Old Business
As I have noted recently, I am running about two to three days behind posting my trading activity. There are a number of excuses for this, of course, and none of them all that valid. I have also lagged behind in reading the blogs of others, and this morning I read an excellent post from one of my favorite options bloggers, Mark Wolfinger. Unfortunately for my Iron Condor trade, I read it 11 days late.
In this post he discusses the correct strike-pricing for protective debit spread adjustments. He states several times that one should never buy farther OTM options than the iron condor itself, and that's exactly what I did. Over the next few months, I need to reflect on this and tweak my adjustment strategy. I'm hoping using this advice will help flatten out my returns, because I'm experiencing somewhat more volatility and stress than I would like, given the low income potential of this trade.
The AAII Sentiment Survey for 12/15/2010 still shows some very bullish investors out there, although slightly fewer than last week: 50% are bullish, down from 53% on 12/8/2010. As expected, this results in a continued no-position for CS|MACO, which doesn't participate in trends that are fueled by investor mania.
New Business
I bought some Research in Motion (RIMM) puts this morning at the last minute. I generally like to buy these a week or two before the earnings release, but I wasn't paying close attention and missed out. RIMM has always been one of my favorite shorts during earnings season, and I personally think that they have no future without a major retooling of their business. Nobody talks about "Crackberry" anymore, now it's Android this and Android that, with the occasional fan-boy crowing about iPhone coming to Verizon (still). I was expecting RIMM to admit a further reduction in its market share, disappoint on earnings numbers, and guide lower for next quarter. But that didn't happen, and when I left the office in disgust, RIMM was up 5%. So tomorrow I'll unload the put for a 50% loss and move on.
Another put position I entered today was Kinder Morgan Energy Partners (KMP). KMP owns and manages energy transportation and storage facilities in North America. It has a positive correlation to natural gas prices, but not a dramatically high one because its income is fee-based. Thus KMP's income fluctuates more with demand for natural gas than with natural gas itself. KMP has a big dividend yield: 6.3% So why short it? Oh let me count the ways:
1. Jim Cramer loves it, and he usually loves at the top and hates at the bottom.
2. They have a $22B market cap, revenue of $8B, $192M in cash, and $13B in debt. Debt is more than 50% of the market cap, and nearly 68x higher than cash reserves. That means they're using debt to finance their dividends.
3. Quarterly earnings have declined 10.8% since this time last year, to $1.25/share. Dividends are $4.44 per share, so they're also paying more in dividends than they're earning in profits.
4. They need to quadruple their profits in order to cover those dividends, but the highest praise that Cramer can come up with is that high dividend stocks are good in a rising interest rate environment. Yes, true. But that doesn't solve KMP's internal fiscal problems.
This stock needs to fall. I bought some March 2011 puts on it, and I'm working orders to buy some more on a rally. I don't know when it will fall or how far, but my puts are there to profit when it does.
Last but not least, I bought some calls on GLD (Gold ETF) today, expiring in March. If the current short-term sell-off continues, I'll buy some more. I'm looking for a GLD price above 150 by expiry. That would be a massive return on the call investment.
Showing posts with label Wolfinger. Show all posts
Showing posts with label Wolfinger. Show all posts
16 December 2010
09 December 2010
Such a Slacker
I've been distracted most evenings lately from the four Xbox games I picked up during Black Friday madness, and so it has taken me even longer than usual to record thoughts, trades, and rambling nonsense. As if that weren't enough to eat up my attention, the Bintgoddess and I just received our HTC Incredibles we ordered through Amazon Wireless, and I at least have been spending more time than I should customizing and moving into my new phone. I had intended to switch from AT&T+iPhone to Verizon+Android when my contract ran out in August, but the Bintgoddess' pre-pay plan ran out of minutes, and we could save more money to switch us both to a family plan now, despite the early termination fee from AT&T. With nearly free phones (1 cent each from Amazon Wireless) and free 2-day shipping, the choice was pretty clear. And yes, Amazon did charge my credit card $0.02. Silliness.
Iron Condor
The January 2011 Iron Condor position has required some adjustment to keep it close to delta-neutral recently. Recall that I opened a 650/660/810/820 iron condor on Nov 8, and then adjusted it Nov 16 by buying a 630/640 put spread. Since we're into December, I'm now erring on the side of closing positions rather than opening them - but I'll still increase a position if it's the right thing to do for the risk or the greeks.
The stock market had been rallying pretty hard the last week or two - in fact, it has been rallying pretty hard ever since the day after I put on that downside protection. This is not a surprise - it's just how I roll: don't believe me? watch me play poker on Full Tilt sometime. But I digress. With the stock market rallying and delta going pretty negative, it was time for some upside protection.
