Must have had a typo in there. Maybe a hypothetical example to clarify:
Say you start with the -520p/+510p for $0.50 credit. Then say the index falls to around 540 and you decide to take some action. Here you can add the +520/-2 510/+500 put fly for say $0.50 debit netting into the -510/+500 short put vertical for now no-profit-potential net zero credit. The thought is to now sell something like the -560/+570 call vertical for maybe $1.00 so you are now in a condor for a net $1.00 credit. Not the best of all worlds but still a bit of a better fighting chance then having been in the original contemplated condor without much wiggle room.
From: OptionClub@yahoogro
Sent: Monday, January 04, 2010 2:01 PM
To: OptionClub@yahoogro
Subject: Re: [TheOptionClub.
Michael:
I would appreciate it if you would clarify the Butterfly you would possibly use in the second last paragraph of your response below. Thank you.
Bob
----- Original Message -----
From: mcatolico
Sent: Sunday, January 03, 2010 5:08 PM
Subject: RE: [TheOptionClub.
com] Looking for input on a condor paper trade I am constructing
I am not a big fan of selling <10 delta options. What I have learned after
many years of trading is that these cannot be realistically defended. By
that I mean that protecting these options as the underlying moves toward the
short strike forces you into a guessing game - and one that is very costly.
You either defend too early or unnecessarily thereby forfeiting your razor
thin potential profit or you act too late and are simply in a position to
fight to minimize further loses.
From a reward for risk standpoint the ratio you suggest points out how
challenging it is to defend your position. for instance, one way to protect
your position is to add a butterfly and thus force the short strike out.
Example with the -700/710 side of the condor you could add something like
the +700/-2 710/+720 fly to net into the -710/720 wing. But adding that fly
will require a debit trade and, if done at the wrong time or price, can
almost entirely wipe out the original credit received. If it costs you say
50 cents your original 11.5:1 reward for risk now shrinks to 32 to 1 and the
risk of losing is now presumably greater since the underlying is probably
already bumping up to your short strike instead of being a couple standard
deviations away.
In effect, this kind of trade (i.e. one with short 10 delta strikes)
basically a set-it, forget-it type of bet. Yes it will work out many times
and hopefully the Russian roulette you play with this type of position works
out.
My style of trading is, as implied, avoids the nail-biting of this type of
trade. If I were to attempt it though, I'd be much more inclined to just
sell a strangle or pick one direction where I didn't think the underlying
would trade and sell one half of the condor, bide my time and then sell the
other half if it makes sense later on.
With the short strangle (or even a straddle) the idea would be that if the
underlying makes a directional move, there would be more credit available to
help defend the weak short strike. E.g. if the position starts with the
-520p/-700 strangle and rut goes toward the 700 strike, you can add
something like the +700/-710 vertical to shove that short strike out and pay
for it by selling something like the -540p/+520p or whatever to keep your
net credit somewhat stable.
With the short vertical, you can either wait and get lucky on guessing the
direction correctly or, if wrong, when the underlying moves to threaten the
short strike, only then sell the other side of the condor at strikes that
allow you to pay for defending the losing vertical. e.g. if you bet on a
January effect rally and sell the 520p/510p vertical but the market decides
to tank, when near the 520 strike you add the 520/20/00 butterfly to defend
the 520 strike and pay for it by selling whatever call vertical pays for the
debit (plus probably a little more insurance).
Lots of different and time-intensive ways to play these things that I'm sure
others will comment on.
-----Original Message-----
From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com ] On
Behalf Of Johnnyvogue
Sent: Sunday, January 03, 2010 2:19 PM
To: OptionClub@yahoogroups.com
Subject: [TheOptionClub.com] Looking for input on a condor paper trade I am
constructing
Forgive the elementary nature of this question (actually a few questions),
as you will see it is probably a good thing I am looking at this as only a
paper trade. Looking at a February RUT condor consisting of 520/510 puts
with 700/710 calls. My reasoning for choosing the 520 put and the 700 call
as my short positions is they each have a delta of 8 in keeping with a
suggestion from a course I took. The 520 put is out more than two standard
deviations and the 700 call is between one and two standard deviations. So,
as far as I can tell this is a high probability venture, but of course the
reward is limited. (at about .80) Is this considered to be too low of a
risk reward? It seems to me having to put up $920 to get $80 is not a great
ratio. I have heard the term "picking up nickles in front of a steamroller"
and it may apply here. Am I putting too much emphasis on the deltas?
Finally what consideration should I be giving to the volatility on these
options? The 520 put is at 38.09 while the 700 call is at 21.48. How does
an experienced trader view this aspect of a potential trade? As always,
thanks to each and everyone of you who offer your insight to those of us
still finding our way. John
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