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Options - Iron Condors, Vertical Spreads, Flys

Edge

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Any other vertical spread or butterfly traders out there? My bread-n-butter option trades have been iron condors and broken wing butterflies mostly on the cash settled Russell 2000 (RUT). I dabble in vertical spreads in the SPX, OIH, & XLE and other liquid indexes and stocks. I am almost always negative delta and negative gamma and open most trades for a credit.

I'd love to kick around ideas with others that are currently doing or wanting to learn the same.

As an example I currently have open a Sept RUT (710p/720p/830c/840c) Iron Condor and an Oct RUT (840c/850c/870) skip strike butterfly.

-Edge
 

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Edge

Edge

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I've taken half of the RUT 840c/850c/870c trade off the table but plan on letting the other half run through expiration. I wanted to take some profits and remove some risk in the event we go straight up. Best case would be a slow run up to 850 and I wouldn't want it to go above 865 or else I would be giving it all back and then some. If we stay range bound or go down from here, i'll keep my credit for a profit.

Next week I will start looking for a November expiration spread, i'm starting to feel a bit bearish so I might be more aggressive and sell a call vertical spread instead of buying an unbalanced fly for a credit as I did for October. If we do get a sell off and volatility goes up i'll also be looking to sell some iron condors as a vol play.

I'm also going to keep my eyes open for a stalling of the ^NDX, it is another good product to trade with tight spreads and volume. I'd love to get in front of that thing if it takes a breather.

-Edge
 

randallg99

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firstly, thank you for sharing your thoughts and strategies.

I originally thought these types of strategies were very aggressive, but after reading online about them, it appears that they are rather conservative in that they have both limited upside and downside... good luck with this strategy. My only experience with options is selling covered calls and selling naked puts to acquire the stocks I want.

I have a couple of questions
1. what is your goal, is it a lump sum on a monthly basis? or percentage?
2. what kind of returns have you experienced?
3. do you trade these options on just indices or any underlying stocks?
4. do you own any stocks?


this is where I read some information after reading your post.
http://www.poweropt.com/ibutterflyspreadhelp.asp
 
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Edge

Edge

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I think it is very hard to talk in terms of what is aggressive or not aggressive when discussing these strategies, what it comes down to is the risk:reward at any given time and what the investor is comfortable with. To me, buying straight calls or puts is risky, unless if they are to hedge an existing position.

One person can sell an iron condor (or any other type of spread) for a 5% ROIC and feel that they aren’t very aggressive because they statistically have a 95% of keeping that 5%. Another investor might feel that selling an iron condor for only 5% is very aggressive because the risk:reward is horrible if it goes against you.

On the other hand if you sell a spread for 33% ROIC, which statistically is 1 std deviation, you have a 67% chance of being successful and keeping that premium and it has a little better risk:reward if the trade goes against you.

I’ll try answering your questions:

1. what is your goal, is it a lump sum on a monthly basis? or percentage?

My personal goal is monthly income averaging 10% ROIC month over 12 month period. I started selling spreads for about 30% monthly ROIC and understanding that one loosing month will cost me 2 winning months. I wanted to improve that by making adjustments to my trades if it was going against me to limit my loss on a bad month to only cost me 1 months worth of gains. I don’t feel that it was a bad strategy, but it has morphed throughout the year.

2. what kind of returns have you experienced?

It wouldn’t be fair to disclose my personal returns because I haven’t been consistent in strategy or invested capital. I can say I have exceeded my goal over the past year by a pretty good margin and I am well into triple digit % gain. Although the past year has been very good, it has been a roller coaster ride with some nail-biters and I’m not really comfortable increasing my position size with the risk:reward of a 1 std deviation iron condor.

3. do you trade these options on just indices or any underlying stocks?

I only trade these on indices, ETFs, or liquid stocks. As I’ve said before, the RUT is my favorite product, NDX is also a good product, and I like XLE and OIH for some diversification from time to time.

4. do you own any stocks?

I don’t hold any individual stocks at the moment, except for in mutual funds in 401k. Just not enough leverage for what I want to accomplish at this stage of my plan. I understand covered calls and short puts, but they aren’t the right strategies for me at this point.

I checked out that link attached in your post, it was really an example of what I consider a butterfly. I don’t do many straight butterflies except for hedging directional deltas on existing positions. If you look at stretching out the body of that fly, or creating an unbalanced butterfly, you’ll have a better idea of the trades I do.

Edge
 

Rawr

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This sounds fascinating and very interesting - in fact I would love to learn more, but I have to be honest - I have 0 idea of what you are talking about. Are there some good sources for beginners so we can read up on this?
 

NerdSmasher

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Yes, I'm on the same boat as Rawr. Having just read up a little bit on condors and butterflies, they seem like they could be incredibly profitable; since you don't have to have any of your own money to make them, but I would like to learn more about them before I try to use them.

