New SPX Iron Condor Jan 07

holzie said: "This is a small trade I placed today. Let's follow it here until expiration: -1 SELL SPX 1465 CALL +1 BUY SPX 1470 CALL -1 SELL SPX 1375 PUT +1 BUY SPX 1370 PUT ------------------------------ CREDIT: $135.00 BP EFFECT: -$365 ($500-135) BREAK EVEN STOCK PRICES:1373.65 - 1466.35 MAX PROFIT: $135 - (4*$1.50 COMMISION) = $129.00 MAX LOSS: $365 Just a note here. Broker used is TOS. To give you an idea of OptionsXpress....the commission would be $51.80. On top of that, they would hold full $500 of your money instead of just the max risk of $365.00. Max.Profit with TOS = 129/365 = 35.34% Max.Profit with OX = 83.20/365 = 22.79% or if you actually consider your capital used or frozen then it is 83.20/500 = 16.64%...who's the winner -- the broker...who carries the risk...you. Let's watch the trade: The rules: 1) No adjustments -- for simplicity. 2) Close loosing leg/wing if it comes within 10 points of short leg at ANY time. The short strikes are slightly above 1 standard deviation till January expiration, this means probability of profit of aprox. 68% (Cheybyshev's theorem)...each day, this standard deviation range will close, meaning that on January 9-10th, our condor will be 2 standard deviations away from maximum range. This means a 95% probability of success. FYI, 3 standard deviations is 99%, for the curious ones :) Holz."

drdan said: "Good trade Holzie!"

holzie said: "[QUOTE=drdan]Good trade Holzie![/QUOTE] It's really a great limited risk/limited reward trade. SPX is very liquid, which makes getting in and out of trades a breeze. The volatility is under 15%, which makes the trade more predictable. I am not a day trader, in the sense that I would be able to watch my positions during the day. I can only analyze them when I come home in the evening. I will consider placing a smaller trade with higher return/risk on an individual stock few weeks before expiration, depending how this one is going. Holzie."

Rbreb13 said: "I appreciate your input Holzie. I'm just starting to learn options and have been paper trading for a month for practice. Learning spreads, credits, debits, etc. types of options is a bit confusing to me but with reading and practice I'll get there."

Hanger said: "As I admitted when I joined, I am a simple options guy straight calls/puts...But reading this is intriguing.... So when you made the trade you were bullish? Anything below 1373 you lose money anything above 1466 you gain?"

holzie said: "[QUOTE=Hanger]As I admitted when I joined, I am a simple options guy straight calls/puts...But reading this is intriguing.... So when you made the trade you were bullish? Anything below 1373 you lose money anything above 1466 you gain?[/QUOTE] No, no and no :) Let me help you understand what iron condors (ICs) are about. First of all they work the best in a somewhat flat market. Now, you should be asking why, right? See, did you ever notice when you are holding calls or puts with current month's expiration that they start to loose value even if the underlying stays flat or moves just a little? Frustrating, isn't it? I know, I have been there. See, an OTM option is nothing much than a time value and a little bit of volatility (simplified). Time value, or theta, works against the call holder but it works for the call seller. The closer to expiration you are getting, the time decay picks up. Ok, so now you are aware of this principle. Let's move to the idea of trading an IC based on what you know about time value. When you do an IC, your goal is to RECEIVE premium, instead of paying it. To limit risk, you have to also buy something to cover your butt in case the market really swings huge against you. So you sell more expensive call/put premium and buy less expensive call/put to limit risk. Look at my SPX condor. Notice what I sold - 1465 call and 1375 put. Notice what I bought 1470 call and 1370 put. Can you see how I sold the more expensive stuff and bought the less expensive stuff? I bought when SPX was at 1420. Now I have my position and in best case scenario on January 20th 07 all the options expire worthless = OTM and I get to keep the PREMIUM. OTM in this case is SPX closing between 1376 and 1464. If market stays in this range UNTIL EXPIRATION I realize my maximum profit of $129. You can see that the break even prices are pretty close to this range as well. Remember, you don't want to be ATM or ITM. This is why I set my rule to close the position if the market comes within 10 points of each of my short (the one I sold) leg -- even intraday. Ok, so now you will probably ask me what happens to my profit if I have to close my put leg let's say 1 week till expiration. Well, it still will most likely be profitable. My call leg will most likely realize maximum profit ( roughly 1/2 of total max profit on a DELTA NEUTRAL condor) and I had three weeks to erode some of the value on the put side as well. I will still have to shell out a little bit of money to buy back the more expensive puts I sold (unless you roll the loosing leg out for further credit but we won't get into that right now...) But it won't be a tragic amount. In practice, since I don't sit in front of my computer all day, when I am forced to close a leg on a $100 credit, I still walk away with $30-40 after commissions at expiration -- it's not a max profit but it was still worth my while and I consider the trade safe. Bear in mind, that ICs on a volatile stock or index can be a nightmare and requires a lot of skill and experience, which I have neither. That's why I have such a wide market range. I started out with more than 1 standard monthly deviation on my range, which translates in initial probability of max profit success of 68%. I don't like to go below that so it may take a while to find a good risk/reward scenario. Man I hope I didn't loose you. I really kept it simple enough to get my point across but you need to read up on it more so that you won't get hurt. This is still options man and it is a fast paced game. Holz."