First, I bought back about half of the 810/820 call spreads for 1.40: a very reasonable 10c loss. This moved the delta up about halfway to where it needed to be, but gamma was still pretty negative. Another up-move and the position would be in trouble again, so I beat the rush and put on a Wolfinger Kite Spread. Specifically, I bought back an extra 810 call for 3.70, and financed that by selling four 830/840 call spreads for 50c each. Not only did this bring delta to a nice manageable level and give me some much-needed upside protection, it also significantly improved my max-loss on the upside. Of course if MDW is reading this blog, he's probably seething that it isn't a perfect Kite Spread - I should have sold the 840/850s, or reduced the sales by 1 contract. Tough. I am convinced this was the right trade to make, whether it can rightfully be called a Kite or not.
The next day, I took advantage of another rally to buy back a few of the 660/650 put spreads for 45c. This lowered delta a bit again, but like the previous day's adjustment, it really helped out in the max-loss department. The total position now has a nice flat S-curve to it, and theta miraculously is still 13. So a sideways market for the next 30 days should net me about .25 per contract - that may not sound like much, but that's 2.5% margin-return on a monthly trade.
It's also about time to be looking for a February trade, but I'll learn my lesson from January and wait for volatility to come up a bit. Using paperMoney is nice, because I have so much fake margin in there that I can make trading decisions without having to be concerned about margin. If I want to put on February before taking off January, so be it. Doing that with real funds would take some very careful money management... or more money than I have.
CS|MACO
Still very bearish signals (53% are bullish as of last night, way too many for my taste) from investors, who happen to be right this time about the market as it sustains an uptrend, and bullish signals from the trend following MACO component. As a result, it still waits in (fake) cash.
CiG
Eurodollar futures (GEH1) gave a bullish entry signal on Tuesday, so I bought them at the stock market close for 99.56. Trading Eurodollar futures is similar to watching a bad horror movie: long periods of mind-numbing boredom punctuated by moments of pure terror. So far I'm in the boredom phase - two days after buying them, I'm up 3 ticks. W00t! No exit signal yet, so I wait.
Iron Condor
The January 2011 Iron Condor position has required some adjustment to keep it close to delta-neutral recently. Recall that I opened a 650/660/810/820 iron condor on Nov 8, and then adjusted it Nov 16 by buying a 630/640 put spread. Since we're into December, I'm now erring on the side of closing positions rather than opening them - but I'll still increase a position if it's the right thing to do for the risk or the greeks.
The stock market had been rallying pretty hard the last week or two - in fact, it has been rallying pretty hard ever since the day after I put on that downside protection. This is not a surprise - it's just how I roll: don't believe me? watch me play poker on Full Tilt sometime. But I digress. With the stock market rallying and delta going pretty negative, it was time for some upside protection.
First, I bought back about half of the 810/820 call spreads for 1.40: a very reasonable 10c loss. This moved the delta up about halfway to where it needed to be, but gamma was still pretty negative. Another up-move and the position would be in trouble again, so I beat the rush and put on a Wolfinger Kite Spread. Specifically, I bought back an extra 810 call for 3.70, and financed that by selling four 830/840 call spreads for 50c each. Not only did this bring delta to a nice manageable level and give me some much-needed upside protection, it also significantly improved my max-loss on the upside. Of course if MDW is reading this blog, he's probably seething that it isn't a perfect Kite Spread - I should have sold the 840/850s, or reduced the sales by 1 contract. Tough. I am convinced this was the right trade to make, whether it can rightfully be called a Kite or not.
The next day, I took advantage of another rally to buy back a few of the 660/650 put spreads for 45c. This lowered delta a bit again, but like the previous day's adjustment, it really helped out in the max-loss department. The total position now has a nice flat S-curve to it, and theta miraculously is still 13. So a sideways market for the next 30 days should net me about .25 per contract - that may not sound like much, but that's 2.5% margin-return on a monthly trade.
It's also about time to be looking for a February trade, but I'll learn my lesson from January and wait for volatility to come up a bit. Using paperMoney is nice, because I have so much fake margin in there that I can make trading decisions without having to be concerned about margin. If I want to put on February before taking off January, so be it. Doing that with real funds would take some very careful money management... or more money than I have.
CS|MACO
Still very bearish signals (53% are bullish as of last night, way too many for my taste) from investors, who happen to be right this time about the market as it sustains an uptrend, and bullish signals from the trend following MACO component. As a result, it still waits in (fake) cash.
