The Option Pit Method Mastering Iron Condors Option

The Option Pit Method Mastering Iron Condors Option Pit

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What I will cover • • What is a good condor Why we adjust Basic risk management rules When to skip adjusting How to adjust in simple forms More advanced adjustments Using VIX ETN’s and condors

Iron Condor • A good iron condor should not need adjusting • The underlying should sit still – HV should be low • IV should drop or stay stable • Time passing and nothing happening is key

HV

IV

Iron Condor • In the case above the Iron Condor would have made money…quickly • The key is to not be greedy and take profits – Many traders hold these spreads too long because they think they should collect all of the premium • They shouldn't instead they should take the easy money and move on. • Take the money!

Common Risk Mistakes • Thinking that the way things are will persist • Thinking that the way things are WONT persist • Failing to understand that things need to scale – Trade plans need to SCALE!!!

Scalable • This is the key question in a money management plan • A real trading approach should be planned for 200, 000 not 20, 000 dollars • this is why it is so important to be a realist • If it doesn't scale, it doesn’t work • Many retail traders take FAR bigger risks with small accounts because they don’t think scale

Condor Risk • Condors can lose money on rallies and sell offs however they lose more often on rallies • The market tends to run higher, not lower • Moves lower are quick and hard – the trader can see the risk • Moves higher can seem harmless but the next thing the trader knows – BAMMM!!!!

Max Loss • How much the trader is willing to lose on a trade • This, for a condor should equal about what the trader is looking to make

Absolute Max Loss • While one should set a max loss the trade that adjustments are set at, one needs a second max loss – THE ABSOLUTE max loss • If the underlying moves a 1 day 1 STD the trader would be out of the trade, the trader needs to make an adjustment – We all know how to calculate this…right? • Absolute max loss is usually the credit received on the condor

Adjusting • Most condors should not be adjusted because they win or lose • Condors that look good but run into trouble should be adjusted – Especially if the condor is done under the conditions that Andrew went through – Even the winners need some help some time

Adjusting • It can be surprisingly easy to adjust, one just has to set rules • We follow the 1/3 1/3 rule

1/3, 1/3 Rule • Set Max Loss • When you are at 1/3 of max loss make an adjustment to reduce risk • When you are at 2/3 of max loss make a second adjustment to reduce risk • When you are at 3/3 of max loss KILL THE TRADE!!!

Bull Adjustments • If the underlying rallies there are 5 options and 1 advanced option • Close • close pieces • Buy call spreads • Kite Spreads • Margin spread: Bull diagonal calendar spread

Close • If a trade goes bad quickly. . Close it • Believe it or not this might be your biggest adjustment technique • If one follows the rules for entering a condor most of the time it should work if it doesn’t CLOSE the losing spread with the winning spread and leave

Partial Close • Using the 1/3 1/3 rule one can slowly reduce the spreads on the losing side • Buy enough spreads to cut delta in half • If the underlying keeps moving buy more spreads back • If the underlying hits the final third close the whole thing • ex

Call adjustment • If one really likes a spread but is afraid of momentum one should buy calls against the short call spread • Buying a call will provide quick support • EX

Buy Call Spreads • Same as buying calls, but take advantage of out of control skew • If the upside is Bid this is the way to hedge a condor • EX

KITE • A kite buys a near dated call and sells call spreads against it • The best play for short lived moves • This is the best adjustment by our belief when we think the move coming is going to die, but we are unsure of ourselves. • EX

Margin Trade • In a condor, trader are afraid of gamma and not vega • A bull diagonal can be the same – Buy near term call and sell later dated upside call

Bearish adjusting • There are fewer good bear adjustments that work however there a few • Cover • Buy puts • Buy Puts spreads • Back spreads

Buy Puts • Put spreads are great for covering delta when the underlying moves • Often the underlying moves fast on down spreads moves we like this Back adjustment when things move fast • Take advantage of skew moves and vol at same time • ex

Back Spread • Great for stock condors when vol is underpriced • If the underlying drops and vol doesn’t rallying trader should execute bear back spreads • If vol is low traders should execute back spreads • ex

Summary • If one is stubborn around condors he or she will lose • There are good adjustments for good spreads • Its really about scale

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