Hanger said: "Holz- Great explanation....I don't plan on jumpin into anything...just not my style...but definately gives another thing for me to read up on. It seems like a pretty smart and relatively safe(in options that is). Will papertrade a few after reading up on it quite a bit more and see what I can find. Again, thanks for the awesome response....your making me think...both good and bad :D"

drdan said: "[QUOTE=holzie] Man I hope I didn't loose you. I really kept it simple enough to get my point across but you need to read up on it more so that you won't get hurt. This is still options man and it is a fast paced game. Holz.[/QUOTE] Good explanation Holzie. But I agree you probably lost most of the people in the room. We will just have to keep making trades and explain them as we go along. The more explanations the more trades the more people may understand. I think it may be just our language is funny to them. LOL"

nicholasbellono said: "You lost me on that. Can you suggest any good books/ places on ther internet to learn about these types of trades? I really want to learn. Thanks a lot. :)"

nicholasbellono said: "Another question I have is How do you sell an option when you didn't buy it in the first place?"

holzie said: "[QUOTE=nicholasbellono]Another question I have is How do you sell an option when you didn't buy it in the first place?[/QUOTE] The retail investor enters the entire IC order at one time. Like this. By the way the software used here is TOS' desktop trading platform -- free for account holders. It makes trading so much easier. [IMG]http://linuxgaming.us/images/2006-12-19-RISK%20PROFILE.jpg[/IMG]"

drdan said: "I think his question was more simple than that Holz. Nick - you can buy and sell stocks or options at any time. Basically the broker and/or the market maker lends you the contracts or the stock to sell if you do not own it. In stocks it is called shorting a stock in options it is called writing an option. I think in options it is easier to understand because you are selling contracts just like on a house. On contracts someone is always the seller and someone is always the buyer. For example when writing a call you are selling a contract that gives the buyer the right to purchase 100 shares of a stock at a certain price. Just like selling a house, you write a contract giving the buyer the right to purchase your house at a certain price, then when the date of the contract comes up (expiration for options or closing for the house) the buyer then buys the stock or the house if he wants to he has an "option" to buy or not to buy. If the buyer opts to buy the stock you as the writer/seller have to provide them the stock at the current market price. So if you do not own it you better have enough in your trading account to cover it because your broker will buy the stock for you. After the contract is written it can then be bought and sold over and over again until expiration in the open market, just like option contracts for real estate or notes for loans on real estate. Do you understand? It is really easy once you get the terminology and the concepts down."

drdan said: "Let me correct something I wrote in the above - Upon exercising of a call option you need to give the buyer of the call the stock at the strike price (contract price) of the call. You need to buy, or already own, the stock at the current market price."