CiG
Eurodollar futures (GEH1) gave a bullish entry signal on Tuesday, so I bought them at the stock market close for 99.56. Trading Eurodollar futures is similar to watching a bad horror movie: long periods of mind-numbing boredom punctuated by moments of pure terror. So far I'm in the boredom phase - two days after buying them, I'm up 3 ticks. W00t! No exit signal yet, so I wait.
16 November 2010
Big News for Boring Trades
It's been a busy few days. The CiG trade finally fired a signal on Friday, but I was in Colorado all weekend so I didn't have time to write it up. Then I came home with a head-cold just in time to support a major roll-out at the office that went pretty wrong. By the time I got home last night all I wanted to do was sleep. So now here we are. Excuses excuses.
Saving Money While Asleep
First the CiG trade on Friday. You may recall I decided to run it on S&P futures as well as treasury note futures, because I feared that treasury notes would bore me to death. On Friday, it signaled a buy-on-close on the S&P, so I did. Things were looking good Monday morning, but not good enough to reach the target exit signal. By this morning, the whole world was fleeing from risk again and the stock market opened significantly lower. Since there are no clearly-defined stop rules, I decided to sell the position for a loss shortly after the stock market opened. I felt that what we were seeing was not a momentary blip but in fact a setup for a selling day. I was right: I sold the position at 1188 at 9:00. At the 3:00 close, ES was down to 1176.
Because CiG tries to buy on dips, though, it had another buy signal come out on ES today. Pleased at my ability to dodge at least some of the sell-off today, I decided to get back in with a new long position at the close. So I'm still long from Friday, but I took a 12-point ($550/contract) hiatus. That's almost a winning trade all by itself. Not a bad money-saving siesta.
No joy in treasury note futures yet. Yawn.
Insert Spy Pun Here
CS|MACO, another boring trade, is finally starting to see some life. It has been locked flat while SPY has rallied over the last 3 months, due to the bearish signal coming out of the contrarian investor sentiment component and the bullish signal coming out of the moving-average-crossover component. One of those two opposing forces was removed today when SPY closed below its 25-day moving average, breaking the SPY>25MA>200MA relationship that has been in place since October 4. That's not a sell signal yet, though, because the terms of the trade state that I won't enter a position on the removal of a signal. I need the CS component to affirm its bearishness tomorrow after the close before I can short this puppy.
A Boring Iron Condor is a Good Iron Condor
Unfortunately, this one is starting to get a little exciting. When I opened the position I groused about my poor judgment a little bit regarding the low price I was paid to initiate. Sure enough, the VIX almost immediately rallied while RUT flagged, causing my delta to increase as I rode the curve down toward my put spread. Delta of +16 this morning, so time to adjust already.
It seems ridiculously early to be thinking about exit orders, but I could buy back my call spreads for only 60c already; so I put in some limit orders to buy back at 20c. That doesn't help my delta, but it does lock in a profit on half the trade - and with some careful adjustment the other half might not cost too much.
As for the put spreads, I looked at the mouse-ear like I used last month and decided it was overkill: RUT was 710 or so when I was adjusting, and my put spreads are 660/650s. A mouse-ear would throw my delta so horribly negative that I would have to buy back most if not all of my call spreads to contain it. Plus it was crazy-expensive, at $21.
The next thing I looked at was simply reducing the call spread position. That would certainly help the delta and the feel of the position, but I felt the cost was a little high. A variant of this is to roll the call spread down a few strikes, also increasing the position a bit to finance the roll. This increases risk, and I wasn't happy with the outcome or my perception of the risk-reward trade-off.
I also looked at Wolfinger's Kite Spread, which involves a naked long OTM put and a credit put spread even farther OTM with 3-4x the size on it for financing. That had some real potential, but it really hurt the theta. Ultimately I decided I could achieve my delta goals and flatten the value graph best by putting on some 630/640 debit put spreads. I bought just enough (at 1.90) to get the delta under +5. By the close, the delta was back up to +5 again, but that's within my parameters.
Boring News for Big Trades
I'm still not holding GLD calls, and I'm glad. I'm looking for bargains in some of the mining companies right now, but I haven't had time to look very hard yet. Earnings season is upon us, and if I can capture a couple of positive earnings surprises before the event-driven IV goes through the roof, I'll be a happy camper.
