Options Trading IQ



(1) ?I see that you prefer 20wide strikes for RUT credit spreads. ?I have always used 10wide. ?I know you like the wider spreads due to the lower commissions and, evidently, better strike pricing however, isn't the position vega higher? ?And in this case, it would seem the PnL would fluctuate much more due to the higher vega exposure. ?Further, the ROI is lower with wider strikes. ?Pls comment.Yes, the Vega exposure is higher, that can be a good thing if IV is high and you’re expecting a drop. ROI should be similar, if you bring in $10 for 10 ten point spreads or $10 for 5 twenty point spread, the ROI is the same. 10x10=$100 capital at risk, $10/100 = 10%. 5x20=100, $10/100 =10%(2) ?Do you always have a GTC standing order to exit your positions per your profit targets? ?I’m watching the market all day, so I don’t have stop losses live in the market. I just keep an eye on my positions and adjust when necessary.(3) ?In the RUT IC example, you started out with 14.1% of total capital or 35% of allowable allocation. ?How do you determine?when?to use less than the full 40% allowable and?how much?capital to deploy? ?In other words, how did you settle on an 8 lot entry for this trade?Normally, for this capital level, I start with a 10 lot. However, with volatility on the rise and the debt ceiling issue, I decided to drop that a bit lower than normal. I never start with the full allocation of 40%, I like to leave some powder dry for adjustments as you have seen with this position, I have scaled up to 12 contracts now and still have more room to add capital to the trade if needed.(4) ?Below is a simplistic 'greek matrix' I put together. ?Is this correct? YesDELTA?PositionUp MoveDown MoveLong+DeltaGoodBadShort-DeltaBadGoodTHETA?PositionTime DecayNALong+ThetaGood-Short-ThetaBad-VEGA?PositionIV IncreasesIV DecreasesLong+VegaGoodBadShort-VegaBadGood(5) ?For the RUT IC, when you report the PnL after each adjustment, does this figure include the booked/realized profits from rolling the puts and calls? ?Or is this value simply the open position PnL ?Yes, I report total P&L to date(6) ?You made the following comment on the RUT IC: ?"Also our delta is now less short than it was when we made the adjustment, despite RUT moving slightly higher."???How does delta drop with a rise in RUT? ?Is this due to the severe drop in IV?Yes, this was due to the severe drop in IV. Even though the market rallied, the calls dropped in price.(7) ?I noticed in your written comments you did not discuss any of the Greek ratios for any of the RUT IC adjustments. ?Are these are not as important for the IC as it is with the other plays?The following ratios are good ones to stick to no matter what income strategy you are trading:Delta/Theta 25%Vega/Theta 300%It doesn’t always work out that way. For example, at initiation of an iron condor, your Vega/Theta is more likely to be 400% or a bit higher. This is ok, it’s generally higher at the start of a trade, as time progresses, it will gradually come back towards 100% or 1-1. If you’re trading 60 day condors, your Vega/Theta ratio will be a lot higher again, maybe 800%The above is a guide, you need to figure out your comfort levels, which may be different from mine.1-Can you explain why you trade the cash indices vs the ETF's? Is it strictly for lower commissions from fewer contracts? Based on the commissions you mentioned in session 2, can the wider spreads in the indices cost more in slippage than the commission difference?Yes, lower commissions is one reason, early assignment is the other. See 2-As a follow up to your answer on using 20 wide spreads, since the option premium falls somewhat asymptotically as you move away from ATM strikes, I can't visualize how the 20 pt spread could be more than 2x the 10 pt spread? Also, while the cost is lower thereby increasing potential reward, the risk is higher. If you use stops diligently this shouldn't cause greater losses, but it does require more margin and produce a lower return on capital at risk. I don't have an opinion on the width, I just want to better understand the thought process and analysis. Your answer left me scratching my head a bit.Generally, 2x the 10 point spread might bring in a little more than the 1x the 20 point spread. Occasionally, the 20 point spread can bring in more income. There are pros and cons to both approaches; you need to figure out what works for you.3-I noticed that one of your adjustments used the same strike price as one leg of the original spread. Have you had any problems unwinding or moving positions in this case? I use tos, which I think is pretty good and if I've stepped on one of the existing strikes, I've had to break up the trades when rolling. Do you try to avoid this?Yes, very good question. Most