holzie said: "Update on the trade: The market has been dancing pretty much on the same spot, which is perfect for our delta neutral iron condor. The longer the market keeps staying at one place the less time it has to move in either direction --> our probability of max. profit success increases each day. Still 29 days till expiration, which is a long time and we will have to watch it very closely for the next 2 weeks. After that, the trading range will narrow above 75% prob. of success and this rate will pick up more and more each day towards expiration. This is why a lot of IC traders don't enter trades until last week or so before expiration -- they just do not want to hold the bag that long. They won't get as much premium either, of course. You could expect to get less than 10% return on our particular trade if entered January 12th for example. We started out pretty conservative and the compensation was just right, that's why we entered the trade. There will be times when nothing looks good and that's ok. We don't like ICs in violent markets -- I like my sleep! Holz."

nicholasbellono said: "dan- thanks for the responses and email. I know how options work the concept of them. The thing I didn't understand was how you can sell a contract you don't even have yet? Also how does Holzie come up with his probability? I am looking over your site later tonight. I'm going to understand this thing and figure out how to do it! Thanks guys- Nicholas"

drdan said: "[QUOTE=nicholasbellono]dan- thanks for the responses and email. I know how options work the concept of them. The thing I didn't understand was how you can sell a contract you don't even have yet? Also how does Holzie come up with his probability? I am looking over your site later tonight. I'm going to understand this thing and figure out how to do it! Thanks guys- Nicholas[/QUOTE] Well if I didn't answer your question in my above post let me try again. When opening a trade instead of the "Buy to Open" contract you can choose the "Sell to Open" contract on your brokers screen. You do not have to own a contract to sell one. Someone has to write a contract first before it can be bought so you are now the one writing the contract when you choose "Sell to Open". What we work on here with redit spreads is premium. You know when you buy an option contract you pay a premium for it. (An option is priced with intrinsic and time value, added together you get the price or premium of the option.) Well as a writer or seller of options contracts we collect that premium. It gets placed in our account as soon as well sell the contract. We get to keep that premium if the option expires worthless. We know are profit before we even open the trade. We also limit our risk when you do a spread strategy like this one Holzie is doing. I hope you and other understand. Also NIck a lot of my explanation is not just for you. We have a lot of interest in options on this forum it is just a foreign language to many of them and the thought of selling/writing options is foreign to even some experienced options traders. So if anyone has questions about what I or Holzie are trying to explain. Ask away. Even if you want a simple definition of some of the terms."

nicholasbellono said: "Dan- Thanks for the response. I got a chance to look over your site a bit. I understand holize's post now. I still don't understand where the profit comes from. You are credited the money for writing the contract, I understand that. But why buy the cheaper calls. Holzie- What do you mean by IC trader"

drdan said: "[QUOTE=nicholasbellono]Dan- Thanks for the response. I got a chance to look over your site a bit. I understand holize's post now. I still don't understand where the profit comes from. You are credited the money for writing the contract, I understand that. But why buy the cheaper calls. Holzie- What do you mean by IC trader[/QUOTE] IC trader means Iron Condor trader (IC=Iron Condor) When you write/sell an option you need to somehow be sure that you can come up with the stock if someone exercises their option. Meaning calls you out or puts the stock to you. If you just sell an option it is called writing a naked option and you need a large enough trading capital plus margin to cover the cost of the strike price of the option. For example if you sell 5 contracts of a $25 stock price you need $12,500 to cover the stock if your option is exercised. (500 shares at $25 each). OR more which is usually the case, because you are going to have to purchase the stock at market prices to cover the option! If you have the stock already lets say you own 1000 shares of a an XYZ stock then you can sell up to 10 contracts of an option of that stock because you already own the stock it is then called a covered option. Now the way to do it without having a lot of capital is to buy a lower strike price call or higher strike price put to cover the sold options. If a sold option is exercised you can then turn around and exercise your bought option. In fact, the broker does it for you automatically. You are using it for insurance and in most cases if you have a lower capital it is the only way to do the trade."

