that you could not exit the put spreads at any meaningful discount from their maximum value is incorrect.

Once you do the math (arithmetic), then if you decide that zero risk is the sweet spot
for you, then it will be an informed decision.  Right now it is a decision based on fear.  Do not misunderstand:  Fear is a great reason for avoiding a trade.  But don't you want a realistic estimate of how much would be at risk?

That brings us back to the question: Can you sell only call
spreads, and the answer is yes.  But to do that, you should not be a
bullish investor.  You don't want to wager against your
anticipated direction for the market.  So, do you prefer to sell only
call spreads?  The reply may be 'yes,' and if so, you are trading
reasonably.  If the answer is 'no' but you feel forced into doing it, I'd suggest you find an alternative strategy.

"Also, my not having received the
premium from
both the call and put side of the iron condor could limit my ability to
make a kite adjustment."

Regarding kite spreads;

a) You don't have to use kites.  There is
nothing magical about them.

b) Nothing hinders your
ability to use the kite strategy  If you want to use it, use it.  You
seem to have convinced yourself that if the credit collected when
opening your call spreads is too small, that kites are precluded. 
Nonsense.  If you decide not to sell credit spreads and pay too much for
insurance (any type), that's a decision.  It has nothing to do with
using kites.

Keep in mind
that kites are not a simple slap in on and forget it strategy, although
that's how it appears. 

Perhaps with only a few months experience, and
with IV remaining elevated, you ought to think about more useful
techniques than kites.  I also believe that you have far more to worry
about than kites.  You are new to this game.  Concentrate on learning
things that are important to your profitability – and one strategy for
managing risk is not at the top of that list (as long as you have some
plan in mind for reducing risk – when necessary).

"I realize that in the event of a sudden upswing
in the market due to some government action I would still have the
exposure of losing the maximum, but this scenario appears to be much less likely than a
similar scenario on the downside.
Given my concerns, is it reasonable for me to expect to be profitable if
I limit my trades to call credit spreads?"

Norm, I cannot answer this question.  Sure a meltup occurs less often and moves more slowly than a meltdown.  You want my opinion on how well you will do by trading short?   I don't know where the market is headed.  I don't know how far OTM you plan to sell the spreads.  I don't know how quickly (or slowly) you plan to adjust, nor do I know your adjustment plan.  I have absolutely no idea if it is reasonable to expect to make money based on what I know.

If you are bearish, then it's a very viable trading plan.  Go for it. 

If you are market neutral with a crash fear, it may be okay to trade this plan.  But I would not be happy camper if I were in your shoes and would choose to trade smaller size. 

If you are bullish, it's a death wish.

"Also, would it be too
personal a question to ask how you made out with your iron condor trades
during 911 and during the recent sudden drop in the market?"


Yes, it is far too personal.  I don't remember 2001.  I was not trading iron condors at that time.  I did much
better than average in 2008, with a small loss for the year and did
worse than average during all of 2009. 

The recent drop worked very well for me.  I had no problems for two reasons: My shorts were far enough OTM and I covered some put spreads on the rally.  Trading reduced size also made it easy.

I believe you have too much on your mind.  You must go after the more important stuff at this stage of your career.  I appreciate your need to understand the details, if you have the time to work on them.  But spend your energy on finding a suitable strategy and figuring out how to deal with your market fears.  There are inexpensive ways to play for a crash.


June 2010 Expiring Monthly.  Table of contents


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Owning Stock vs Owning Calls

Hi Mark,

I think you taught me a lesson on not to get fixated on cost
basis. I have to tell you that cost basis is the thing I am obsessed
with since day one of investing and still is at the moment. It would
take a long way to move away from it but I’ll take your advice to focus
more on risk/reward.

However, I disagree with you on one thing, which is when you compared
the risk of holding stock vs long calls/call spreads. It is obvious
that I can easily lose 100% of my call/call spreads. It is also possible
to lose 100% if I’m long stock, but the possibility is very remote. In
terms of absolute dollars, the amount I can lose in a short period of
time is going to be a little more than the maximum loss in options, but
it is very unlikely that I’m going to lose all my money in DFS.

Long calls to me is a short-term speculative play and long stock is
for a longer term, and I am comfortable with my stock positions not
hedged. The amount I allocate for stocks is a lot more than I allocate
to options (since I’m still a relative rookie in options). The amount of
money I am willing to commit to one option position can only buy
some very OTM calls (which normally don’t end up ITM) but can buy
spreads that are more profitable. That should explain why I’m
comfortable with long stock but not the long calls.