brokers with not allow you to have a buy and sell order open in the same strike at the same time. Usually I have all 4 order ready to go, but I only transmit the new sell to open orders, once the buy to close orders have been filled. The other thing to do is roll via a butterfly spread. For example, if you have this position:+10 RUT 970 puts-10 RUT 990 putsAnd want to roll up to 1010-990, you could SELL this butterfly:Sell 10 RUT 970 putsBuy 20 RUT 990 putsSell 10 RUT 1010 puts 4-You touched on your recent adjustments (rolling puts up) as being a more aggressive approach. Would you be more cautious when the put spreads are under pressure since down moves will spike the IV?Somewhat. I might be more cautious with the puts (and roll them out) , but if the VIX is spiking higher, you can generate more premium from the calls as well, so I would be ok with rolling the calls down as well. 5-I had no trouble pulling up the log, it was very helpful. Thanks for making this available. A few comments (hopefully it doesn't sound like whining); 1)it would help if you used the same columns on every screen shot (especially the price column so we can see where the index is at that point in time); 2)I personally like to print the information to review and file and the graphs are just humongous, since they do not contain a lot of detail can they be downsized; 3)if your platform has the ability, it would be a major plus to see the current P/L line. Not only does this temper some of the enthusiasm created from looking at that flat max profit line at expiration (very enticing for most of us amateurs), but it also helps to visually see the effects of changes in volatility (esp why IV spikes hurt the position on condors). Noted, I will try to keep the screenshots the same. Unfortunately, IB does not show the current P&L line.6-You made a comment about 25 wide being better than 20 on the diagonals in the second session, but I didn't catch the reasoning.SPX options tend to have more liquidity around the 25 strikes. 1700, 1725, 1750, 1775. If you look at the volume traded each day, you will notice that the 25’s have most of the action. 7-The trading plans provide guidelines for when to adjust but not how. My first impression is that adjustments can be quite discretionary in nature. Are there rules or guidelines for what adjustments to use for the various triggers? If so, this will be a big help. Putting the trades on is fairly simple and knowing when to adjust is also straight forward but how seems to be the key to profitability. I am concerned that if these are largely discretionary in nature, one month is not going to be enough time to be exposed to all the possibilities and definitely not enough to master the intricacies of this critical activity.A valid point. I don’t have any hard rules on how to adjust, each month is different so it’s hard to have a rule for every conceivable scenario (and that doesn’t include unconceivable scenarios). Markets are constantly changing, and so our trading plans need to be changed / tweaked / adjusted periodically. I haven’t seen too many trading strategies where you have strict rules that will continue to work year after year. You have to try and develop as many tricks as you can as a trader.Let me think on it some more and try and come up with some guidelines by the end of the month. 8-Can you go through examples of past cycles where the market moved only one way to show how you managed to maintain your stop (or perhaps did better than that) and what steps you took up to then? Your aggressive adjustment moves (rolling the unthreatened side closer), while I personally like the idea, also increases risk in the case of a reversal, especially later in the cycle. Can you also show an example of this - where you rolled one side in and then had to defend that side?I will see if I can find an example. In terms of making this adjustment later in the cycle, I would not recommend that, this is only something I would do early on in the trade.It does happen though, you roll the puts up for example, only for the market to reverse and place those puts under pressure. This is part of the reason why when I adjust, I don’t like to get back to completely delta neutral. I like to cut delta in half for example. Say from -40 to -20.1. As the RUT goes higher, we are at a risk of reaching the Iron Condor upper range, so?it's clear ?why we need to perform an adjustment of "moving" the strategy further up by rolling the puts and/or the?calls. But one of the reasons ?you give for rolling the puts higher at the Oct 11 adjustment ?was to cut ?the delta. The?delta before adjustment was -7 , and after adjustment -43. ?Can you clarify why the need to reduce the delta and make it?more negative? don't we wan't a neutral delta ?