Any advice you can give, or resources for learning would be greatly appreciated!
:thankyousign:
 
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Edge

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There are some decent resources out there, but i'm not sure if it would be bending the rules by posting links since a lot of the sites that give education also have advisory services.

I'd google for vertical spreads, iron condor, calendar spread, diagonal spread, butterfly spreads, call spreads, put spreads. Everything I do is basically a combination of 1 or more of these strategies.

The Options Industry Council has a decent site:
http://www.888options.com/store/Options_Strategies_Quick_Guide.pdf

Also search through the websites of the popular option brokers, there are some good nuggets on their sites.

Lawrence McMillan has some good books out there, particularly his Options as a Strategic Investment, but if you don't understand me, you probably won't understand him until you get familiar with the basics. I know others have learned a lot from Sheldon Natenberg's book Options Volatility and Pricing.
 
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Edge

Edge

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Yes, I'm on the same boat as Rawr. Having just read up a little bit on condors and butterflies, they seem like they could be incredibly profitable; since you don't have to have any of your own money to make them, but I would like to learn more about them before I try to use them.

Any advice you can give, or resources for learning would be greatly appreciated!
:thankyousign:
Hey NerdSmasher - The amount of capital can be minimal, but I don't want you to think that you don't need any of your own money for these trades. Your broker will have a margin requirement based on the risk of your position.

Edge
 
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Edge

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With the rally this morning I decided to jump into November options expiration. I bought a RUT 850c/860c/880c skip-strike butterfly for a small credit.

If I hold to expiration here's what I would expect for returns:
RUT below 850 - 10% ROIC.
RUT between 850-870 - anywhere between 10% and 110% with the sweet spot at 860.
RUT above 871 - this position gets really ugly really fast.

Breakeven for this position is 871. I will monitor and kick around possible adjustments as the market changes.

I'd appreciate any feedback on this position and adjustments from you all also.

Edge
 

randallg99

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from my understanding.... a typical butterfly would have had you buy in the money calls in conjunction with out of the money calls... what am I missing? (I looked up RUT, and it closed at 824.74 today, am I looking at the correct symbol?)
 
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Edge

Edge

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from my understanding.... a typical butterfly would have had you buy in the money calls in conjunction with out of the money calls... what am I missing? (I looked up RUT, and it closed at 824.74 today, am I looking at the correct symbol?)
I'm not sure that that is considered typical butterfly, it would be a typical ATM butterfly, I don't to much business ATM. I typically structure my positions so that the breakeven point is 1+ standard deviation OTM on my positions when I initiate them.

You are looking at the correct symbol, it wasn't a good day for my position yesterday, if this bull continues into next week i'll be looking for adjustments. The RUT is really 10X the IWM if you are familiar with the IWM.

Edge
 

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randallg99

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for some reason, I was under impression that the bottom 1st long call price had to be ITM... but now I understand that the calls do not have to be ITM.

so you are long 1 of the 850c and 1 of the 880c but short 2 of the 860c, right?

not familiar with IWM

... now that I understand clearer... is your initial position cost-free as a result of the sale of the 860c?
 
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Edge

Edge

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for some reason, I was under impression that the bottom 1st long call price had to be ITM... but now I understand that the calls do not have to be ITM.

so you are long 1 of the 850c and 1 of the 880c but short 2 of the 860c, right?

not familiar with IWM

... now that I understand clearer... is your initial position cost-free as a result of the sale of the 860c?
Yes, that is the position I have currently.

My position is more than cost free, I actually recieved a credit for putting it on. Don't confuse cost free with risk free though. I'd welcome a little sell off or at least some sideways action to get this position back in the green. Plenty of time though and my bias of the market hasn't changed.
 

randallg99

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both upside and downside potential with the butterfly seem limited, but that keeps risk at bay... but the potential reward seems much more compelling....

do you close one of the positions at a time? or do you close them out all at once? (within the day, hour, minute)

I will watch your trade, but please update your thoughts on the positions as it goes along.... I am really glad you made me aware of this type of trade. It is nicely leveraged with a credit to boot...



Also, what is IWM?
 
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Edge

Edge

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both upside and downside potential with the butterfly seem limited, but that keeps risk at bay... but the potential reward seems much more compelling....

do you close one of the positions at a time? or do you close them out all at once? (within the day, hour, minute)

I will watch your trade, but please update your thoughts on the positions as it goes along.... I am really glad you made me aware of this type of trade. It is nicely leveraged with a credit to boot...



Also, what is IWM?
You do limit your upside and downside, I view that as the benefit of being able to be a little bit wrong and still make money.