Hi F,

1) It's my opinion that being obsessed with P/L is non-productive.  I cannot provide evidence that it's true.  The final choice depends on how you decide to manage your portfolio.  From my perspective, I own a position as it exists right now:  Do I want to hold it, sell it, add to it?  That's the decision.  Why should my original cost play any role in that decision?

2) I NEVER recommend owning long calls as a directional play.  I did suggest owning high delta calls as a stock replacement for investors who want to reduce downside risk.

I NEVER will recommend owning OTM calls for anything except protection – and I really don't like owning OTM options for any reason. So, if you took anything I said as a recommendation to buy such calls instead of stock, there was mis-communication.

NOTE:  This conversation refers to owning single options as a directional play.  [The kite spread uses OTM options, and that play is not relevant to this discussion]

3) If you feel comfortable owning stock, then by all means, own stock.  The idea of substituting high delta call options apparently does not appeal to you. 

It's good that you disagree.  Blindly agreeing with someone else is a bad idea.  Don't abandon your methods unless you are sure you are doing what is right for you.

Nevertheless, DFS offers an ideal scenario for stock replacement.   DFS Jun 13 calls carry very little time premium (20 cents).  For that small premium plus the 2 cent dividend, you can own insurance.  If the stock drops by 5 points, that's a lot worse than losing $3 on a call option. 

However, If you consider that time premium to be too much to pay, then your decision is based on complete knowledge of your choices.  That's ideal.

4) This is never mentioned, but stock can be thought of as a call option with a strike price of zero, and an infinite expiration date.  You prefer to own this zero-strike call.  There is an alternative: the Jun 13 call (an 8-week option) has a time premium of ~ 20 cents. 

5) You consider calls to be a short-term speculative play.  That's because you think in terms of which calls you would buy to gamble.  Those calls are very speculative and you are right to commit only small amounts to such plays.

Consider this:  You are willing to commit cash to owning the zero strike call.  And you are willing to speculate with a small sum on an ATM or OTM call.  But, you ignore the possibility of owning a high delta call. 

I know it seems as if I am trying to confuse you and take away your cherished beliefs.  But I find this philosophical discussions fascinating.  Analyzing a position and turning it into something safer, at a reasonable cost, is always worth considering.

But if you can even think about – as you say you plan to do – looking at risk/reward for positions after you own them, then perhaps you can consider stock substitution – especially when the cost is so little.  I agree that it is a more painful decision when the time premium of a 2-month 80 delta call is several dollars (obviously on a much higher priced stock).

6) I recommend owning high delta (~80) call options under these conditions:

a) You want to own stock
b) You believe the stock is headed higher, but don't want to take much risk

Under those conditions, selling the shares and replacing them with high delta calls solves the problem.  Solid participation on the upside and limited losses.

FYI, this trade is exactly equivalent to buying a put option to protect a stock position.

d) I never recommend buying calls.  But if you are a directional player who buys stock, high delta calls are a very reasonable alternative.  I never recommend buying protective puts.  But if the conditions stated above obtain, then stock replacement is an equivalent choice.



Coming in the May, 2010 Issue of Expiring Monthly:

  • Interview with Dr. Brett Steenbarger – trading coach and psychologist
  • The CBOE Benchmark Indexes
  • Pro and Con: Trading with House Money

and much more


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The Greeks. Are they Greek to you?

Hi Mark

Reading thru your blog, I feel I have a lot to learn. I noticed
the graph you use above.  Is there any software you recommend for us?

When I look at Greeks of the positions (I use OptionsXpress), there
are Delta, Pos.Delta, Pos.Gamma, Pos.Theta and Pos.Vega. What is the
difference between Delta and Pos.Delta?

I may know the definition of each
Greek, but I have no idea what the numbers represent.

For instance, -59
for Pos.Delta, -3.12 for Pos.Gamma, 14.66 for Pos.Theta and -7.49 for
Pos.Vega.(I have an IC with some kite) What message do those numbers
tell us?



Hi 5teve,

You do have a lot to learn.  It' not difficult to understand what an option is.  Options are not complex.  But putting everything together so you can understand what your position is supposed to do to make or lose money requires an education.   I understand that you are a rookie
option trader and I don't know where you are in your education process.
  Take your time.  You have the rest of your life to trade.   

