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Opinion: New option strategy needed?

It's after Labor Day and for many people (in the Northern Hemisphere) summer is over.  Many times, that means the summer doldrums are behind us and September, traditionally the worst-performing month, and October, the scariest month – lie ahead.

There is so much bad news in the air, that it amazes me that anyone is making bullish market predictions.  There are too many bears out there, and I'm not going to wager on direction.  Nevertheless, the bulls, and especially the bears are noisy. For the past several months, VIX futures have been predicting more volatile times are coming, and soon. 

Should we take any action based on the above, or conduct business as usual?  Do we continue to use our favorite methods, or is this the time to minimize negative gamma?  Or do we take a different path and pay to own positive gamma?

As regular readers know, I'm a premium-selling (always with limited risk and never naked short any options) iron condor trader.  At least most of the time.

I usually ignore anyone's prediction of future stock market activity, and go about my business.  That includes paying careful attention to sizing trades correctly (good money management) and keeping portfolio risk at acceptable levels (good risk management).

I see no reason to abandon that philosophy now.  However, every once in awhile complacency sets in and it's easy to broaden the limits of one's comfort zone – just by getting lazy.  The point of this post is to be certain everyone is aware that overconfidence is a portfolio killer.  If you have been doing well by trading iron condors over the past several months, please be alert to the possibility that the markets may stop being so kind. 

Yes, I know there have been big up and down movements, but they have not been sustainable in recent times and the market has traded within a range.  If your iron condors were chosen with strikes that never became threatened, and you collected your time decay day after day, you are on a nice winning streak, and it's time for a big decision.


Scenario I

We get so few periods in which iron condors do well month after month, that we must milk them for the increased profitability as long as it lasts.  That means sizing trades near the maximum that your comfort zone allows.  It means holding trades a bit longer (NOT to expiration) and collecting a few extra nickels of profit when exiting the trade.  [It does not mean going nuts and taking outlandish risk – but I assume you already know that.]

If the market has been 'behaving' then we should continue to go for small extra gains because the opportunity to do that is likely to disappear at any time. But even one additional month of increased profitability is worth seeking.


Scenario II

Say 'thank you' for the good times and prepare for more volatile markets.  That may suggest owning insurance for your positions or merely saving more cash.  Cash can be used to make adjustments or for opportunities that appear after market volatility increases. 

The choice: prepare for dangerous September and October by playing it safer – or not.

It's really a choice, but I make it a point of recognizing that I cannot predict the future.  Others may see increased volatility ahead, but I don't have any opinion (that I care to back with cash) on that coming true.  Thus, I'm choosing business as usual.  However, I will not be extra aggressive.  I'll respect the possibility that VIX futures traders have a good reason for bidding those futures to high levels.  But, I will not be afraid either.  I want to make the attempt to take advantage of what has been for me, an ideal iron condor environment (for only 3+ months).

What about you?  Heading into Sep/Oct with guns blazing, or are you prepared for a full retreat?

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The September 2010 issue of Expiring Monthly will be published in two weeks (Sep 20, 2010).  The major theme of this issue is 'directional trading – a discussion.'

Most traders have a directional bias and act on it.  Others don't.  This months issue tackles the topic from different vantage points.

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