Book Summary of "Profiting with Iron Condor Options"

Iron Condor is the mathematically most efficient way of utilising your capital in the option markets. Most efficient does not mean it is most profitable. Most option traders make the mistakes of stuff all the capital in options as much as possible, thinking that they only make money when they are in the market.

They couldn't be more wrong.

Choose to enter the market when it is ideal, not indulge in it anytime you want.
This book taught me to look out for ways to effectively profits from Iron Condor, and to exit the market as soon as possible, and wait for another entry to set up the Iron Condor.

A great book. I would be referring to it as much as possible.

Profiting with Iron Condor Options

Author-- Michael Hanania Benklifa

Time Decay - Theta

Effect of a chance in price of underlying security - Delta
Acceleration - Gamma
Volatility - Vega

We are trading time.
ATM options decays differently than OTM

ATM decay - Waterfall, it accelerates towards the end.
OTM decay- value drops dramatically then levels off closer to expiration (because no much value to lose near the end)
Because of OTM decay, we dont hold contracts till expiration.

Dont wait till expiration. Exit as long as you have earned a decent % profit within a % length of the contract.
For example, 29% of total credit with 25% of the length of contract, 71% of total credit within 50% of length.
Out of Market means u are not exposed to market risk.
"Dont push your luck"

Volatility
IV divided by 16 times square root of number of days = how much the price will move for 1 Standard Deviation (68%)

Options are hedges, like puts bought to hedge against stocks portfolio hence buyers may overpaid for them, that is why IV higher than historical volatility (Volatility Gap)

Iron condors best on stocks with large number of strikes, reasonably high priced, high liquidity in OI & volume, price not dramatically affected by specific news.
Best- SPX, NDX, RUT, all European options (SPY is american option)

Placing a Trade
Trade works best when it is set up as a reaction to the market.
Only time when u do not react to market conditions is when u first enter the trade.
You want an iron condor that is
(1) range bound (2) long enough (3) profits

1) Time
2) Position
3) Price

"Art of the Imperfect Trade" satisfy two of the three conditions is enough.
"Keep one third as profit"

Sell when got spike in IV.
The day after expiration has many buyers jumping back, which dampens the price.
A month from expiration seems most favoured but it is too near for risk management.
A condor placed the friday before the previous month's expiration, for 5-6weeks for best. 7-8weeks is also good depending on situations.

Keep a lookout for ViX spikes and if VIX prices break upper Bollinger Band.
VIX ATM puts & calls should be same price. If not, it is a hint of things to come.
Also if next month ATM prices are substantially higher than this month, it may indicates potential large drops in future.

Delta
Delta is not symmetrical, as prices fall far faster and steeper than they climb.
Strike at Delta 10 should be much further away on the put side than the call side.

Price
Evaluate credit as a percentage of total margin at risk. for example, credit of $1,000 as % of margin received of $10,000.
Do SPX at quarter step, 1950, 1975, 2000, as liquidity is greater there, which implies tighter bid-ask spread.
Easier to balance Deltas when short strikes at these quarter strikes, as SPX has tendency to gravitate to these prices because of greater liquidity in options, futures and ETFs-: trade with the institutions, not against them.

Every $0.25 credit received for selling a SPX iron condor is abt 1% return on margin.
Therefore $1 is 4%, $2 is 8%.
Plan in advance what price you received, and what price to close it, to get your % return.

Putting it together
Position- Delta 10 positions outside previous highs & lows. Charts not trending strongly in either directions.
Price: high credit of $5 (20% of margin) volatility, which has been trending nicely, just had a 1-day spike.
Time- expiration in 4-5weeks

You can only choose 2 out of 3, prioritize.
Price is your first consideration.  You want to capture a portion of the credit, but not all. Keeping 1/3 or 1/4 is easier than waiting long enough to capture 1/2.
Then position is directed by price. If Delta 10s cannot provide the good price, you need to wait till it does (Volatility spike) or trade the farther out month. Position is NON-negotiable.
-->> Time is negotiable. Time is the only constant in trading condors. Keep a "reserve" of time in your trade so that you have time to make adjustments. It allows you when to remove or adjust your trade.

