TDM

Edwin makes a good point. This is pretty abnormal volatility lately, so it's not a great metric. Some trades like the current NFLX and AAPL trades do inherently have less volatility, but also less profit. I actually take extra large allocations of the SPX, VIX, etc trades since they are easy to get filled on, and the strategies are solid--however, that does expose me to much bigger swings than if I followed the model porftolio, especially in the current environment. Second, these trades are often taken in the context of the overall portfolio. For example, the current SPX butterfly helps offset any losses from the VIX calendar and SPY/TLT combo, and vice versa. Often, if we've got a calendar open (Say a GOOG calendar) that's stretched to the upside and will benefit substantially from a pullback, we might enter another trade that is delta positive, so they provide somewhat of a hedge. You can certainly skip the index trades, but you do need to take into account the context of what you do choose to trade, and make sure the trade is well positioned independent of the rest of the portfolio. (Generally this is the case for non-index trades, but not always). Finally, the volatility of any trade is really just a question of your risk tolerance, and your risk tolerance should be based on dollar losses, not % losses. If a trade has the potential to lose 50% or 100%, it may make sense to take a half or quarter allocation. I think this generally makes more sense than just skipping a trade because it swings a lot from day to day. For example, Steady Condors almost invariably gains or loses 5-10% on a given trade in a month, so its an incredibly low volatility strategy. Nevertheless, I often have my biggest winners and biggest losers (more of the former, fortunately!) from Steady Condors because I have allocated 4x as much by $ to SteadyCondors as to SteadyOptions, so a 10% gain on SCO is comparable to a 40% gain on SO. This means the dollars risked on all of my trades is pretty comparable, regardless of the strategy. There are some articles here on position sizing, and I highly recommend them--Kim has done an excellent job. Of course, you should always be prepared to lose everything on an options trade because "worst cases" do happen (QIHU straddle a month ago lost 40%, most straddles lose no more than 10%). However, most of the time you should be able to limit your losses to 1-3% of your total portfolio, which is an amount you need to be comfortable losing if you're trading options. Hope this helps! -T

Hi Kim, You write to buy slightly below the mid and sell slightly above the mid. This would be better than mid pricing (i.e., if a spread is trading at a 1.00 mid, we would try to buy it for .98 and sell it for 1.02). Is this correct? I know I struggle to get mid pricing often and would think it makes sense to buy slightly above and sell slightly below, accepting a few cents of slippage. Also, are there any exchanges that you've had luck with? Thanks, T

SeanM, you should be able to get into account management by manually typing the authentication code into the sDSA app. Unfortunately it doesn't send a link, but the manual challenge code always works for me. I use sDSA for everything. It makes it so much easier than having to track down and look up a code on a card.

Euan Sinclair did some work on what he calls the Volatility Premium. Basically, he showed that there is a significant long term edge to selling premium on indexes, because implied volatility is, on average, higher than realized volatility. He demonstrated some simple strategies (akin to Karen Supertrader), and showed that they would have produced consistent profits since 2001, even including events like 2008 and last week. He didn't advise these strategies (actually, he advises against them), but rather used them as a "proof of concept" passive strategy, to show the advantages of selling premium. The idea was that you can substantially improve on that performance by doing something like Steady Condors. Interestingly, he found that there is no corresponding inherent edge in selling premium on stocks. There are frequently short term edges on individual securities, as the market often has a bad estimate of volatility, but not the same systematic edge that you find in indexes. If anyone wants to read more, the book is Volatility Trading by Euan Sinclair. It's got good information, but it is definitely one of the more technical/quantitative/academic books I've read.

