fradav

Thanks a lot Chris. One question:- I know with ICs and calendars it's best to avoid holding shorts close to expiry. In this trade I'm using 50% more longs to offset short:long delta ratio which is approx .5 (long) to .8 (short) in week prior to expiry for ITM options. However that still wouldn't cover the final day or 2 when gamma takes over. Do you recommend rolling weeklies early to avoid the danger? I notice from your earlier trades you're sometimes rolling 7-10 days in advance once the shorts are ITM.

Am planning on entering this trade now with a slight variation in the set-up, will sell ATM weekly puts against Dec168's with a ratio of 3:2 long to short. My thinking is that I'm entering with SPY at around 168 (as compared to 158 when Chris placed his original trade) and I want to optimise profits on neutral weeks whilst giving up some gains on bullish weeks (as opposed to the short ITM puts with enough extrinsic to cover cost long term) and having a slightly better delta hedge for down moves as compared to a 5:4 ratio. Of course you can never guess the market direction but my best guess is more sideways for a while rather than breaking way through all time highs. Does this sound reasonable? Thanks for any feedback.

Chris, thanks so much for taking the time to write such a comprehensive reply, very much appreciated. I'm still working out what to with my portfolio with respect to allocation. My logic would tell me that until my portfolio is a certain size, the annualised returns from an option income strategy should be superior to anchor trades (AT), but once you get above a certain amount (due to inherent limitations trading large accounts with former and esp. tax advantages with latter), the AT strategy would be superior. Of course if you're patient enough compounding returns would be a large advantage with AT, but I'd think there's a threshold account size above which AT is the smart way to go. I can see you do both, and you've obviously thought it well through for your situation. I'll need to sit down and do some calculations based on past performance to find something that's ideal for me. Re. the SPY diagonal, I've been trading various combos of these both on paper and live. I did actually try it with both calls and puts, went very well on paper but first week live didn't work due to QE volatility. In short when SPY spiked, I had 2 legs working against me (long puts and short call) and only 1 for (the long calls) after the value of the short puts was used up. It left me having to guess where it was going next, and I took the wrong decision (to protect being crushed with further up move), bought back half the short calls at a loss, and rolled up 50% of puts. Then Bernanke spoke and I got badly whipsawed. Lesson was (1) with only one side open, i.e., calls or puts, it's easier to manage and of course to be careful placing the trade on volatile weeks. I'm paper trading combos now to get more experience (also on SPX which I like for this trade) and look fwd to following your trades here. Hope you continue to place your trades here on SO! Best regards

Chris (or any other knowledgeable people here ) I've a few questions that I'd very much appreciate an answer to. I understand there's a lot of variations here based on buy/sell ratio, OTM, ATM, ITM and each will have advantages based on whether it's a bear, bull or flat market. But is there any specific combo that's been backtested and produces the best average annualised results in all markets without guessing market direction? I know the results of selling ATM puts on SPX is well documented and performs best in a flat/bull market but not sure about how it compares to put diagonal spreads with the various combos. As it stands, using an approx 5:4 ratio with ITM shorts it's almost a SPY portfolio replacement strategy if I'm not mistaken. Otherwise it becomes a bit of a guessing game, e.g., "down this week so I'll sell ITM 1:1 ratio as there might be a bounce next week" Secondly, since the downside risk can be relatively accurately predicted, what's the max portfolio % you'd allocate to such a strategy? Would you only sell short what you could cover with cash, even with the longs as protection? Otherwise one could use a lot of leverage without too much risk since shorts are covered. Finally, would SPX be a good alternative to decrease commission fees and remove worry of assignment of DITM puts, no matter how small that risk is? Thanks for any thoughts on the above.

Chris, thanks a lot for your great advice, much appreciated. Been reflecting on it and you're right about taking the loss and trying to use the remaining funds to make the best investment possible rather than holding onto a losing trade in the hope of a market retraction, in which case the losses can escalate out of control, in synch with my blood pressure. My brain is inclined to avoid taking the loss, as I feel like I'm buying back OTM calls after a euphoric bull run, but as you say, it's not wise to try and out-guess the market. But I know I should act soon. Thanks again for your help Chris.

I'm currently going through the sorry situation you refer to above, sold a RUT iron condor last week using a large portion of my margin. There was a small spike in volatility on day I sold it (RUT dropped to 924) so I thought I could get benefit on declining volatility. Within a week the RUT is up 46 points, and close to my short call (980, long is at 1010). I closed the put side for profit but my paper loss is still large. Only positive is that it's June so still 43 days to expiry. Am considering rolling out to July 980/1010 (for a credit) while I still have decent credit for my 1010 call, and opening another put spread. Of course I'd be there for another month waiting for a retraction that might not come. But at moment my goal is simply capital preservation. But I've learned a serious lesson regarding position sizing. And (sgain) that I don't enjoy the trade (IC), the psychology of fearing both a rise and a fall completely negates the perception of it's 'safety' (I placed delta 10-13s) Any advice much appreciated!