When enter a trade?
Trade out of opportunity (volatility), not out of necessity (time expiration).
Wait for a jump in VIX, it can be a percentage term relative to previous day.
Or as a break in the upper Bollinger Band on the VIX.
Or standard deviation in change in prices of VIX or S&P is greater than 2 SD

1) Get a min $3 credit or greater, which is 12% return on margin.
2) Delta shld be 10 or less, but never greater than 12.
3) Expiration day must be no closer than 49days, if volatility take a huge jump before day 42, consider it, but prefer to trade the month farther out.
4) Call short strikes shld be at least 100 to 125 points higher than current prices
Put short strikes shld be at least 125 points lower.
This cushion not just allow you to stay out of assignment, it allows you to adjust.
5) Trade when SPX is at quarter price.
6) Enter on a volatility spike day (a down day)

Sideway market - Take profit once achieve target, do not push your luck. Market do not stay sideway for too long

Uptrending mkt-
Up is good, but up too fast is not good.
Best to wait until a down move in mkt.
Reminder that volatility is up when market goes down, but not up when market goes up.
In uptrending, leave room for market to go higher. Lean on quarter prices to enter. Wait for market to finish 1 leg up to quarter price, if it can't and fall to lower quarter price, use as reference. Preference is still to enter on a down day, with spikes in volatility
IV ought to be higher than HV.

Exit is key to profit.

Exit strategy that works best is to give back almost all credit. Profits of 3% in a few days is considered good.
Don't stay through expiration as Gamma may burn u. When u exit u r now a buyer and choices may be against u.

Exit profits- good to set GTC profit exit price immediately after enter. Place order before market opens if its in your favour, to take advantage of amateur hour.
Exit time- close expiration a month before expiration, to have a wider defensive. If you staying because market moves against you, rapid time decay is your ally.
Close 2-4weeks after entering.
Exit P&L Curve- take profit without hesitation. Disappointment in less profit is better than disappointment in losses.
Exit Capital- preserve capital. If lose money, exit at break even. Lots of small gains and an occasional loss is key to success.

Can sell condors 2-3 days before holidays and long weekends.
Buy back to close right before the weekend, when Theta is discounted.
Prices decline abt midday on Friday or day prior to holiday, & drop quickly in final few minutes.

Why not close after hols? Remember events during hols can ruin your positions too. Berlin wall.

Downtrend days
Good to setup due to spike in VIX.
First & last hours are unstable and strong reversals in 1st hour are not unusual. Can just take profit and run. Or enter at this point of great uncertainty, for the VIX

Sometimes VIX continue to climb after u enter, make ur positions in losses.
U close the side that is farther, open a newer, nearer one for extra credits.
Can use credits to shift other side.
Can exit the trade too in a small loss or break even to open a new one another time.

Warning, if SPX reach 50 points near to 1 of your side, better adjust.

Another sign is when delta is more than 30.

A good trade

1) Making sure condor was large

2) trading at quarter strikes

3) selling 10 delta

4) making sure the initial credit was high

5) making proper adjustments to condor to protect principal

Adjustment rules

1) easier to adjust in a down market as you get more credits for rolling down the call credit spreads

2) harder to adjust in an up market because you do not get much for rolling up the put credit spread and you bring the position closer to your downside risk

3) trade the math, don't let delta go over 25 to 30

4) when possible, adjust when the market is moving in the opposite direction intraday. Adjust the puts when the market rallies, or adjust the calls when the market dips.

5) trade only what is in front of you, and not what you or anybody else thinks that the market will do.

6) if you must speculate, assume worst-case, not the best-case scenario

7) if you must adjust, consider getting out at breakeven at the first chance available

8) you can always put in a new trade with better strikes

Manage your risk, take the loss, reduce your exposure when necessary.