It's important to be able to speak the language of options and to understand the terminology.  However, memorizing definitions without knowing how to translate those definitions into real world terms, does not help you learn what it is you want to know.  Let's see if I can clear up any
difficulties you may have with the Greeks.

First: Choosing software is personal. I have not found anything I like – at least nothing that is available at no cost.  I don't require complex software, and look at the cost-free alternatives.  For my needs, my broker's offering is good enough.

Now on to the important discussion.


I'm sure you understand that each option has certain properties.  For example, you know that a call option has positive delta.  In the options world, each of those properties is represented by a Greek letter (ignore the fact that vega is not from the Greek alphabet). 

Collectively those characteristics of an option are knows as 'the Greeks.'

What purpose do those Greeks serve and why should you care?  The Greeks are used to quantify (in terms of dollars gained or lost) the estimated risk and reward that you will realize for a specific option, or group of options, if certain market events occur. Because you must understand how much you can make – and more importantly, how much you can lose – if the stock moves 5 points, or if three weeks pass, or if the implied volatility increases by 4 points, it's necessary to pay attention to the Greeks.  They allow you to make a very good estimate of just how much money is on the line at all times.

Position Delta

That 'group' of options may be a simple spread, such as a calendar spread or an iron condor.

However, the group of options can include more individual options, such as the entire collection of options in your portfolio.  Using different words, those are all the options that comprise your option POSITION.   Thus "Pos. Delta" represents your 'position delta' or the sum of the individual deltas associated with each of the options in your entire position.

Your position delta is calculated by adding the delta of each option you own and subtracting the delta of each option you are short (i.e., sold).  If you own 10 RGTO Dec 80/90 call spreads, your position delta = 10 x the delta of the 80 call, minus 10 x the delta of the 90 call.

**Remember that calls have positive delta and puts have negative delta.  Thus, when you sell puts, you subtract a negative number, and position delta increases.  When you buy puts, position delta decreases.

What's the point of knowing position delta, or any other Greek, such as position gamma or position vega?  As mentioned, the Greeks provide a good estimate of risk (and reward).  In your example, the message to be derived from: position delta = -59 is: 

If the underlying asset moves higher by one point you can anticipate earning that number of dollars.  In this case that is -$59. In other words, a loss.

Instead of getting confused by positive and negative numbers, look at it this way:  If you have positive delta, you are 'long' and should profit when the underlying rises.  When you have negative delta, you are 'short' and should profit when the underlying falls.

Keep in mind:  Each Greek is merely an estimate.  The market does not 'promise' to deliver a $59 profit if the stock declines by one point.  Other Greeks are in play, and sometimes the effects are additive and sometimes they offset each other (more on that in Part II).  

Repeated for clarification:  The Greeks don't do anything.  They don't make money.  They don't make positions risky.  Greeks allow you to measure risk.  the Greeks allow you to measure potential gains and losses.  They serve no other purpose.

When you measure risk, you have a choice.  You may live with the risk, or you may hedge that risk.  That's why the Greeks are essential for risk management.  When you measure a risk factor (delta, time decay, etc,) you can hedge, or reduce, that risk.  You can ignore the risk or offset all or part of that risk. 

When you trade stock, if you believe you are too long and uncomfortable with the risk, all you can do is sell some shares.

When you trade options, there are many reasonable alternatives to get 'less long.'  One choice is to sell positive deltas or by buy negative deltas.  And that does not mean you must buy or sell calls or puts.  You can hedge (adjust) the position (or portfolio) with any combination of options, including a kite spread.  Obviously some choices are more efficient to trade than others, but knowing how to hedge a position is one of those matters you learn from experience or by reading Options for Rookies.

When you understand how position Greeks translate into real money, you are well-placed to make important risk management decisions.  When the definitions of the various terms are merely a blur, you cannot function efficiently.

to be continued

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More on delta neutral trading

Continuing the discussion on whether delta neutral trading is truly as 'ideal' as its adherents claim it to be.

Hi Mark,

If I recall correctly, there's some empirical research out there
suggesting that being short volatility on the index has an
edge, I would think that staying (roughly) market neutral is the
simplest way to express that edge without introducing too many
variables. Trading long I think would mean abandoning that edge, maybe
that's what makes you uncomfortable? 

Jason T,

Over the years, implied volatility on indexes has been higher than realized volatility. There is no way to know if that
will continue to be true.
  However, being short index volatility has resulted in the seller having an edge.   