holzie said: "[QUOTE=nicholasbellono]dan- thanks for the responses and email. I know how options work the concept of them. The thing I didn't understand was how you can sell a contract you don't even have yet? Also how does Holzie come up with his probability? I am looking over your site later tonight. I'm going to understand this thing and figure out how to do it! Thanks guys- Nicholas[/QUOTE] Nicholas, I there are 3 ways I can tell my probability. Using the TOS software, I can look at the probability graph, second, I can use the ever narrowing range of 1 standard deviation (68%) and see if it's slightly above or below, and third, you can use the deltas. The third one is the hardest one to tell so I only glance at it to see if it roughly corresponds with the first two. Alright, I am gonna make a separate post in which I will go through what would happen with our position and profit if the market threatened our call side...meaning if the market just started running towards 1465 (minus 10 points remember our rules). Before I do that I want to show you 1 thing. We placed this trade on 12/15 for a $135 credit and $365 risk. Today is the 12/21 and the same trade can only be placed for $90 credit and $410 risk. The earlier conservative trade would return 36.9%.....but if we made the trade today, we could hope for 21.9% return. It is the same CONSERVATIVE trade! You could consider still trading it at today's credit because 22% return on a high probability trade like this is really good. I learned my second month trading ICs that I get extra juice out of them for placing them in the 3 week of current month's expiration: for example -- December 14th-15th placing trade for Jan 07 condor. It is true that you get to hold the bag for an extra week, but we started with a very wide range to begin with and that's what you have to take into consideration. Alright, if you understood this so far, you should now ask why not buy 2 month IC...meaning Feb 07 -- extra juice, right? NO! It is risk - reward in options. The THETA, or time value, of your February contracts would be around 1/10th of a January contract. Basically, the little extra juice you might get would be negated by the fact that you would hardly make any progress during January, while you are the risk holder. Progress in ICs is the rate of option's values being crushed by time. I am not holding anything for anyone for 4 weeks for free. On top of that, your holding period is 2 months now, so even if you made 50% on your credit (you would probably get less), you would have to divide it by 2, to compare apples to apples with January contracts.... I am gonna do the other post now. You will like that one, I guarantee ya :) Holzie."

nicholasbellono said: "So with an Iron condor you are writing calls and puts or naked options? Also does TradeKing.com have the TOS software, if not who does? Thanks again"

holzie said: "[QUOTE=nicholasbellono]So with an Iron condor you are writing calls and puts or naked options? Also does TradeKing.com have the TOS software, if not who does? Thanks again[/QUOTE] Nicholas, with IC you are selling calls and buying calls AND selling puts and buying puts ALL at the same time. Your broker has to have a platform for that (I am not going to go into something called "legging"). Also, TOS stands for Thinkorswim at thinkorswim.com. The software is free to use for any customers and it is by far the best options software package I have seen. All I need is at one place and I don't have to go all over the net for different types of analysis. If you need help with getting around certain limitations in opening an account, such as having less than $3500 to open one, let me know and I will help you get around that. Holz."

holzie said: "Update: I laid out a closing strategy for our January condor in the new thread about the newest position in Feb07 condor. When both legs get filled I will post final result here. Holz."

holzie said: "Update: Trade closed today: JAN07 1465/1470 CALL closed for 0.05 debit JAN07 1375/1370 PUT closed for 0.15 debit Total 0.20 * 100 + (4 * $1.50) = $20 + $6.00 = $26.00 Total condor yield: $129 - $26 = $103/$365 = 28.22% in 21 days I know I proposed at the beginning to hold till expiration but I had real money in this transaction and I had to manage the risks of the condor. We will not resell any new January contracts because I am not happy with the premiums we would receive for the type of market we are in right now. We have had our new February condor rolling on nicely for 2 days now. If you have any questions, please let me know. Holzie."