Wing buyback only if you have a strong conviction that the market will reverse direction

Day Trade before Earnings Day

IV 1st month / IV 2nd month

IV May / IV June (for example)

If this Sort Value is more than 1, then there is a skew worth speculating.

Use the same principles to open iron condors, on the options that are going to expire soon.

Seek Deltas below 10, but you can afford to be more aggressive with the call sides.

Look to close the positions right at the 1st hour, take profits.

Look at the ATM calls, what is the price, add to the current price of stock, to know that is the expected price speculators expect the stock to rise to.

Same for ATM puts, but minus instead.

Trade with delta 10, get credits, quit on the day earnings or the NEWS are announced, immediately asap.

You may lose some trades, win most.

Most trades will win due to the shrinking of the volatility. However, keep your trade small as inevitable, some iron condor will fail.

Book Summary of "Get Rich With Options" By Lee Lowell

This is the first book I read that let me understand more about options.

It is not technical, and not dry, allows me to get interested in options, before I took on more technical books that explains more on options, the greeks involved.
I have read a lot of books, and summarised them in my notepad.. will slowly blog them out to share with anyone who are interested in option trading as an income generating strategy.

Hope this Summary helps anyone who is interested!

Get Rich with Options - Lee Lowell

Calls - the right to buy at a strike price, before expiry date

Puts - the right to sell at a strike price, before expiry date

Option calculator of delta, option pricing

www.ivolatility.com

Delta- 

the percentage relationship of security price with your option price

Example 0.60- When the underlying security moves up $1, your option price moves up 0.60

Volatility

HV - Historical Volatility (based on historical) and IV Implied Volatility (forward looking)

The higher the volatility, the higher option price is

The lower the volatiltiy, the lower option price is

Buy and sell at opportunate time

option price of different stocks may varies a lot due to volatility.

Reverse Skew (usually stocks)

For certain stocks, as strike prices goes down, the implied volatility goes up, due to fear factor of downside moves, this is known as reverse skew. People start paying higher price for downside protection, which inflates option prices, which in turn heats up IV numbers.

Forward skew

As strike prices goes up, IV goes up. Typical for soybean market, especially during summer growing months.

Soybeans trae wtih IV levels getting higher as you move up in strike prices. As dry summers can produce potential droughts and a reduced supply of soybeans, investors tend to favour buying upside protection, which causes more interest in upside strikes.

Smiling Skew

Incorporates a reverse skew and a forward skew

A forward skew develops when the higher-strike options have an increasing large IV. ATM is usually at bottom of the IV curve

Spread - buying 1 option and selling 1 to hedge

1) hedging keep initial cost down and allow more trades

2) spreads can offset an option purchase a lower IV with a sale of option at higher IV. - getting the "volatility edge"

Strategy 1- Buying DITM options on stocks / indexes

Idea- to spend only 50% or less of the stock costs, to control the same amount of stock, using options, and enjoy close to the same price movement (hence to seek delta > 0.9), and with limited losses.

To close this position once profitable, to not hold till the expiry.

1) Choose the deepest DITM option, that has a delta of at least 0.9 and above

2) Choose the lowest strike price possible.

3) If you have choices, try to choose the one with the nearest breakeven price (strike price + premium)

End-results

1) Expire worthless

2) Sell options at any time

3) Roll your options (sell and then buy a new DITM option

4) Exercise the call options and own the assets

Benefits-

1) Lower up-front cost

2) Less Capital at risk

3) Maximum movement- high delta

4) Higher ROI

5) With less capital and lower cost, you can divert funds to other low risks assets

Drawbacks

1) No dividends nor voting rights

2) Expiry dates

Strategy 2- Get paid to buy stocks "naked put selling"

Idea- To own a stock at a lower price than current market price, but instead of waiting for prices to drop and buy, sell naked put options for an income. If prices drop below your targeted price, you would be forced to execute but that is alright as you want to own the stock anyway.

