Lou:
Actually, in this case, margin and max loss are substitutable for each other. I also believe that if you check carefully, even though you are doing it in an IRA, it is actually being done “inside” of a margin account in your IRA. Even though you are not borrowing money from your broker, certain types of transactions are required by securities law to be done inside a margin account even in an IRA. For example, a cash secured naked put, even though you have 100% of the cash in your account, nevertheless it is being done on “margin”, selling short any option (even if part of a spread with defined risk) must happen in a margin account as opposed to the purchase of an option which may take place in a “cash” account. The major difference between a margin account in an IRA and a non-IRA margin account, is that in a IRA margin account, you will not have had to sign any hypothecation agreement or any loan agreement since there cannot be any moneys borrowed. In other words, you are doing these transactions in a margin account, but doing it at 100% margin at all times (in the IRA margin account).
SO getting back to your original question, in my mind profit percent would be premium received / max loss (which is in fact how much cash you need to tie up to secure the position at your broker).
Ken
From: ConservativeOptionS
Sent: Friday, July 02, 2010 12:29 AM
To: ConservativeOptionS
Subject: [ConservativeOption
Ken,Dave,
Thanks for all the information. It's quite helpful.
I trade out of my IRA account so there's no actual margin involved, but the P&L is basically spread less premium/results at expiration or whenever position is closed. Since the spread less the premium is the same as the max loss then would it be correct when using unequal wings (which I had considered) to also use the proceeds divided by max loss?
I am trying to make an option methodology the basis of an overall strategy, so I have a couple of other ideas I'd like to bounce off the group, but I'll open a new topic for that.
Lou
--- In ConservativeOptionS
>
> There will be many differences of opinion but I do condors every month and
> the way I figure profit is that I take the margin required to put the spread
> on, (margin should only be required on one side of the condor but there are
> some brokers that take it on both, if yours hits you for double margin you
> should consider another broker) and divide into that the premium received
> and that is my max profit percent. When the trade is done I use the actual
> premium kept / margin to get the final figure. Margin should be spread
> between the short and long of one of the pairs - premium received, since
> this is your max loss at expiration (if it is truly an IC and is balanced on
> both wings). In your case the margin required would be $100 (spread between
> short and long call - $60 (premium taken in) - $40 margin (and max loss) and
> max profit % would be 60/40 = 150%. This is HIGHLY unusual for an IC to
> show a potential return of that size and it is due to what everyone on the
> boards has been discussing about VVUS, the FDA committee's pending
> recommendation. Your profit range at the prices you quoted are from $5.40 to
> $15.60. You keep all the premium you took in between $6 and $15 and max loss
> is under %5 or over $16.
>
>
>
> One of the major factors, other than price that affects IC's is volatility,
> so large volatility swings will also affect your "interim" profit and loss,
> but at expiration, all vol is 0, so if VVUS is still between the strikes you
> keep everything. Just the pain of waiting until expiration may get more or
> less depending on vol and also gamma changes as price nears one or the other
> short strikes. Remember, max loss and max profit is ONLY an expiration
> number.
>
>
>
> Hope this helps.
>
>
>
> Ken
>
>
>
>
>
> From: ConservativeOptionS
> [mailto:ConservativeOptionS
> Sent: Wednesday, June 30, 2010 12:18 AM
> To: ConservativeOptionS
> Subject: [ConservativeOption
>
>
>
>
>
> I finally took a little bite and entered an order for a couple of contracts
> on a condor. This is my first condor so I just want to get my feet wet
> without getting nervous.
> The details (all July): long put @ 5, short put @ 6, short call @ 15, long
> call @ 16. Net credit if filled .60 (between bid/ask).
> Max profit 60 between 6 and 15; max loss 40 below 5 or above 16; breakevens
> at 5.40 and 15.60. It appears to be a fairly conservative position.
> Two questions I have:
> First, how do I figure profit? I'm guessing something like the difference
> between the short strike exposures (900) divided by the profit or loss, so
> that if I made the max profit of 60, the profit would be 60/900 or 7%?
> Somehow that doesn't seem correct. It would intuitively seem to me to be
> 100%, but if that were the case, how would I figure a $30 profit, or a $20
> loss?
> Second, what surprises should I be watching for (other than the obvious
> possible major price swing)?
> Lou
>
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