Hi Narrative, I remember when I had that same fear. I was convinced that margin trading was too risky, because of exactly what you said--I didn't want to lose more money than I put in. Ultimately, I realized a couple things. First of all, I needed margin in order to trade most types of spreads. Since they involve buying one option and selling another, it doesn't matter that your risk is defined--your broker requires you to have margin just to execute the trade. It is up to you to know what your risk is. Some spreads--like most calendars--have risk limited to the debit you paid. Others, like SPY/TLT, have risk limited to the difference between the strikes of the spreads. Others, like VIX Calendars, have risk substantially beyond the margin requirement. It's what we call "tail risk"--very unlikely events. But those events do happen, and theoretically your losses are unlimited. (In practice, there is some limit to how high volatility can go, but that limit is not necessarily the margin required, like it is for other spreads). The second thing I realized was that by getting a margin account and trading spreads, I was actually reducing my risk. Although it's counter-intuitive, you stand to lose much much more if you are limited to buying calls and puts (so, directional positions & straddles with substantial time decay) than if you trade spreads, where you can take advantage of more nuanced market conditions and have multiple options hedging your bets. By taking advantage of the "difference" between two options, you're taking on less risk than if you were to buy or sell either option by itself. Of course, you can still take excessive risk through poor position sizing and management, but spreads themselves are not inherently riskier- I think they've got quite a bit less risk when done well. Finally, there's quite a bit of research which shows that implied volatility is, on average, higher than statistical volatility for indexes. This means that option selling strategies, like our Butterflies, Iron Condors, and SPX/RUT Calendars--have a statistical edge. No, they won't be profitable every month, but there is money to be made in the long run by selling options, and you can't do that without margin (except for a few covered calls). I don't intend to push you to open a margin account- I know it's a tough decision, and I wouldn't be writing this if you hadn't expressed that you're prepared to lose all of the cash you put into your trading account. Trading is risky, and it's surprisingly easy to get arrogant and make stupid decisions (I've got a large loss right now in VXX puts to prove it). I just wanted to share my experiences and what helped me make the decision. If you're still uncomfortable, you might talk to IB about coding your account to only trade defined risk spreads, to ensure you don't accidentally place a trade like a VIX calendar with more risk than you're comfortable with. It would essentially be like an IRA, which can trade options, but only so long as all positions have a defined risk and there is sufficient cash to cover that risk. I don't know if they do it, but I do know it's possible because they have to do it for IRAs: http://ibkb.interactivebrokers.com/node/188 Hope this helps, and best of luck to you in whatever form of trading you decide to do.

Hey CivicGuy, Where is that setting? I can't seem to find the tab in configuration, and when I search for it it's not showing up. Thanks, T

Hi Charles, You asked at the end if you need a margin account to make this trade. In my experience, you need a margin account for most spreads, because you are simultaneously buying and selling large amounts of options, even though they are executed as spreads. Thus, most brokers require a margin account to execute the trades, even if you are not actually using the margin account to borrow money. Not sure if this relates to your problem; that line at the end caught my eye.

I think it depends on several factors, including what you mean by "hedge," or more specifically, how many deltas you want to reduce. If you want to truly hedge a long portfolio, subscribe to Anchor Trades and read up on Chris's methedology. It can be readily overlayed over any long stock portfolio, not just the ETF one that is the "official" portfolio. On the other end of the spectrum, I've had some good luck selling covered calls on individual stock (or ETF) positions. If the market goes up a little, sideways, or crashes, you keep a reasonable amount of premium which will take the edge off the crash. The only problem I have with Credit Spreads is that they can get pretty expensive if we have a recovery. The October 205/210 SPY Credit spread is about 1.50- in my opinion, that's not much protection relative to a cost of 3.50 if the markets recover in the next 6 weeks. The other big factor I see is whether you are trying to hedge against a "crash" or a "slow burn." If you're looking at a crash, OTM puts are probably your best way to go, but you could also consider a straight volatility play, since we can expect an IV spike if the markets drop another 5-10%. If you're looking at a "slow burn," you may want to consider something like the delta negative butterflies we currently have on. I actually loaded up on some extras of those (complete with the call hedge) specifically for the negative deltas. I figure if the market grinds down in the next several weeks, I will make a tidy profit (30-50% depending on how long it takes), which will take the edge off the drop. Just some food for thought. I'm looking forward to hearing from other's as well as there are always better ways to do it. I will have to check out the bear calendar spreads.

There have been a couple times when I've sat in a trade for way too long, with many moving pieces, praying the market does what I want. Then one day, I looked at the current P&L chart of my trade. I realized that my best case on the trade was about a 10% profit on my max risk, and because of the negative negative gamma, the max loss was a real possibility without much of an exit opportunity. I compared this to some other basic strategies, like an SPX calendar. I realized that I had a host of other trades I could use the capital for which would be more in line with my risk, higher return, and let me sleep at night. I sold the position and haven't looked back. Yes, the loss sucks. But not as much as not having the capital to stay in the game and make your money on the next trade. -T

I think IB is your best bet for the strategies here at SO. I personally have an account at both IB and Lightspeed. I use IB for options/spread trading, and LS for straight day trading. Lightspeed is really geared towards fast order execution (at the best available price) and custom routing, not to the SO style.

In order to get accurate P&L charts through earnings, you need to model the one-day volatility crush associated with earnings. Unfortunately, most options software (including what brokers provide) is not equipped to accurately model this volatility. You generally can't do it yourself on their platform even if you decrease the IV, because it decreases it across all options equally. If you broker lets you model changes in IV for different option chains, you might be able to do it, but then you need to know how to model it, which is itself a challenge. There is some software (OptionVue and the spreadsheet that's included with Exploiting Earnings Volatility are the two I know of) that does model the IV collapse with reasonable accuracy, but even then it is difficult to come up with profitable options trades. In order to employ earnings trading as a profitable strategy, you need some kind of edge over the market. You either need to be better than the market at predicting volatility (size of move), direction of move, or at finding pricing discrepancies within the option chain. I've been working on it for several months now. I do think it's possible, but neither easy nor for the feint of heart.