Do not sell naked put options on stocks that you don't want to potentially own.

Good to go in when valued stocks get hammered down, the IV will make put options even more expensive.

1) Choose a stock that you like to own, potentially for long term.

2) Choose a lower price than its current price, that you would think is a bargain

3) Sell a put option

4) Collect income most of the time, and be prepared to execute it if needed

Margin requirements = [(20% of underlying price) + (credit received) - (amt strike price is OTM)] x 100

End-results

1) Expire worthless

2) Own stocks that you want to own, but carries risks that stocks plunge, which would affect you anyway if you outright own the stock

Strategy 3- (Most Favourite of Lowell) Credit Spread (also taught in Daniel Loh)

Sell 1 option and buy the less expensive options for credit

Bull Put Spread

Bear Call Spread

Idea- instead of choosing the price direction where you predict it will go, choose the direction you predict it will not go. This will give you extra allowance. As long as as price does not go too wrong, you benefit due to Time Decay.

1) Sell and buy nearest pair of OTM put options when you think the security is bullish.

2) Sell and buy nearest pair of OTM call options when you think the security is bearish.

3) Sell the more expensive, and buy the cheaper options, for positive credits into your account. (hence credit spread)

4) Debit spread is when you sell the cheaper option, do it only when you are very confident of the directional bias, meant for punting, not a credit spread earning.

5) Wait for time decay or close for profits

Best trades- majority of your trades.

Daniel Loh focusing on this strategy

Strategy #4- Selling covered calls

Idea- If you own a stock, sell covered calls on your own stocks at a higher price

1) Option premiums allow you to earn some income. higher probability

2) If you had to exercise the options, take it as an opportunity to realise your gains.

3) Same golden rule, whenever an option moves swiftly in your favour, usually good idea to buy back the position and take profits.

Strategy Bonus- Ratio Option Spreads- More risky, more rewards, need more experience

Idea- buy 1 expensive OTM options and selling multiple less expensive OTM options to hedge

Allows you to take advantage of a directional bias without incurring an initial debit or having to speculate on low probability OTM option.

Even if all expires, you keep money. As it involves selling naked options, there is a low chance but high risks of losing a lot.

1) buying an OTM option, and selling multiple, less-expensive, farther OTM options against it in 1 single spread trade

2) the multiple sales would provide extra credit on your 1 expensive option purchase

3) You will get credits if all options expire worthless

4) Best case scenario- Price moves towards the middle of the range you bought, giving your bought options profits, and making your sold options worthless

5) Selling put ratio spread is better than call ratio spread, as security can only go to zero, but can rise to infinity. However, some call ratio spreads are worth it

Smiling Skew - optimal as higher IV as you move away from ATM makes option pricing more expensive and worthwhile to sell.

Example-  Call ratio spread on soyabeans

Soyabean options great to trade at summer months, just in spring- Soybean forward skew

Nov price 604 3/4 

Buy 680 calls for 90cents

Sell 5 Nov 820 calls for 21 cents each

Total credit $1.40

if soyabeans move up to 680 - 820, you gain in bought calls of 680, but your sold options of 820 can expire worthless. Good returns

Be mindful of StopLoss, as what you do not like may still happen. SL and stay Sharp

Stock / Indexes Call Ratio Spreads

Indexes are reverse skew- sales of far OTM put options offset by purchase of not-so-far OTM put options -> big winner.

Example:- Put ratio spread on 2006 DJ 11,000

Sell 56 7000 put options for $560, and buy 3 10,400 put options for $30

If all expire worthless, earn $530 credit

If it moves to between range of 7000 and 10,400, then you earn big profits.

if it moves below 7000, huge losses.

Unlimited Risk exposure, stay sharp with SL

Gold- What is the costs of mining?

Nice chart showing the costs of gold. Good for gold traders, to have a economical support level for how low gold can go?