Some try to exploit that edge and still remain vega neutral.  They buy individual stock options (obviously choosing appropriate, lower IV vs. realized volatility stocks), and short index volatility.

I don't see how taking a lean of a few hundred deltas equates into giving up that edge.  If I choose, I can remain fairly Greek neutral, except for that small delta 'lean.'  At this point, it's merely a discussion, not something I plan to do.

Do you truly believe that being just a little long (or short) delta removes the edge gained by being short index vega?  I don't see why that should be true, and remain unconvinced.

From a more personal experience, a couple of folks I know who trade with
a directional bias very very well tell me that entry is a key
determinant in making money. I'm absolutely terrible at timing these
things, and every time I've tried I've lost money. I don't seem to have
any edge in that area, and no real reason to think I will develop a
sustainable one anytime soon.

I am confident that while having to
constantly adjust/roll my positions is painful, I think I have an edge
that I can focus on.
It may also be a time-frame thing, most directional traders I've seen
seem to operate on shorter time frame (daily, hourly, sometimes even
minutes) than I'm comfortable with outside of having a machine do it for
Goodness knows that if I were smarter/more skilled I'd be swinging
directionally, but as Clint Eastwood said, a man's got to know his

Very appropriate quote.  Suitable for anyone who participates in the markets.  Know your limitations.

Traders who trade with a directional bias tend to be very short-term traders for good reason.  The bias tends to be short-lived.  They see a chart pattern or some other data that suggests the next mini-wave of trading will be on the buy or sell side.  They play it, and it ends quickly.  In that scenario, the timing of an entry is critical.

Do you remember that old Merrill Lynch adage: 'I'm bullish on America'?  That's for investors.  No trader can have a multi-year opinion and expect to use it profitably. 

Other directional traders may have a longer-term horizon and follow the trend.  Trend following is an entirely different approach that I do not discuss at Options for Rookies because it pays to be 100% long or short when playing the trend.  As has been pointed out, most of the time the trend is too short to be profitable. 

The big decision when 'trending' is understanding when the trend has ended – and not stubbornly holding onto directional trades.

I agree that I have no edge in the area of timing an entry, and don't pay a lot of attention to that aspect of trading.  I know that's heresy to those who follow charts and use technical analysis.  

A trade either does, or does not, meet my requirements.  If it does, I enter the order and must rely on money management skills to protect my assets.  That's certainly less fun that making a trade, taking the profits and looking for the next trade opportunity.  But you and I know our limitations, and make no serious effort to time entry points. 

Eric Falkenstein at Falkenblog has a theory that risk is
actually relative, and the biggest risk is not that we underperform our
markets, but we underperform relative to others (or even worse, people
we think less of). Do most of the folks you talk to trade directionally
or market neutral? When markets are one way like this, I always think
about going directional, and when markets are stuck, the trend traders
all think about going market neutral.

This is a key psychological factor.  Perhaps the only factor.  As a market maker, I always said that all I want to do is make my share of the money.  I wanted to earn a living and it doesn't matter how well any other traders in the pit perform.  But I'm very competitive, and when I did not make the most money every year (and possibly I didn't in any year, despite a couple of good ones), something was missing.  That's a bad attitude!

But I get it.  Bull markets are enjoyable for the vast majority of traders, yet for my entire trading career (as a market maker), I prospered in bear markets (1987 being an exception) and lost money during bull markets.  That's sad.  But, it's one good reason for being market neutral, now that I'm an individual, trading from home.

But I look at the recent huge bear market, followed by a large bull market and I took advantage of neither.  How can that be a good result?  When RUT moves 34 points in two days (Mon and Tues), a 200 delta lean may not be big money, but it represents about $6,800.  And, if not stubborn, the potential loss is far less.  At some point, I'd give up those 200 deltas.

Don't get me wrong, I would not have been in at the bottom and may have even sold out most of those extra deltas along the way.  But why struggle with iron condors when it's easy to take a lean?  When the upside already looks risky for my portfolio, an extra few deltas is cheap insurance.  

Buying a kite spread or extra call option gives me positive gamma and negative theta, but it does provide a good upside boost over most price ranges – at little cost.  What's so bad about that?

To me this entire discussion evolves abound a situation without a good solution.  So neutral I remain.

PS Outside this blog, I don't have
detailed conversations with many traders, so cannot answer.


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