Iron Condors

Never “leg in” to the Condor like with the HP (High Probability) spreads.

The trade is always placed with a limit order asking for a minimum of a $1 credit.
Cedit spreads are 2 strikes apart between short and long Options.

Example:
Submit an limit order for an Iron Condor that uses the 118/120 strikes for the put spreads (118 long, 120 short) and 126/128 strikes for the call spreads. (126 short, 128 long).

These trades are VERY Vega sensitive so you would want to enter at the time of maximum implied volatility.

Start by looking to see if you can secure at least a $1 credit for the entire condor using “2-wide” spread strikes at the .30 delta level on the short calls and puts.

The LP (low Probability) Condor trade does not perform well during times where the chart is really moving. This trade performs exceptionally well during times where the market has just finished making a big move and then consolidates sideways for a few weeks.

Spread Types

Credit Spreads: (Bull Call Spread, Vertical Debit Call Spread)

Give you maximum credit on day one and you carry that obligation until trade closure or expiration. Losses that are not riskmanaged can be staggering. These are typically set up so that the price must do nothing, or at least move AWAY from the spread in order to profit.

You are bullish on the underlying instrument.
This is a Long Vega trade.

Buy a front month Call option that is slightly in the money and to help reduce your cost basis, you sell a front month Call option somewhat out of the money.

Credit spreads are always “Negative” or “Short” Gamma” positions. This feature of Gamma works against the position as price gets closer to your short strike.

Bull Put Spread Construction:

     Buy 1 OTM Put (cheaper)
     Sell 1 ITM Put   (expensive)

Debit Spreads:
Require cash to set up on day one however your maximum risk is normally limited to your initial investment. Profits can be several times what your initial investment was. These are usually set up so that the price must MOVE for you to profit.

Greek - relationship

As you pick an option farther out of the money (OTM) the Theta is larger but at the same time the Vega is large too. Unless the Volatility is really high at this point and is ready to fall, buying this high Theta is too risky.

Gamma:

Increases as we get closer to the expiration week. Gamma tends to increase the closer that we get to Expiration.

If we’re selling an Options position, then we’ll have a Negative Gamma number. This means that the closer that the price comes towards our position, the faster that losses will accelerate.

When your position is far out of the money and had 30 days left to trade, the Gamma value is very small and a move towards your position – even a big one – wondn’t change your Delta value very much.

When you get near Options Expiration HUGE swings in the Delta value caused by this Gamma effectis going to cause equally large swings in your current P/L of the position.
Get out of the position before Gamma becomes a problem.

Long Gamma position: One that gains value as the price closes in on the short strike price.
Short Gamma position: One that loses value as the price closes in on the short strike price.


Vega:

Credit Spreads are Negative, or “Short” Vega positions by definition. This means that they do not like to see Implied Volatility rise AFTER you have entered the position; they will lose value. Implied Volatility up = loss of value on your credit spread.

-Ve vega  means if volatility drops you make money, if it rises you lose money.


Credit spreads are Short Vega, they respond positively to a drop in Implied Volatility.
Vega Risk is particularly high when the VIX is low and traders are complacent.

How to hedge Vega risk?Long Options - puts and calls that we buy will gain value as the Implied Volatility increases.
Debit Spreads - an option spread that we pay money for will display a “long Vega” characteristic.

“back month” option was much more sensitive to Vega than a front month option.
The effects of Vega shrunk as time approached Expiration.

The main risk that we need to guard against is when we enter short put spreads during low-volatility conditions.

This is the risk of Vega stepping on a position that was entered in a low-volatility environment, and transitions into a higher-volatility environment.


(Wider spreads wider spreads has higher Delta. commissions go down.)

Theta:

Going farther in the money (ITM) theta decreases. Vega increases.

Using the Greeks

Gamma:

Negative Gamma means that this is a Short Options position, therefore we want the price to go AWAY from the position….in the case a  of Bear Call spread down since it’s a short position.

Secondly, it’s shows us how much the Delta will change if the stock moves up or down one point.

If the price goes higher, then the Delta of the position will increase by the Gamma amount, If the price goes lower, then the Delta of the position will decrease by the Gamma amount.

The Gamma Risk is that as the price comes closer to this short Bear Call Spread Options position, the Delta Risk will rise faster and faster; it creates an “acceleration” of risk.

** if delta is -ve and the stock goes up you loose.
** if gamma is -ve and delta is -ve and the stock move up, the delta will increase by gamma amount.
** if gamma is -ve and delta is +ve and the stock moves up, the delta will decrease by gamma amount.