I would like to echo Kim's comment re paper trading on IB. Their platform is not intuitive, and there's no reason to have learn a new platform when you start trading. Also, one thing to keep in mind when paper trading--it is much easier to get an order filled on paper than it is in live trading. I think paper trading is great, but you do need to be aware that when you start live trading, you will likely have a lot more work to do to try to get your orders filled at favorable prices. Good luck and welcome! -T

I've found the best way is to set up twitter such that notifications from SteadyOptions get texted to you. I always get the alert within a few minutes of Kim posting it. GOOG was a crazy trade. I've been following SO since the beginning of the year, and generally have gotten the knack of fills--but GOOG was something where if you missed Kim's price, it started going down and never turned back. The current round of calendars really took a beating during this post-Greece run up, but it's a testament to the strategy that the losses are not catastrophic.

The commissions column is there--but it is blank, or occasionally shows like $8 when commissions were much higher. Does yours show accurate commissions or is this just a platform glitch?

Hi All, Whenever I look at the tradelog in IB, it shows me all of my order executions as spreads, but it doesn't show any of the commissions and fees. Sometimes it shows like $8, but invariable the total is wrong. Does anyone know if there's a trick to getting commissions to show in tradelog, or if there's another place where you can view all of your transactions by spread? I'm trying to log my trades, and it's rather cumbersome to try to calculate it from the confirmations, which are showing it to me by individual option rather than spread. Thanks, T

I found myself very confused when I first switched to IB by what they consider to be buying/selling. I've found what works for me is to go into strategy builder, click the legs as I want them (buy/sell), and then "buy" whatever combination results for the appropriate credit/debit. I never try to "sell" something through strategy builder as that's when it reverses the legs. Think of it as building a strategy like an IC, then "selling it" to close it- this reverses the legs and charges you a debit.

Is there any way to see the "true" spread prices in IB, or do you have to calculate it yourself based on the individual legs?

Thanks for posting your results and ideas Yowster. Very interesting to read about.

I recently joined SteadyCondors, and wish I had joined sooner. I think their strategy is uniquely positioned to both take advantage of these periods of low realized volatility and hedge against large moves in the index, in a way that traditional Iron Condors are not. Of course, if I had actually known how range bound the SP500 would be, maybe I'd take a leaf from Karen Supertrader's book and sell a bunch of naked strangles... lol.

I understand that it's possible to get better fills than you--I actually did it myself on a couple of those trades. I've got absolutely zero complaints about SO--I love the service and have made more money than I should have by now as a new trader I'm trying to understand what role a broker plays in slippage, and more specifically how close to the mid people typically get filled. Do you usually get filled at the mid on these spreads (whether or not the mid is the same as the official price)? If not, how much slippage do you usually have?

Hey Everyone, I'm considering the move to IB, but I already have a broker that I like through Fidelity (I negotiated commission on par with IB with the possibility of going lower later). I've been having some trouble getting fills, but I'm not sure if that's because I'm a new trader or because IB's fills are noticeable better. Those of you with IB, how close to the mid are you typically filled? I find I usually (but not always) need to give up around 2c from the mid to get filled. The exception is liquid or volatile spreads, like TSLA or NFLX, where I can usually get close to mid fills (or the mid jumps down a few cents and so I get filled at what was recently the mid). If you are filled at the mid, do you have any tricks that help?

I've tried tracking trades in a spreadsheet, with some luck and some issues. Here is the basic layout I've got, with columns for each: Open Date, Strategy, Closing Date, Ticker, # of Contracts (Or more precisely, # of spreads), Open Price, Close Price, Margin/Risk, Commissions, P/L $, P/L %, Trading Notes For adjustments, I manually add the net credit/debit to the position. So, if we open a straddle for $5, roll both legs sides for a 1.30 credit and a 1.00 debit, and sell for 5.10, I enter =(5+1.00-1.30) in the Open Price, and 5.10 in the close price. Anything else I consider relevant goes into the notes column, which I've chosen to do as a comment to keep the chart concise, but allow the notes to be detailed. A few issues I've had with this format are: 1. This is not an efficient or detailed way to track adjustments. Additionally, for double calendars, you have decide whether to enter as two separate trades, as one trade with the full # of contracts and averaged price, or as one trade with half the number of contracts and a summed price. 2. It is difficult to balance including all relevant information and making the spreadsheet difficult to read. Underlying price, strike price, volatility are all relevant to track, but lead to a complex spreadsheet, especially with adjustments/double calendars/fills at different prices/etc. 3. I also trade other strategies besides those here at SO; this increases and changes the relevant information, so you either need multiple spreadsheets or something more complicated. If anyone has suggestions based on how they track their performance, I would love to hear it. I'm actually considering writing a basic program to keep track of all of this information in a more sensible and easily-analyzed way, as well as automating the data entry. -T