Kevin,
Paper trading iron condors is a good way to learn about many of the pitfalls that exist for those who trade them. You sold a Dec. 490-500-620-
The expiration risk graph is a reflection of your position's value at expiration, and since there are still more than 30 days until those December contracts expire your risk graph is not an accurate depiction of the current value of your position's value. Now, you're looking at the greeks for that position trying understand what they are telling you. That's good. So, here's what's happened from a greeks perspective.
When you opened the position everything was likely nicely centered and looked just great. That's how most iron condors start. Each of your short options had a similar delta and the long options had a slightly lower delta, since they were both a bit further away from the money that the short contracts. As the RUT began moving higher towards 580, gamma caused the negative deltas in the short call option to grow faster than the long deltas in either the more distant long call or those in the short put option. This has given your overall position a that negative delta, which tells you that if the RUT were to trade a lower it would help your position out a bit.
Now, I'm not sure when you put the trade on. We have seen implied volatilities move higher with the recent market correction, however. Iron condors are negative vega trades, so if the vols increased after you opened this trade that will also create an unrealized loss in the position.
I think you need to take another look at your theta, though. Your position theta should be positive while the market is between the short strikes. This reflects the idea that your position is gaining value from the passage of time.
In general, iron condors are all about probabilities. They can be sold so as to give the trader a high probability of success. That high probability of success comes at a price, however. The price is that the potential downside of the trade outweighs the maximum potential profit significantly. Many iron condor traders have made profits on these trades month after month, only to see all of those profits and then some wiped out from one big loss on one trade.
Those of us who trade iron condors for the long haul have to learn how to manage the positions so that we don't experience those overwhelming losses. There are different ways of doing this, but the primary concept is that you do not want to allow the position to take you into the red more than a predetermined amount. So, in your case we might draw a "line in the sand" by saying that we do not want to lose much more than our initial credit of $2,300. Let's just pick $2,500, and say we won't lose more than that.
We then need to have plan to curtail losses once the market starts moving after the position is opened. Some guys like to roll the vertical spreads away from the oncoming market, some like to dynamically hedge by adding or subtracting deltas, some like to layer positions one on top of the other. There is not "right" way or "better way," it's just a question of finding the techniques that make sense for you and applying them in a reasonable and effective manner to prevent yourself from getting hammered during those couple months each year when the market seems to decide that iron condor traders have had it much too easy and need to give back some of the profits they've been pulling in the other ten months out of the year.
So, what you've been watching in your position is the fact that after you opened your position the RUT began moving. When the position's value is effected by movement in the underlying in excess of positive effects of theta decay, you'll see an unrealized loss. Some of this is to be expected and tolerated because we can't stop the market from moving and the position does carry a high probability of success. At some point we need to basically step in say "enough is enough" by applying some form of position adjustment, hedge, etc., so as to prevent the market from dealing us a devastating blow. Avoid the devastation, you'll be around to enjoy those months when things work out in our favor.
Christopher Smith
TheOptionClub.
--- In OptionClub@yahoogro
>
> Hi,
> I am very new to Iron condors. I put on a paper trade so I could "mess around" with adjustments etc The position I put on is.
>
> + 10 ^RUT DEC 490 PUT = $7.5
> - 10 ^RUT DEC 500 PUT = $8.7
> - 10 ^RUT DEC 620 CALL = $4.5
> + 10 ^RUT DEC 630 CALL = $3.4 TOTAL CREDIT = $2300
> RUT 562 at time of condor
>
> After several days and RUT at 580 i see that at this point, although still nicely between my short options prices (althought 22 delta on the short put) it shows me as being down net $1700 and I'm confused to the reason why. Withing my graph if it were to expire now it will be a profitable trade. On this note I do notice that my theta is -137. Still total delta on the Condor is -37
>
> Any help would be appreciated.
>
> Kevin
>
To unsubscribe from TheOptionClub, send an email to:
OptionClub-unsubscribe@yahoogroups.com
No comments:
Post a Comment