Simulating Adjusting of Jan 07 SPX Iron Condor

holzie said: "I am sure a lot of you were wondering this. If this is so conservative, how do I know that a trade still won't turn against me? Well, you never do know. Even when we start out with 68% probability of success, the market can go crazy on you in either direction. This is why we ONLY stick with index options, or ETFs with volatility 15% or LESS so if they move violently, you can come home, have a cup of coffee and some cookies and run some simulations on adjustments or closings. To recap...our position, purchased on 12/15/06 is: -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 ---------------------------------------------- Now, we SIMULATE that it is January 13th, 2007 -- 7 days till SPX expiration (called settlement) and SPX is trading at 1455.00. Our rules say that we would close the threatened position (wing) if we come within 10 points at any time --> 1465 - 10 = 1455.00 -- whoops, we will close this one. Let's see how it looks before we close it: [IMG]http://www.linuxgaming.us/images/IC-call-threat1.png[/IMG] Please follow only checked trades, which in this case is the original iron condor only. We can see that at 1455, with all the time passed, we are still $40 on the upside, BUT the market can add 10 points any time in the remaining 7 days, which would mean making no money, or worse, actually taking a loss. A lot of retail investors will become emotional at this junction. They will probably bust out their candle charts with MAs, MACDs, Stochastics, Bollinger bands...whatever they can to see if they can "chance" it. I don't do that because this is way too much human emotion/involvement in a mechanical trade like this. It started out sweet and simple, I want to keep it sweet and simple. [B]That's why you set the rules at the beginning of the trade. You know when and how to get out before you place the trade! Every time! No exceptions! I don't care if you play 5 point spread on Coca-Cola, 2 days before expiration! What we will do is close the call side of the condor by buying back the 1465 calls we sold 3 weeks ago and selling the 1470 call because we have no more use for it. In the following picture, you will see 2 trades checked: 1st is the original iron condor and 2nd is the trade for closing our call position. [/B] [IMG]http://www.linuxgaming.us/images/IC-call-threat2--buybackcalls.png[/IMG] Ok, so what just happened? Well we had to spend $30 dollars to liquidate that wing, but our risk on the bull side is gone. So all we have left are the puts. The puts are very very far from being threatened...1455-1375 = 80 points away with 7 days to go. I am not saying it's not possible to dip that low in 7 days but very unlikely. We want to let it expire worthless. After this adjustment/closing our profit will change:$135 (initial credit) - $30 (debit for closing the calls) = $105. Our initial risk was $365, thus 105/365 = 28.76%. And now you see, how important it is to start conservative and neutral, have a plan beforehand, and most importantly, execute the plan like a machine -- this means [B]stick to the plan to the letter - deviating from your plan does not mean you are a flexible trader, it means you are an emotional trader.[/B] Lastly, I want to show you why we don't want to close the entire condor on January 13. Look at the last picture below. We would have to spend additional $65 to close it only 7 days till expiration. Why? It's all nice and dandy with our put wing, isn't it? If we closed it, our profit before all commissions added up would be $135 - ($30 + $65) = $40. Commisions would eat up additional 8*$1.50 = $12, so we would end up with $28 profit, which translates into 7.6% monthly profit. I know that 7.6% profit is better than a sharp stick in the eye but remember that we trade derivatives and carry a lot of risk, compared to carrying just long stock. You must demand to be compensated for this added risk or not enter a trade at all. Here is the last picture: [IMG]http://www.linuxgaming.us/images/IC-call-threat3--let_%20puts_%20expire.png[/IMG] Hope this helped and I will be happy to answer any questions. Holzie"

dumaman said: "what the hell was i looking at.. lol... sorry.."

nicholasbellono said: "I'm with dumaman on that. I can understand what you are doing but not well enough that I could go and find a trade, execute it correctly, and then adapt to changes in the market like you just did."

holzie said: "Guys, it's ok that you are not getting it all. I know how you feel. On top of that, unfortunately for you, I am really new at trading spreads and iron condors, AND options in general. I have been in options for a 1 year and lost a lot of money, well all the money actually, at the beginning...Dan calls it "tuition from the School of Hard Knocks" :) But seriously though, just to give you an idea how complicated this can get, I have watched a video recently of a professional options trader. He had a iron condor on RUT, which is a much more volatile index compared to the SPX. I have watched him enter a trade in a narrow range, squeeze out a very rich credit, and then when I thought he was screwed at one point he started adjusting it...that's where I lost him. This guys would adjust his condors and actually keep getting more and more credit. Way too hairy for me, but this guy does this every day for the past 10 years. And there are guys that have been trading this way for 20+ years. They are all very humble and respect Mr.Market. Here is the link to the video:[URL="http://optionsjunky.#############/"]http://optionsjunky.#############/[/URL] It's actually a site and the video is on the left side...it's the only one about RUT adjustment. Check the videos out...you will learn something. Holzie."

holzie said: "Hmm, ok, the board is slightly not cooperating so it is: optionsjunky-dot-blogspot-dot-com Holz."