Saving Money While Asleep
First the CiG trade on Friday. You may recall I decided to run it on S&P futures as well as treasury note futures, because I feared that treasury notes would bore me to death. On Friday, it signaled a buy-on-close on the S&P, so I did. Things were looking good Monday morning, but not good enough to reach the target exit signal. By this morning, the whole world was fleeing from risk again and the stock market opened significantly lower. Since there are no clearly-defined stop rules, I decided to sell the position for a loss shortly after the stock market opened. I felt that what we were seeing was not a momentary blip but in fact a setup for a selling day. I was right: I sold the position at 1188 at 9:00. At the 3:00 close, ES was down to 1176.
Because CiG tries to buy on dips, though, it had another buy signal come out on ES today. Pleased at my ability to dodge at least some of the sell-off today, I decided to get back in with a new long position at the close. So I'm still long from Friday, but I took a 12-point ($550/contract) hiatus. That's almost a winning trade all by itself. Not a bad money-saving siesta.
No joy in treasury note futures yet. Yawn.
Insert Spy Pun Here
CS|MACO, another boring trade, is finally starting to see some life. It has been locked flat while SPY has rallied over the last 3 months, due to the bearish signal coming out of the contrarian investor sentiment component and the bullish signal coming out of the moving-average-crossover component. One of those two opposing forces was removed today when SPY closed below its 25-day moving average, breaking the SPY>25MA>200MA relationship that has been in place since October 4. That's not a sell signal yet, though, because the terms of the trade state that I won't enter a position on the removal of a signal. I need the CS component to affirm its bearishness tomorrow after the close before I can short this puppy.
A Boring Iron Condor is a Good Iron Condor
Unfortunately, this one is starting to get a little exciting. When I opened the position I groused about my poor judgment a little bit regarding the low price I was paid to initiate. Sure enough, the VIX almost immediately rallied while RUT flagged, causing my delta to increase as I rode the curve down toward my put spread. Delta of +16 this morning, so time to adjust already.
It seems ridiculously early to be thinking about exit orders, but I could buy back my call spreads for only 60c already; so I put in some limit orders to buy back at 20c. That doesn't help my delta, but it does lock in a profit on half the trade - and with some careful adjustment the other half might not cost too much.
As for the put spreads, I looked at the mouse-ear like I used last month and decided it was overkill: RUT was 710 or so when I was adjusting, and my put spreads are 660/650s. A mouse-ear would throw my delta so horribly negative that I would have to buy back most if not all of my call spreads to contain it. Plus it was crazy-expensive, at $21.
The next thing I looked at was simply reducing the call spread position. That would certainly help the delta and the feel of the position, but I felt the cost was a little high. A variant of this is to roll the call spread down a few strikes, also increasing the position a bit to finance the roll. This increases risk, and I wasn't happy with the outcome or my perception of the risk-reward trade-off.
I also looked at Wolfinger's Kite Spread, which involves a naked long OTM put and a credit put spread even farther OTM with 3-4x the size on it for financing. That had some real potential, but it really hurt the theta. Ultimately I decided I could achieve my delta goals and flatten the value graph best by putting on some 630/640 debit put spreads. I bought just enough (at 1.90) to get the delta under +5. By the close, the delta was back up to +5 again, but that's within my parameters.
Boring News for Big Trades
I'm still not holding GLD calls, and I'm glad. I'm looking for bargains in some of the mining companies right now, but I haven't had time to look very hard yet. Earnings season is upon us, and if I can capture a couple of positive earnings surprises before the event-driven IV goes through the roof, I'll be a happy camper.
06 October 2010
December Iron Condor
In another of my paperMoney trades, I experiment with iron condors. Today I opened a position on my next month's iron condor, expiring in December, on RUT. RUT is the Russell 2000 index, and options on it are European-style and cash-settled. This means they cannot be exercised early (very important for spreading), and in-the-money options at expiry won't cause securities to change hands - just money. Settlement at expiry is weird, though, so it's best not to take them to expiry in any case.
WTF is an Iron Condor?
An iron condor is a market-neutral option strategy that is short volatility but with limited profit/loss ranges. It consists of two vertical spreads: a put spread below the current index price, and a call spread above the current index price. The long options in the spreads are both farther OTM than the short options, so opening an iron condor position generates a credit. The farther apart the short option strikes are from each other, the lower the risk that the iron condor will lose money, but the less credit it generates on opening.
A picture is worth a thousand words. Luckily for you, I have both. Check out this page from Option Trading Tips: Iron Condor Description. I'm working on getting permission from ThinkOrSwim to include screen shots from their software. In the meantime, this is the best I can do, sorry.
Terminology does not agree on how to refer to iron condors that generate a credit when opened. They consist of two short vertical spreads, but many (including the website above) call that combination a Long Condor. To me, selling means that I get money; buying means that I give up money. So throughout this blog I will rightly or wrongly refer to iron condors like they're short: I sell them to open them and I buy them to get out. So today I sold an iron condor, opening a short position, and I generated cash. Questions? No? Excellent.
