The final part of Don's questions,
"Today at noon, I ran a trade using the RUT December options Trading the 560/550
Put and the 650/660 call spreads according to TOS (thinkorswim) that trade
could be executed with a net inflow of nearly 5.00 I know that you feel
comfortable with 3.00 credits. Is this trade something
that you would consider?"
Yes, I would consider it. There is nothing magical about a $3 credit. But this position is not that far OTM, and the probability is high that this iron condor is going to run into trouble. I prefer to have better odds of success going in, and would not do this spread because: a) My comfort zone manager tells me that I'd rather be short options that are farther OTM and b) I have room to satisfy that need because I'm willing to take less than the $5 premium. I can more farther OTM, accept a smaller premium, and still be happy with the trade.
"Lastly I know that you would never hold to expiration but is negative gamma
the main reason that you do not trade into the last week,? Or is
the cost of doing business, by closing the open trades, ensures the profit,
removes risk and allows you to look into your next trade?"
'Never' is the goal. I sometimes find myself holding longer than I prefer.
It's the negative gamma. Too risky for me.
Commissions are not a factor. I trade what I want to trade. It's wrong to fail to make trade because costs are too high. It's much easier to go with a less costly broker.
Closing positions and removing risk is something I like to do.
In addition to the above I ran the following and traded in my paper
Received 4.50 credit for the RUT Dec 560/550/650/660 IC trade with the
-Delta 12.70 Gamma -.85 Theta 31.01 Vega -164.52
I also traded the following SPY bought 100/sh at 106.5 sold the Nov 107 call
(2.98)and bought the June 105 Put (8.25) my Greeks are:
Delta 6.65 Gamma
-3.16 Theta 1.60 Vega 20.12
I am interested in how you would use these Greeks to assess risk now and in
the coming months. Note: the Greeks are sums of the individual positions.
Using real words like…geez I have too much Gamma when that's added to my
Delta I'm gonna lose-LOL or something like that! Maybe geez my vega risk is
really high I could lose 'X' if this happens…
What are these Greeks saying to you and your experience that I do not yet
Don, you do not make it easy for me.
1) You said the IC could be traded for $5, but you accepted a $4.50 credit when trading. That doesn't sound good to me. But is it not relevant to the question.
2)Regarding the iron condor, the Greeks tell me the same thing they tell you. You are collecting some time decay – and I know you understand that. You are short vega, but all your iron condor positions are short vega.
By choosing December options you are short more vega than someone who sells short term options. The good news is that you are gamma neutral.
Don, I always thought I used 'real' words, but I'll see if I can accommodate by re-wording what I said above: [For all readers, I apologize for the English and hope my European and South American readers can follow]
Geez Don, That nasty guy – that gamma – youze know, da enemy – he's not too ugly right now. I wouldn't trust him as far as I could t'row him, and he can get real ugly real fast – but right now he's ok. We got a truce. He's our temp buddy.
Now da one we gots to watch out fer – he's dat vega guy. He's ready to make a move – but dunno which way. We could make a fast buck if someone kicks him in the shins and he falls over. But if he makes a getaway and speeds up – we could be in trouble.
Outside of dat, I got nuttin' to say.
3) The buy-write, or covered call.
I see you adopted the collar strategy outlined in the recent academic paper. I'd be interested to see how this works for you. I don't like it. I find the longer-term put to be too costly. I do understand you hope to write calls about six times and collect far more in call premium than you paid in put premium.
These Greeks speak a different dialect and I'm not understanding what they are saying. They mention being long vega and there's some risk in that. The Greeks also talk about how that negative gamma can get worse in a hurry, if SPY moves higher.
Here's the risk in this position: A rising market will kill the premium you paid and will make it difficult to make any money. If that put premium disappears, you will not be able to recover it. The calls will move well into the money and you will be assigned an exercise notice – leaving you with naked long puts.
To protect those puts, you would have to take some action with your call spread. It's as if you are forced to roll the position on a rally – even when you prefer not to do so. That is the risk of buying puts with a high premium. Of course, a lower market will provide extra profits. But to me, that's a play on vega and is not a true collar.
Don – collars are very flexible and there is nothing wrong with the collar you chose. From my personal point of view, I like the collar as protection for assets, and not as a market play. That being said, it is a perfectly reasonable idea to turn it into a market play.