No easy way to answer that adjustment one. Ideally, I don't like to adjust, it means my trade isn't going as i'd hoped. I make adjustments based on my updated bias of the market. I do find the skip strike flys easier to adjust than iron condors, that is why I am trading them more and more. I generally look for ways to remove risk from my position while not giving up all the potential when a trade is going against me. I will post my thoughts and adjustments and I will look for feedback from others on adjustments and discussion.

IWM is an ETF for the russell 2k. I view it as what the SPY is to the S&P 500. IWM is more liquid than the RUT, but also 1/10th the size so you'd have to do more contracts with more comission. Depends on what you want your position size to be.

Edge
 

randallg99

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I am throwing some ideas around on paper and the volatility will make a nail biter of us yet. Following the pricing has become very interesting and I am trying to establish the relationships among the different strike prices vs. time...

will probably pull the trigger for a position next week with 1% of my portfolio.
 
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Edge

Edge

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It has obviously been a rough couple of days on my position with the rocket up market.

I think I have 3 ways of going about adjustments:

1- Do nothing, I put this position on for a reason with a margin of error. If my bias is that the market is overextended and my short strikes aren't in jeopardy, I won't adjust.
2- Add more downside risk to compensate for the bad upside risk. If the upside continues, my loss wont be as severe. However, if the market comes back down, i've added an additional complexity of risk to the position. Also, if I do add some downside risk in the form of a credit put spread, do I do it now or wait for a small correction so that I can get more premium for the spread.
3- Remove portion of upside risk for a small loss. This is one of those hope you are wrong adjustments, but just in case.
4- Take position completely off.

My personal rules dictate that I do #3. Will I be able to follow my own rules?? What I see myself doing since this is so early in the expiration cycle is waiting for a small correction and doing a combination of 2 & 3. Not sure of the magic number yet, i'll probably do something next week after I reevaluate. Stay tuned.

Edge
 
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Edge

Edge

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Well I just watched the market throughout the week and didn't make any adjustments to my +850C/-860C/+880 fly. That was a welcomed sell off on Thursday, but there is still a whole lot of earning season and a fed meeting between now and my 871 breakeven point for November expiration.

Right now there is only a 36% chance that my position will will be profitable if I hold through expiration so I will still be considering adjustments throuout the next few weeks. Specifically, I will be looking to remove risk from the position during any down market days. My bias has changed since I put this position on, so my decision on how to adjust has become more clear.

Please feel free to share any ideas. I'll post any adjustments as I make them. Stay tuned...

Edge
 
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Edge

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Well.....i've done the opposite of what I said I was going to do. My plan over the weekend was to reduce my upside risk in my position (I had no downside risk). The opportunity came for me to reduce risk and still let some of the position ride out to possibly turn positive, but instead of removing risk and turning this into a +delta fly, I sold an iron condor RUT (+730p/-740p/-870c/+880c).

I am now carrying more upside risk than I have all year long, and i've added some downside risk. I've gone against a lot of my personal rules, but I actually really like my position and my odds right now. I think there is significant edge in this position with the amount of premium I have recieved.

This position is a winner between 738 and 872 with the sweet spot at 860. There is only a 12% chance of this expiring below 738 and as long as we don't rocket straight up, I am hedged to make a profitable exit if I slowly approach my short call and want to exit before expiry.

Stay tuned because I might not be done with this November position yet. If we get some more fear in this market and 20-30 point sell off within the next 7-10 days I plan on opening another short put spread at or below my existing 730/740 put spread.
 
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Edge

Edge

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I just can't stand still this month, this is the most active trading i've done in any prior month. Not sure if this is a good thing or a bad thing, but I feel pretty good about my position.

This morning I bought back half of my 850/860 RUT call spread, this call spread was really a hedge for my short 860/880 RUT spread that made up my initial 850/860/880 fly. I did this simply because my bias on the market makes me feel pretty confident about my 860 short strike and I don't want to throw away all of that "hedge" money to expire worthless.

I'm thinking if I add any more risk to this position, it will be in the form of a short put spread within the next week. If not, i'll let this position mature and start looking to possibly remove some risk 7-10 days before Nov expiry.

This isn't the way I normally trade, I normally put on a position 4-6 weeks before expiry and let it mature through expiration. I put out more risk this month becuase I felt the risk/reward edge was favorable. I will probably be more active in taking some off the table early also. Stay tuned....

Edge
 
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Edge

Edge

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Well, I took advantage of the sell-off today and unloaded the other half of my Oct RUT +850/-860 call spread, this leaves me with a -860/+890 spread and a -740/+730 put spread.

Remember back on 10/6 I was wondering how I was going to adjust this position to get rid of upside risk, well now I've got to keep aware of the downside risk. LOL. Short Iron Condors will bring out the bi-polar in all of us.