bklambco said: "If you were jumping in for Feb 07 SPX this week just prior to expiration. Considering how spx has been acting lately What would you pick and your logic for it? I know the prices will change on open these are from IB Sunday last price. Market at 1430 -1 sell spx 1485 call -1.15 +1 buy spx 1495 call +.50 credit (.65) or -1 sell spx 1480 call -1.65 +1 buy spx 1490 call +.80 credit of (.85) -1 sell spx 1475 call -2.35 +1 buy spx 1485 call +1.15 credit (1.20) -1 sell spx 1470 call -3.25 +1 buy spx 1480 call +1.63 credit (1.62) -1 sell spx 1465 call -4.35 +1 buy spx 1475 call +2.35 credit(2.00) -1 sell spx 1460 call -5.80 +1 sell spx 1470 call 3.25 credit (2.55) ==== There seems to be some scalp plays with only a couple day left for Jan -1 sell spx 1455 call -.45 +1 buy spx 1470 call +.10 credit (.35) Is this reasonable considered market closed on monday and only 2-3 day left? I have some options background not a lot learned the hard way by lose first learn a lesson. Next lession.... [QUOTE=holzie]This is a small trade I placed today. Let's follow it here until expiration: -1 SELL SPX 1465 CALL +1 BUY SPX 1470 CALL -1 SELL SPX 1375 PUT +1 BUY SPX 1370 PUT ------------------------------ CREDIT: $135.00 BP EFFECT: -$365 ($500-135) BREAK EVEN STOCK PRICES:1373.65 - 1466.35 MAX PROFIT: $135 - (4*$1.50 COMMISION) = $129.00 MAX LOSS: $365 Just a note here. Broker used is TOS. To give you an idea of OptionsXpress....the commission would be $51.80. On top of that, they would hold full $500 of your money instead of just the max risk of $365.00. Max.Profit with TOS = 129/365 = 35.34% Max.Profit with OX = 83.20/365 = 22.79% or if you actually consider your capital used or frozen then it is 83.20/500 = 16.64%...who's the winner -- the broker...who carries the risk...you. Let's watch the trade: The rules: 1) No adjustments -- for simplicity. 2) Close loosing leg/wing if it comes within 10 points of short leg at ANY time. The short strikes are slightly above 1 standard deviation till January expiration, this means probability of profit of aprox. 68% (Cheybyshev's theorem)...each day, this standard deviation range will close, meaning that on January 9-10th, our condor will be 2 standard deviations away from maximum range. This means a 95% probability of success. FYI, 3 standard deviations is 99%, for the curious ones :) Holz.[/QUOTE]"

bklambco said: "If you were jumping in for Feb 07 SPX this week just prior to expiration. Considering how spx has been acting lately What would you pick and your logic for it? I know the prices will change on open these are from IB Sunday last price. Market at 1430 -1 sell spx 1485 call -1.15 +1 buy spx 1495 call +.50 credit (.65) or -1 sell spx 1480 call -1.65 +1 buy spx 1490 call +.80 credit of (.85) -1 sell spx 1475 call -2.35 +1 buy spx 1485 call +1.15 credit (1.20) -1 sell spx 1470 call -3.25 +1 buy spx 1480 call +1.63 credit (1.62) -1 sell spx 1465 call -4.35 +1 buy spx 1475 call +2.35 credit(2.00) -1 sell spx 1460 call -5.80 +1 sell spx 1470 call 3.25 credit (2.55) ==== There seems to be some scalp plays with only a couple day left for Jan -1 sell spx 1455 call -.45 +1 buy spx 1470 call +.10 credit (.35) Is this reasonable considered market closed on monday and only 2-3 day left? I have some options background not a lot learned the hard way by lose first learn a lesson. Next lession.... [QUOTE=holzie]This is a small trade I placed today. Let's follow it here until expiration: -1 SELL SPX 1465 CALL +1 BUY SPX 1470 CALL -1 SELL SPX 1375 PUT +1 BUY SPX 1370 PUT ------------------------------ CREDIT: $135.00 BP EFFECT: -$365 ($500-135) BREAK EVEN STOCK PRICES:1373.65 - 1466.35 MAX PROFIT: $135 - (4*$1.50 COMMISION) = $129.00 MAX LOSS: $365 Just a note here. Broker used is TOS. To give you an idea of OptionsXpress....the commission would be $51.80. On top of that, they would hold full $500 of your money instead of just the max risk of $365.00. Max.Profit with TOS = 129/365 = 35.34% Max.Profit with OX = 83.20/365 = 22.79% or if you actually consider your capital used or frozen then it is 83.20/500 = 16.64%...who's the winner -- the broker...who carries the risk...you. Let's watch the trade: The rules: 1) No adjustments -- for simplicity. 2) Close loosing leg/wing if it comes within 10 points of short leg at ANY time. The short strikes are slightly above 1 standard deviation till January expiration, this means probability of profit of aprox. 68% (Cheybyshev's theorem)...each day, this standard deviation range will close, meaning that on January 9-10th, our condor will be 2 standard deviations away from maximum range. This means a 95% probability of success. FYI, 3 standard deviations is 99%, for the curious ones :) Holz.[/QUOTE]"