Where To Begin...
Here I have to give Mark Wolfinger props again, because about a year ago I looked at iron condors briefly when a co-worker (not a professional trader, in this case) told me about how he was making a guaranteed 10%/month on them. This seemed too good to be true, and after analyzing them a little I decided that it was: the probability-weighted return on his capital was far too low for the risk of ruin he was taking. I dismissed iron condors as hardly better than naked option selling, and was ready to leave it at that. In the process, however, I ran into Mark Wolfinger's blog Options for Rookies, and I started reading it regularly. Over the next few months I realized that there was more to iron condor trading than I first assumed. Guaranteeing 10%/month was indeed too good to be true, as I suspected. But there was nevertheless a viable trade there for someone willing to put in the time and effort to build experience. A firm believer that nothing worth doing is easy, I set out to learn. I'm just getting started on that journey, and though it will never end, I hope that soon I will have made enough progress to begin profiting from it. I don't know when that will be, but I know it isn't now yet.
I've followed MW's lead in a lot of respects, because I am more of a learn-by-doer than a learn-by-reader. As I try different approaches and find my own comfort zones and style, I start to diverge from him; this is natural. But some aspects of his trade are relatively arbitrary from my perspective: he trades RUT because he feels that its volatility is not-too-high but not-too-small; he trades options with 60+ days to expiry because he feels that is the right mix of risk (gamma) and reward (theta). Never having traded iron condors on any index, and never gotten burned in either direction in time-to-expiry, I figured 60+ days on RUT was as good a place to start as any.
My Own Trading Style
My current behavior pattern is to start looking for a new iron condor position around the first of the month two months before expiry. This gives me 60-80 days or so before expiry. Also like Mark, I look to get out of the condor early if the market is willing to let me buy back pieces of it at good prices. I don't try to choose a low-risk / low-reward condor that I never have to adjust, but I try to give it enough room to move that I can make adjustment decisions after work for trading on the open the next day. Taking some of his lessons to heart, I try not to increase my position in the course of adjustments; however, I will do so if I have previously reduced the position via cheap buy-backs. I try very hard to evaluate what the position is now, instead of whether I'm up or down from my entry point. This is a lot harder than it sounds, but Mark harps on it so much that it is starting to sink in.
In Theory, There Is No Difference Between Theory and Practice
A perfect situation in my trading style is to find a new iron condor on, say, October 1 for December expiry that I can put on generating 3.50 or so in premium while keeping the two short options a good 15-20 strikes apart. For this situation to remain perfect, the market needs to move up and down some so I can cheaply (like 20c or so) get out of the two spread legs, but not so much that I feel I need to adjust to protect my position. The perfect scenario ends about 30 days before expiry when I exit the last position without ever having to adjust. Net profit when perfect: nearly $3.00 per contract, or about 30% on margin risked.
But In Practice, There Is
In reality, that scenario never happens. I always have to adjust, I always agonize over how much insurance to buy and when, I seldom pay as little as 20c to buy back my spreads, I frequently enter the position for less than 3.50 credit, and I often find myself still trying to dump some position off with only 2 weeks to go.
I often have two condors on at any given time: one that I'm adjusting and working my way out of, and one that I'm watching eat up theta prior to its first adjustment. If I end up with over 1.00 per original contract profit, I'm thrilled. Note that because of adjustments, 1.00 per original contract is a lot less than 10% margin profit, because the margin gets bigger and the profits get smaller with insurance. If my net cash flows are positive at the end of a condor run, I'm satisfied. If I learn something along the way, it's all worth it.
I'm slowly starting to get a feel for what values of delta make me nervous, and I'm better at choosing adjustments that don't give me a negative theta, since that would negate the whole purpose. I'm always massively short vega, since that's the nature of an iron condor; and gamma doesn't really affect me too much 60 days out. It is nevertheless always the shadow in the corner, and I keep an eye on it more and more the closer to expiry I find myself. Experience has come very slowly, but it is starting to click. That's a cool feeling.
Current Situation
Right now I have a heavily-adjusted November position on. It's too complicated to explain without charts, so I won't try. But despite the drop in volatility the past couple of days as the market rallied, I was able to put on my December iron condor position for my target price of 3.50. It's a little tighter (short strikes are closer together) than some previous months, but I'm also getting a little more comfortable with adjustments; this lets me generate more premium credit at the start without so much fear. My new RUT December condor is a 610/620/770/780, meaning that I am long the 610 puts and the 780 calls, and short the 620 puts and 770 calls. Max profit: the 3.50 credit it generated. Max loss: 6.50.