( around 0) ?so the strategy will not be sensitive to price movement ?And on the Oct 15th adjustment , you say you want to reduce the delta once more. Again, I'm not sure why.?Think you might be confused here, the delta on the original trade was -7. As the market moved up delta moved to -43 then our adjustment cut it to -33.2. In the web page Oct 16 adjustment you say "I needed to adjust my iron condor as the delta dollar exposure was up around?$55,000 " ?. ?In the recording you explain "if we have ?delta-dollar of -30,000 and the market goes up 1% , we lose 1% of?$30,000 ($300)".??So how do we determine when to reduce the Delta-Dollar exposure?Based on capital for the strategy of $40,000, I like to adjust when Delta Dollars is $50,000. You can move that figure higher if you have a higher risk tolerance.3. In the web page Oct 16th adjustment you write "The short calls are still further than 3% away from the market and delta?is only around 0.14 so that is part of the reason for me not wanting to move them. I also don’t want to over adjust and get?completely delta neutral, just in case the market reverses. " ?what's the connection between the short calls having a delta of 0.14 and not wanting to move them? I noticed in the Risk?Parameters you say the delta of short calls should be less than 0.20, but I'm note sure why. what's so special about 0.20?also, why don't you want to be delta neutral in case the market reverses?Once the delta of the short options reaches 0.20 or -0.20, losses start to build up really quickly (exponentially). This is why you don’t want to let the delta of the short options get too high. Again, if you have a higher risk tolerance, you can let the short options get to 0.25 or even 0.30.When a market trends, one side of our condor is under pressure. Generally after a long trending move, overbought (oversold) conditions start to appear. If we adjust to be completely neutral, and the market then reverses, we can potentially be sitting on losses on both the calls and puts.4.Regarding the chart display, why do you display the X axis as % price change , instead of simply the underlying price ?Also, what are the two yellow vertical lines that keep appearing at 3% ?IB shows both % or underlying price, I like to look at both. The yellow lines are confidence intervals, a statistical measure of the likelihood of the index staying within those lines. I’m not sure how accurate they are and I usually ignore them. 5. ?In the Bearish Butterfly , why did you choose 3250 ? ?Also, why don't you want to enter the trade when having another?position ( Iron COndor) with negative delta?Per the trading plan, we enter 50 points below the price. When NDX was 3300, we would centre the BB at 3250. BB’s have negative delta, they profit if the index falls. As we had a large negative delta on our condor, I was reluctant to enter the BB. If the market continued to rally, we would be suffering losses on both positions. 6. In the Diagonal Condor, why is it important for Theta to be more than Vega? Is it simply so the effect of time decay will?be greater than the effect of volatility ???Is this a delta neutral trade ?Theta doesn’t necessarily have to be more than Vega, but it is a good thing as yes, it just means time decay is having more of an effect on the position than volatility.Also, you say Delta is 10% of Vega is a good ratio. Is this the Delta/Vega ?ratio we should aim for in Diagonal Condor?I don’t look as Delta/Vega. I only look at Delta/Theta and Vega/Theta. The lower those ratios the better as time decay is having more of an impact on positions.7. In the event of the market going up you adjusted the DC position by selling ?the ?2 Dec 1630 puts and buying 2 ?additional Nov1630 puts, and then we saw a nice ?spike in the upper side of the chart. What I don't get ?is how buying 2 November puts contributes to the position gaining value when the price moves up ?It’s the fact that we are selling the December options for more than we are buying the November options. Basically we are taking capital out of the trade and getting paid for it. When we own the December puts, we have more capital at risk, because the December puts are more expensive, and more to lose if price rises. If we own the cheaper November options we lose less if price rises. So, it’s not so much a case of gaining more, but losing less if that makes sense?8. Is the reason you decided not get into the Diagonal Condor trade being volatility relatively low for the year with a fear of a spike up which could put us on the lower side of the position ?That and the fact that we could only get about 3% away from the market on both sides with the short options. It’s a pretty narrow range for 4 weeks. ................
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