Wednesday, October 10, 2012

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.

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.

Tuesday, October 2, 2012

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.


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.


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.)


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