WTF is an Iron Condor?
An iron condor is a market-neutral option strategy that is short volatility but with limited profit/loss ranges. It consists of two vertical spreads: a put spread below the current index price, and a call spread above the current index price. The long options in the spreads are both farther OTM than the short options, so opening an iron condor position generates a credit. The farther apart the short option strikes are from each other, the lower the risk that the iron condor will lose money, but the less credit it generates on opening.
A picture is worth a thousand words. Luckily for you, I have both. Check out this page from Option Trading Tips: Iron Condor Description. I'm working on getting permission from ThinkOrSwim to include screen shots from their software. In the meantime, this is the best I can do, sorry.
Terminology does not agree on how to refer to iron condors that generate a credit when opened. They consist of two short vertical spreads, but many (including the website above) call that combination a Long Condor. To me, selling means that I get money; buying means that I give up money. So throughout this blog I will rightly or wrongly refer to iron condors like they're short: I sell them to open them and I buy them to get out. So today I sold an iron condor, opening a short position, and I generated cash. Questions? No? Excellent.
Where To Begin...
Here I have to give Mark Wolfinger props again, because about a year ago I looked at iron condors briefly when a co-worker (not a professional trader, in this case) told me about how he was making a guaranteed 10%/month on them. This seemed too good to be true, and after analyzing them a little I decided that it was: the probability-weighted return on his capital was far too low for the risk of ruin he was taking. I dismissed iron condors as hardly better than naked option selling, and was ready to leave it at that. In the process, however, I ran into Mark Wolfinger's blog Options for Rookies, and I started reading it regularly. Over the next few months I realized that there was more to iron condor trading than I first assumed. Guaranteeing 10%/month was indeed too good to be true, as I suspected. But there was nevertheless a viable trade there for someone willing to put in the time and effort to build experience. A firm believer that nothing worth doing is easy, I set out to learn. I'm just getting started on that journey, and though it will never end, I hope that soon I will have made enough progress to begin profiting from it. I don't know when that will be, but I know it isn't now yet.
I've followed MW's lead in a lot of respects, because I am more of a learn-by-doer than a learn-by-reader. As I try different approaches and find my own comfort zones and style, I start to diverge from him; this is natural. But some aspects of his trade are relatively arbitrary from my perspective: he trades RUT because he feels that its volatility is not-too-high but not-too-small; he trades options with 60+ days to expiry because he feels that is the right mix of risk (gamma) and reward (theta). Never having traded iron condors on any index, and never gotten burned in either direction in time-to-expiry, I figured 60+ days on RUT was as good a place to start as any.
My Own Trading Style
My current behavior pattern is to start looking for a new iron condor position around the first of the month two months before expiry. This gives me 60-80 days or so before expiry. Also like Mark, I look to get out of the condor early if the market is willing to let me buy back pieces of it at good prices. I don't try to choose a low-risk / low-reward condor that I never have to adjust, but I try to give it enough room to move that I can make adjustment decisions after work for trading on the open the next day. Taking some of his lessons to heart, I try not to increase my position in the course of adjustments; however, I will do so if I have previously reduced the position via cheap buy-backs. I try very hard to evaluate what the position is now, instead of whether I'm up or down from my entry point. This is a lot harder than it sounds, but Mark harps on it so much that it is starting to sink in.
In Theory, There Is No Difference Between Theory and Practice
A perfect situation in my trading style is to find a new iron condor on, say, October 1 for December expiry that I can put on generating 3.50 or so in premium while keeping the two short options a good 15-20 strikes apart. For this situation to remain perfect, the market needs to move up and down some so I can cheaply (like 20c or so) get out of the two spread legs, but not so much that I feel I need to adjust to protect my position. The perfect scenario ends about 30 days before expiry when I exit the last position without ever having to adjust. Net profit when perfect: nearly $3.00 per contract, or about 30% on margin risked.
But In Practice, There Is
In reality, that scenario never happens. I always have to adjust, I always agonize over how much insurance to buy and when, I seldom pay as little as 20c to buy back my spreads, I frequently enter the position for less than 3.50 credit, and I often find myself still trying to dump some position off with only 2 weeks to go.
I often have two condors on at any given time: one that I'm adjusting and working my way out of, and one that I'm watching eat up theta prior to its first adjustment. If I end up with over 1.00 per original contract profit, I'm thrilled. Note that because of adjustments, 1.00 per original contract is a lot less than 10% margin profit, because the margin gets bigger and the profits get smaller with insurance. If my net cash flows are positive at the end of a condor run, I'm satisfied. If I learn something along the way, it's all worth it.