If there is a little relief bounce tomorrow, i'll probably sell another call spread, probably the 840/850 to hedge some negative deltas. My other options would to close out the position, I have a pretty hefty profit this month that it seems kinda silly to risk just to be stubborn trying to squeeze out what amounts to about an extra 5% gain.

Regardless of what I do to adjust my November position, I will also start looking to enter a December postion tomorrow or early next week. I'm thinking of a broken wing call butterfly for a credit and no downside risk. However, if the selling continues through tomorrow and the VIX can get up above 25, i'll probably be tempted to take advantage of the volatility and sell the iron condor for December expiration.

Stay tuned.
 

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Edge

Edge

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Well this week is November expiration and my -740/+730 RUT put spread is still possibly in jeopardy depending on if the sell off continues. I'll be watching closely to possibly take some of it off to reduce the risk, but all in all it has been a good month and I feel pretty confident in standing pat.

If you've been following along, it's been a pretty wild month for me, i've invested twice the amount I usually put at risk in a month and this could be my best month yet.

This volatility is giving me very high hopes for December and I plan on taking advantage of the increased vol by selling a lot of premium. I am specifically looking to open a +670p/-680p/-860c/+870c RUT Dec iron condor for about a 2.20 credit on Monday.

Feel free to critique or ask any questions.

Edge
 

randallg99

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yesterday was a strong rally... overnight, Asia rebounded.... what's your status, now?
 
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Edge

Edge

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yesterday was a strong rally... overnight, Asia rebounded.... what's your status, now?
Not sure if you are asking about the status of my position or my bias on the market, i'll try to address both.

I'm going to look for signs of a lower high to form and if it does sell more OTM call spreads.

If I don't get a lower high, i'll look for a skip strike butterfly similar to Oct and Nov.

If your shorts aren't in jeopardy, rising markets are good for iron condors because of the decreasing vols. It's good if you already have a short iron condor, doesn't mean it is a good time to sell one.

As far as my Nov RUT postion, this is great.
 

zaiteku

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Hey Edge,

what do you look for specifically when selling Options (doing credit spreads)? I used to do a bunch of them, Iron Condors, and butterflies, but now since I dont have much time, Im mostly doing Collars and selling Calls farther up the chain.

Do you find yourself using a lot of support and resistance? or more volatility and greeks? or a combination?
 
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Edge

Edge

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Hey Edge,

what do you look for specifically when selling Options (doing credit spreads)? I used to do a bunch of them, Iron Condors, and butterflies, but now since I dont have much time, Im mostly doing Collars and selling Calls farther up the chain.

Do you find yourself using a lot of support and resistance? or more volatility and greeks? or a combination?
A combination of all – TA, FA, probabilities, vols, risk:reward, and greeks. As an example, I am currently short RUT calls for Dec and Jan in the 830-850 range. I am short these calls through short call spreads and skip strike flys.

TA – Declining 200, 50, and 20 moving averages with the 20ma below the 50ma, and the 50ma below the 200 ma. I keep support and resistance in mind when I am monitoring or hedging positions.

FA – I am bearish on the market for many reasons and my short strikes are near the highs for the RUT. This market is going to have to come get me.

Volatility – IC’s are more a play on volatility then price when I put them on. Whenever there is a decent sell off and vix spikes above 25ish, I’ll look for short OTM put spreads to convert short call spreads into short IC’s. If you structure these right and you have the right broker, it doesn’t increase your margin requirement.

Risk:Reward – I usually sell for premiums between 10%-30% returns on margin with the risk reward being between up to 1:1. Anything less than that is almost impossible to hedge. I need to define some rules for myself on position size, as far as how much of my account I dedicate to one position.

Greeks – I use the greeks as more of a dashboard after I have the position put on. With the exception of delta, which I am aware of when I put on the initial position.
 
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Edge

Edge

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VIX was around 25 yesterday. Any other premium sellers out there?

I've got Jan and Feb RUT short call spreads on and i'm trying to get into a RUT put skip strike fly for a credit. I probably will look for an additional Feb RUT Iron Condor next week. All the fear out there makes this a great market for selling premium.
 
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Edge

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Well I decided to try to bring this thread back from the dead just in case there was any interest after my presentation at B/P yesterday.

With the selling late last week and the VIX up around 28 (more fear = more premium in options) I am going to look for an Iron Condor to sell short next week. Don't know 100% sure what my short strikes will be yet, i'll let the market dictate that on Mon & Tues, but I will be structuring a trade that will return around 25% over a 6 week time period if it works out like I expect. The trade will profit from what I expect to be a decrease in volatility and relatively sideways market action to follow.

I post the details as I pull the trigger.
 

Jill

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Well I decided to try to bring this thread back from the dead just in case there was any interest after my presentation at B/P yesterday...I post the details as I pull the trigger.
YES! Definitely interested. Curious, why do you expect the markets to stabilize over the next few weeks?
 

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