holzie said: "If I was to enter the market now, I would do this one. -1 SPX FEB07 1470 call +1 SPX FEB07 1480 call -1 SPX FEB07 1390 put +1 SPX FEB07 1380 put ------------------------ Credit (mark) 2.70, which means that you might get filled at 2.50 The other credits are just too low, because remember, I would like to be out of this one on Feb 9th so you will be buying it partially back for subchange. This market is really very trendy for IC so in a different market you would need to allow more protection on the downside, because it always goes very wrong on the downside. I just dont see the trend to end, and the 1400 level is a very strong barrier for the SPX. The premiums are very juicy on the calls because the market expects to run that way. So you have to allow yourself some room for the market to run in the next 21 days. What broker do you use? What's your commission? If you have a small account, you obviously cannot really do a smaller position on the SPX but make sure you have at least 30-40% of capital in buying power to adjust if you need to. Don't let your condors expire, end them early, give yourself time and room to breathe and move into the next month 1-2 weeks early to get a better premium and thus use up less capital. Holzie. Holzie."

bklambco said: "Now I like this one, gives you a lot of credit to adjust and get out earlier and time decay theta will start to eat into it enabling a buy back if spx does not break past to much resistance. It looks like we are hitting a sideways spx market, from the charts will see. I have been thinking if you get in with to little credit then you have nothing to work with when the market goes against you. Sometimes being way otm on the strikes and having little premium can be worse if the markets really catches on fire. Account is smaller than last year, got hit in the Oct/Nov bad times for credit spread traders, over traded. Mainly trade only spx, rut, oex. So to start off this year going to go slow with a couple contracts leaving capital for adjustments. My adjusments is mainly close them early before they 10 points before short strike is up. Been thinking about Hedging with spy, and using Roll outs, but closing early seems to be the easiest, cheapest for a small number of contracts. What broker do you use? Interactive Brokers. What's your commission? Cheap There is a $10 montly fee for for an exchange fee. If you do more than $30 in commisions the exchange fee is waived. Index options are 1.00 - 1.50 Stock options are .75 $2500 min to open an account. So to put on the spx spread for 2 contracts cost is 2.00 if you buy back the short another 1 buck, let the long expire worthless. There is no base fee like 9.00 plus .75 per contract, or like Trade King 4.00 plus .65 per contract. Platform takes a little time to learn but there are webinars you can take that have been pre-recorded, if you know one platform the learning another is easy. What else?? You can trade Just about anything Futures,Forex,stocks, options. and what have you there are over 50 exchanges you can trade like Japan, Europe,Austrailia. Tools probably not as good as TOS, but if you dont need a lot of hand holding and stuff and just want cheap commisions this is the place to be, execution is is fast. They are an ECN. [QUOTE=holzie]If I was to enter the market now, I would do this one. -1 SPX FEB07 1470 call +1 SPX FEB07 1480 call -1 SPX FEB07 1390 put +1 SPX FEB07 1380 put ------------------------ Credit (mark) 2.70, which means that you might get filled at 2.50 The other credits are just too low, because remember, I would like to be out of this one on Feb 9th so you will be buying it partially back for subchange. This market is really very trendy for IC so in a different market you would need to allow more protection on the downside, because it always goes very wrong on the downside. I just dont see the trend to end, and the 1400 level is a very strong barrier for the SPX. The premiums are very juicy on the calls because the market expects to run that way. So you have to allow yourself some room for the market to run in the next 21 days. What broker do you use? What's your commission? If you have a small account, you obviously cannot really do a smaller position on the SPX but make sure you have at least 30-40% of capital in buying power to adjust if you need to. Don't let your condors expire, end them early, give yourself time and room to breathe and move into the next month 1-2 weeks early to get a better premium and thus use up less capital. Holzie. Holzie.[/QUOTE]"