I'm slowly starting to get a feel for what values of delta make me nervous, and I'm better at choosing adjustments that don't give me a negative theta, since that would negate the whole purpose. I'm always massively short vega, since that's the nature of an iron condor; and gamma doesn't really affect me too much 60 days out. It is nevertheless always the shadow in the corner, and I keep an eye on it more and more the closer to expiry I find myself. Experience has come very slowly, but it is starting to click. That's a cool feeling.
Current Situation
Right now I have a heavily-adjusted November position on. It's too complicated to explain without charts, so I won't try. But despite the drop in volatility the past couple of days as the market rallied, I was able to put on my December iron condor position for my target price of 3.50. It's a little tighter (short strikes are closer together) than some previous months, but I'm also getting a little more comfortable with adjustments; this lets me generate more premium credit at the start without so much fear. My new RUT December condor is a 610/620/770/780, meaning that I am long the 610 puts and the 780 calls, and short the 620 puts and 770 calls. Max profit: the 3.50 credit it generated. Max loss: 6.50.
03 October 2010
So Much Pressure
The first post in my new blog. The first post in my first blog. God.
For the last year or so, I have been writing up my investment activities in Notes and posting them on Facebook for my friends and family to read and comment on. I did this hoping to spark a few lively discussions and free exchanges of ideas, to keep myself honest, and to share some of the knowledge I have gained while working in the futures trading industry for 13 years. Two out of three isn't bad.
I got some good questions asking about this or that, but very little in the way of idea exchange. The big success story was in how I approached my trades after committing to explaining them to others first. OK, "first" didn't always happen, so there was often a fair amount of post-trade rationalizing going on; but there were several times throughout the year when I decided to make a [poor] trade but then abandoned it because I couldn't think of a clear way to explain how it might be successful. Every saved loss is a win.
Ultimately, though, I found the Facebook Note mechanism unsatisfying. I started following Mark Wolfinger's excellent blog Options for Rookies, had some very interesting discussions with co-workers about option-spread trading, and began playing around with Think or Swim's trading front-end using a paperMoney account to try out ideas without throwing real money away to do it. As I spent more and more energy learning about credit spreads and option position management, I started contemplating discussing these topics on Facebook, to my friends and family. I was certain I would immediately confuse them, and I might as well just write my thoughts in a trading journal and keep it on a shelf.
Although trading journals are very valuable, they don't come up with ideas on their own. I realize that for the indefinite future I can expect exactly two regular readers of this blog - my wife and my mother - but nevertheless the possibility exists that someone will stumble upon this public journal, read it, learn from it, and respond with ideas of their own. That would be cool.
I also want the freedom to talk about stuff other than trading. Under my Notes pattern, I felt like I had specified my topics in advance and changing them would make things too incongruous. Beyond investing and trading, I hope a regular reader will find interesting commentary from me on poker, software development, life in Chicago, skiing, and many other things that pop into my head. If not, then at least I'll have recorded my thoughts somewhere and stressed out about my grammar from time to time. That's important, too.
I chose the name Risk of Ruin because I am a big fan of the concept. I think it appears everywhere in life: it's why you buy insurance, wear your seatbelt, favor crash-tested cars, and avoid restaurants where your friend got food poisoning once. It is the single biggest force in a poker tournament, one that must be simultaneously defended against and wielded in order to succeed over the long term; it is the primary deciding factor on how "big" a game to play; it is the bogeyman that good bankroll management practices are designed to avoid. It controls all trade-sizing decisions more than anything else; it is the entire reason why you should diversify your investments. It explains why people who have never skied before think we're all crazy; experiencing its touch is also why we love skiing so much.
Risk of ruin, to me, is more than its definition with respect to trading or poker. It is the flat line on the bottom-right of every net worth graph and EKG display. It is the poison that must be drunk in order to participate in life's game. It is the femme fatale flirting with you in front of your wife. It is the Queen of Spades in a game of Hearts, helping you win or making you lose depending on your skill and a whole lot of chance. It's Gravity.
OK one more cheesy example because I love it so much. This will also establish some geek cred.