++ flat delta, flat gamma, flat vega and a +ve theta is what you would like to achieve.

The Bull Put spreads contribute long deltas.
The Bear Call spreads contribute short deltas.

If delta is -92 that means that for the first  point that the SPY price rises, my position will lose $92 of value.

If the Gamma value is about -50 and Delta is -136, that  means that if the SPY rises one more point, the Delta value will be about (-136)+(-50) or about -186.

If Delta is -370, and Gamma is -68.46:
What it will do to Delta the next 1 point move higher in the underlying SPY, we see that the Delta will read (-317.56) +(-68.46) = -386.02. This shows the importance of using Gamma to be proactive.

So if the value moves beyond our Delta Threshold you can adjust the position by adding some Long Deltas.
We can added a synthetic position by selling a put at the 109 strike, and buying a call at the same strike.

The “acceleration” effect of Gamma tends to intensify the further that we get into the expiration month, and the closer that the price gets to a short strike of a credit spread.

If Delat for the postition has moved to +111 Deltas, which is now telling us that the price needs to go UP for the position to gain value.

Determining a DELTA THRESHOLD based on position size and personal risk/reward criteria will allow you to set an objective trigger point to adjust.

Once your Delta Threshold has been exceeded, you will add Long or Short Deltas to bring the overall position back within your Delta Risk threshold.

Options Greeks

Delta:

Positive Delta positions gain value as the price of the underlying instrument goes up, while Negative Delta positions gain value as the price of the underlying goes down.

Buying calls creates a Positive Delta position.

Selling puts creates a Positive Delta position.
Buying puts creates a Negative Delta position.

Selling calls creates a Negative Delta position.

Options Spreads - will provide Deltas equal to the positive Delta Options minus the negative Delta Options, and the final result can yield negative or positive Deltas depending on the composition of the spread.

A Credit Spread Call Vertical (Bear Call Spread) that is set up OTM will be a negative Delta position, since the negative Deltas of the short strike will be larger than those of the positive Deltas of the long strike.

A Credit Spread Put Vertical (Bull Put Spread) that is set up OTM will be a positive Delta position, since the positive Deltas of the short strike will be larger than those of the negative Deltas of the long strike.

Delta Size:

A long call will generate positive or “long” Deltas equivalent to the number of contracts traded times the actual Delta value of that Option. A long put will generate negative or “short” Deltas equivalent to the number of contracts traded times the actual Delta value of that Option.

Gamma:

Is the measure of the change of an Option’s Delta value with respect to a one point move in the price of the underlying instrument.

As Options sellers, we will almost always be dealing with Negative or Short Gamma positions. Negative Gamma positions lose value as the price approaches the position.

When Options are well out of the money, Delta values change very slowly with changes in the underlying price. The closer that the position gets to the money, however, the faster that Gamma ramps up and “accelerates” the movement in Delta.

A Credit Spread position has Negative Gamma characteristics which means that it will lose value as price approaches the short strike price.

A Debit Spread position has Positive Gamma characteristics which means that it will gain value as price approaches the short strike price.

Theta:

Is the measure of the change in an Option’s value with respect to a one-day change in time.Should be positive, If this “Theta” number is positive, then it illustrates how much your position is gaining value every day as a result of Theta.

If you see a positive number that represents the Theta of your entire position, then you’re doing something right with your Option selling strategy.

Selling Puts creates a Positive Theta position, and Selling Calls creates a Positive Theta position.

Selling a Credit Spread means that the Positive Theta of the short Option is larger than the Negative Theta
of the long Option, so the position will be Positive Theta overall.

Vega:

Is the measure of the change in an Option’s value with respect to a one-percent change in volatility.

If this number is positive, then it illustrates how much your position will gain with a rise in implied volatility.

Generally when you sell an Option, it’s better to have volatility contract after you’ve entered the position, as opposed to expand after you’ve entered the position.

Credit Spreads and Short Options are SHORT VEGA positions, which gain value when implied volatility drops.

Debit Spreads and Long Options are LONG VEGA positions which gain value when implied volatility rises.

Credit spread is a Short Vega position, it will gain value as the implied volatility drops.

Much like Theta, the effects of Vega dissipate with time.

The effects of a change in implied volatility will have the most dramatic effect on longer-term Options vs. those about to expire.


For the purposes of a Credit Spreads you want:

Delta:      Neutral
Gamma:  Negative
Theta:     Positive
Vega:     Negative