Selecting Condor Strikes - A Study

[Fox]

Remember, you don't want to be locking in sizeable losses.

Yes, totally agree with you. It negatively affects me psychologically when I feel I need to play catch up all the time. This is especially so, if I am down 50% or more of my target profit, and all I can hope for is to break even and perhaps squeeze a few crumbs for profit. It's much better to feel that I am still in the game, than pray for divine intervention for the price to swing to your favour .

... whilst the market sorts itself out.

I've always had this irrational fear that the price will whipsaw continuously and take me down. The recent events have shown that markets do perform crazy acts and then "sorts itself out". I guess we earn our keep by maneuvering during the crazy period, and enjoy the fruits of our labour after the market sorts itself out.

[Condors]

Just a quick reminder of what this thread is about:

People who trade iron condors are usually taught to select short strikes at one standard deviation from the current price action.

I think extrapolating option volatility to "monthized" levels is not optimum.

What I want to do in this thread is select hypothetical strike levels, assuming that an iron condor is put on on the expiry Friday of the previous cycle. Some people like to initiate ICs with 2 months to expiry, so we'll have a look at that too.

I'll be using historic volatility, just so it can be automated.

I'll report on how these strikes are threatened or not as time goes by, to test how well this selection process works.

Note that this does not represent any trades I may be doing, it is just an exercise.

On the chart the red lines are 1 standard deviation (68% theoretical probability of staying inside).

The Blue lines are 1.28 SDs (80% theoretical probability of staying inside), which you would probably never get enough premium to trade.

The Green lines are at 0.6 SDs and represent what a low probabilty condor trader might select. It is presumed this trader is prepared to adjust more aggressively.

The assumption is that the condors are put on and left to see what happens at expiry. Remember, this is just a test.

In the real world, traders might adjust, superimpose strategies, exit early or any number of gyrations in order to capture some profit (or not as the case may be).

With expiry this Friday, it's time for another look. All the major stock indices are within the 1SD envelope, so that's a positive for the 1 SD hypothesis... well... all except for the Dow which today has punched through the upper 1SD hypothetical strike. I don't know anyone who trades ICs with The Dow, so we shall make note, but not put too much stock into it.

Russell 2000 was looking like it might give some grief, but is now safe with today's rally.

Still a few days to go, so we'll see what pans out.

Image below is SP500 1 month Nov expiry

[Condors]

Our hypothetical November condors expired today and harking back to the terms of the experiment:

As I am developing the conversation (to myself at this stage   Join in anytime folks, I know you're out there   ) I think extrapolating option volatility to "monthized" levels is not optimum.

What I want to do in this thread is select hypothetical strike levels, assuming that an iron condor is put on on the expiry Friday of the previous cycle. Some people like to initiate ICs with 2 months to expiry, so we'll have a look at that too.

I'll be using historic volatility, just so it can be automated.

I'll report on how these strikes are threatened or not as time goes by, to test how well this selection process works.

Note that this does not represent any trades I may be doing, it is just an exercise.

On the chart the red lines are 1 standard deviation (68% theoretical probability of staying inside).

The Blue lines are 1.28 SDs (80% theoretical probability of staying inside), which you would probably never get enough premium to trade.

The Green lines are at 0.6 SDs and represent what a low probabilty condor trader might select. It is presumed this trader is prepared to adjust more aggressively.

The top chart with heavier dotted lines is to represent a trade initiated 16 Oct with Nov expiry. (1 Month)

The 2nd chart with lighter dashed lines is to represent a trade initiated 17 Sept with Nov expiry. (2 months)

The 3rd chart lighter dashed lines is to represent a trade initiated 15 Oct with Dec expiry. (2 months)

... the idea was to place the sold strikes at 1SD and sit on our hands till expiry, to see how effective this technique is. It will take quite some expiry cycles to see and we've completed just on.

This cycle we have to chalk up a win for the 1SD strikes on both the 1 month and the 2 month as the SPX finished comfortably inside the strikes as denoted by the pink boxes.

The one month strategy would have induced some anxiety as SPX popped into the money on the lower strike for a few days.

Looking at the other indexes was a different story The Dow and the R2K threatened sold strikes right to the end, but just squeaked in (I'll post those images if anyone wants) for the maximum profit.

[Condors]

It is also time for two new hypothetical strategies to begin today, a December condor and a January condor.

At 11:20 AM today I took the prices of the short straddle portion of the condors  so we can track the price real time. I'm not worrying about the wings for now as everybody has a different idea for the wing widths. But it will give us a reasonable idea.

On the SPX at 11:20:

1/ The closest short strikes to the mechanical 1SD width for the December condor is 1030/1145 with a spread of 11.20-13.60 So let's say we managed to sell the straddle for $1200 each.

2/ 1/ The closest short strikes to the mechanical 1SD width for the January condor is 1005/1170 with a spread of 17.10-20.10 So let's say we managed to sell the straddle for $1810 each.

Mechanical levels below (slightly different at the close):

We also still have a December 2 month condor active which is comfortable inside the strikes.