In the Star Trek TNG episode "Tapestry" (wiki), Captain Picard dies because a minor phaser blast damages his artificial heart. Q catches him in the afterlife and sends him back in time to avoid the bar brawl in his youth that ended with him getting stabbed in his natural heart and needing the replacement. Doing so, Q argues, will ensure that Picard survives this present-day minor skirmish. So Picard goes back and avoids taking the risk of the bar fight. It turns out that this scene was an inflection point in young Picard's life: after avoiding that risk of death (aka ruin), he finds himself always taking the risk-averse paths, unable to accept that an uncommon life requires uncommon risks. Popping back to present day, we discover aging Lieutenant Picard is a pathetic little man with little dreams. After several depressing scenes of mediocrity, the hero within demands a repeat audience with Q. Eventually, Picard chooses certain death after a hero's life instead of an extended but unsatisfying existence.
In the real world, we don't get to go back in time and approach our actions with the certainty of known outcomes. This makes it a lot more exciting, don't you think?
For the last year or so, I have been writing up my investment activities in Notes and posting them on Facebook for my friends and family to read and comment on. I did this hoping to spark a few lively discussions and free exchanges of ideas, to keep myself honest, and to share some of the knowledge I have gained while working in the futures trading industry for 13 years. Two out of three isn't bad.
I got some good questions asking about this or that, but very little in the way of idea exchange. The big success story was in how I approached my trades after committing to explaining them to others first. OK, "first" didn't always happen, so there was often a fair amount of post-trade rationalizing going on; but there were several times throughout the year when I decided to make a [poor] trade but then abandoned it because I couldn't think of a clear way to explain how it might be successful. Every saved loss is a win.
Ultimately, though, I found the Facebook Note mechanism unsatisfying. I started following Mark Wolfinger's excellent blog Options for Rookies, had some very interesting discussions with co-workers about option-spread trading, and began playing around with Think or Swim's trading front-end using a paperMoney account to try out ideas without throwing real money away to do it. As I spent more and more energy learning about credit spreads and option position management, I started contemplating discussing these topics on Facebook, to my friends and family. I was certain I would immediately confuse them, and I might as well just write my thoughts in a trading journal and keep it on a shelf.
Although trading journals are very valuable, they don't come up with ideas on their own. I realize that for the indefinite future I can expect exactly two regular readers of this blog - my wife and my mother - but nevertheless the possibility exists that someone will stumble upon this public journal, read it, learn from it, and respond with ideas of their own. That would be cool.
I also want the freedom to talk about stuff other than trading. Under my Notes pattern, I felt like I had specified my topics in advance and changing them would make things too incongruous. Beyond investing and trading, I hope a regular reader will find interesting commentary from me on poker, software development, life in Chicago, skiing, and many other things that pop into my head. If not, then at least I'll have recorded my thoughts somewhere and stressed out about my grammar from time to time. That's important, too.
I chose the name Risk of Ruin because I am a big fan of the concept. I think it appears everywhere in life: it's why you buy insurance, wear your seatbelt, favor crash-tested cars, and avoid restaurants where your friend got food poisoning once. It is the single biggest force in a poker tournament, one that must be simultaneously defended against and wielded in order to succeed over the long term; it is the primary deciding factor on how "big" a game to play; it is the bogeyman that good bankroll management practices are designed to avoid. It controls all trade-sizing decisions more than anything else; it is the entire reason why you should diversify your investments. It explains why people who have never skied before think we're all crazy; experiencing its touch is also why we love skiing so much.
Risk of ruin, to me, is more than its definition with respect to trading or poker. It is the flat line on the bottom-right of every net worth graph and EKG display. It is the poison that must be drunk in order to participate in life's game. It is the femme fatale flirting with you in front of your wife. It is the Queen of Spades in a game of Hearts, helping you win or making you lose depending on your skill and a whole lot of chance. It's Gravity.
OK one more cheesy example because I love it so much. This will also establish some geek cred.
In the Star Trek TNG episode "Tapestry" (wiki), Captain Picard dies because a minor phaser blast damages his artificial heart. Q catches him in the afterlife and sends him back in time to avoid the bar brawl in his youth that ended with him getting stabbed in his natural heart and needing the replacement. Doing so, Q argues, will ensure that Picard survives this present-day minor skirmish. So Picard goes back and avoids taking the risk of the bar fight. It turns out that this scene was an inflection point in young Picard's life: after avoiding that risk of death (aka ruin), he finds himself always taking the risk-averse paths, unable to accept that an uncommon life requires uncommon risks. Popping back to present day, we discover aging Lieutenant Picard is a pathetic little man with little dreams. After several depressing scenes of mediocrity, the hero within demands a repeat audience with Q. Eventually, Picard chooses certain death after a hero's life instead of an extended but unsatisfying existence.
In the real world, we don't get to go back in time and approach our actions with the certainty of known outcomes. This makes it a lot more exciting, don't you think?
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