7. TIMING THE TRADE
a. Opening a credit spread right after earnings is an excellent strategy. You know by then whether it's a hit or miss, and if you are quick enough you can capture the collapse of the implied volatility.(which happens right after earnings are announced). You can realize as much as 50% return by the end of the post-earnings trading day.
A Perfect Day
b. Thursday is a perfect day to open a trade, so that by Monday you'll have profits. Think about Expiration days, the 3rd Friday of every month. Many traders let their credit spreads expire worthless (thus saving commissions), but it means waiting until Monday for the margin to be released (to buy into the next month's spreads) and by Friday, after expiration, the marketmakers have already shaved premium off the new trades. If you are trading weeklies, know that the marketmakers shave off premium between Thursday night and Friday morning, so you want to put on your trades on Thursday to maximize premium.
Better to get out of the trade the day before expiration (by buying back the short put/short call) thus releasing the margin; let the longs expire worthless, but you'll have the cash to buy the next month BEFORE it becomes the new "front month" on the following Monday.Do I always put on the full Iron Condor?
c. Do you trade a bull put, a bear call, or an iron condor? Let the market be your guide. Look at the charts, look at the trend, and if the stock is bouncing off a resistance line, a support line, double bottom, double top, 50 or 200 day moving average, bottom or top of a regression channel -- the market is handing you the trade, up or down. If the stock is going sideways, an iron condor is obviously the choice. Remember if you do a bull put and the stock starts to go down, you can always add the bear call later, and vice versa.
Remember that option margin is held for only ONE side of the condor, so it's advantageous to trade both bear call/bull put together.
8. A Word on Weeklies
They require a lot more attention than the monthlies to make sure the stock is not going against you. But you can make a lot of money if you play them right.
Here's a list of possible candidates (check those charts!) for weekly credit spreads.
9. MANAGING THE TRADE
Track your premium - in and outs
a. Keep a daily list of the profits/loss of the trade. If you opened the trade for $.25, record at each day's end what the reverse of that trade would be. This is a great way to get familiar with how credit spreads move. Also, record the Delta of both short options, and track it.
Analyze what changed- Price or IV?
b. If the trade starts to move against you, your daily record will reflect it. If the delta goes to .15, it's a warning sign. You need to determine whether it's the IV that's affecting your option, or price change of the underlying. If's it's IV, it can possibly and probably bounce back. If there's been some event or news to affect the price, then that requires more attention. If both IV and price go against you, wake up!
If you weren't already in the Iron Condor, open the other side to offset the loss side when delta goes to .15. If the chart rights itself, you'll win on both sides. Otherwise you could neutralize the bad side, for starts.
Check your Deltas
c. If the delta goes to .20, this is the time for more action. Open the other side of the trade, if you didn't start with an Iron Condor. Get rid of the losing side of the trade, and take profit on the changed direction of the trend. If the price stays stagnant, of course, you'll win on both the call and the put sides. Worst case scenario is to get out of both sides at the breakeven point, and you'll only be out commissions. This is how to preserve your capital (your highest priority)
Let's say you get $.30 credit on the bull put, and $.30 credit on the bear call. The stock starts to move upward quickly, call delta goes to .20 and your premium on the bear call is now at $.60 (the cost to buy back the bear call). That puts you in a loss of $.30. 100% loss. If the bull put works out, you'll keep the $.30 credit from that side, and it will be a wash with the loss on the bear call. You'll be down only the commissions. So you must track your income and your daily profit/loss on both sides in order to manage this trade properly.
Neutralizing the Delta d. Another move is to sell additional "good" side contracts to neutralize the delta of the "bad" side of the Iron Condor. This is tricky and should be papertraded! You would do this when you firmly believe that the bad side is going to reverse, and that you will ultimately win both sides, if you just hang onto that bad side.
Example: If the "short" strike of the bad spread has reached a .20 delta, then the long position is trailing behind is usually around .10 or greater delta. It is this delta "difference" that is causing the increasing loss.
If it is a .10 delta difference, count the number of open contracts and multiply those two numbers: .10 Delta times 5 contracts = 50 deltas against you.
Go out to next month's options and find a .50 delta strike and buy it. (call or put) That option will neutralize the bad delta in your losing spread.
My "home base" Options Animal has their own "Secondary Exits" for bear calls and bull puts, namely letting the short be assigned, and turning the trade into a Collar trade. It is a little more "generalized" in their teaching, (plus I don't have a fund large enough to risk assignment) so I appreciate John Kelly's more detailed and remarkable "repair" strategies explained in a way I can get it.
As always, if you have questions/comments, please reach me at firstname.lastname@example.org or reply in the comments section, below.
P.S. My next post will be a "Worksheet" for using this methodology for doing Iron Condors. A checklist, if you will. :-)