QUES: In your trading experience with both the iron condors and double calendar spreads have you found it any more advantageous to theta scalp if I have time daily to monitor?
ANS: I don’t theta scalp a double calendar or an iron condor since they already have long calls or puts that protects your position while theta is collected. I will typically only theta scalp by selling a straddle or strangle. Then buy or sell the stock or etf to offset the delta/gamma risk.
QUES: My own experience is that theta scalping (even at 250 or 300 delta
intervals) have not routinely produced _greater profitability_ vs adjusting via spreads near/around the break-even zones.
ANS: I agree. It is not as profitable as adjusting spreads at break-even points.
QUES: I am a very active gamma trader and have been employing my own gamma/theta/volatility algorithm to adjust my gamma positions.
ANS: I have recently been using a formula that has helped determine when to adjust deltas based on volatility and estimated moves of the stock rather than intervals of 250-300 deltas. I have found it to be excellent. Feel free to test it for yourself.
I’d be interested in your algorithm, if you’re willing to share.
The formula I’m using is simply this: E= ([V/16]*St)*R
16 is the sqrt of 256= the average number of trading days in a 1 year period.
V= Volatility (expressed as a percentage), E= Estimated Move of the Stock or ETF on any given day, St=Stock Price, R=Risk Tolerance (the amount of risk you want to assume above an estimated one day move in the stock before hedging deltas. This can be 1,2 or 3 or 4. I don’t recommend a R value above 4)
If I was selling a straddle:
So, on this day, I would make an adjustment only after a move of 1.28 based on a R value of 2 on the stock or etf on that day and recalculate for the next day based on price change and volatility change.
Closing is easy. I close the position when the theta collapses.
1) I understand that you initiate your positions 30-40 days prior to expiration but you also talk in your videos about adding to your positions. Are you referring to adjustments that may become necessary due to a breakeven being threatened? If not, could you explain?
ANS: I only add to positions to increase my profits and if I feel confident that the adjustments will result in a better trade.
2) How do you decide whether you should structure an Iron Condor or Double Calendar for a given ETF?
ANS: If volatility is high and falling I will use an iron condor. If volatility is moving sideways I will use a DC.
3) I’m wondering what your capital allocation guidelines are. Of your total investment capital, what percentage do you allocate for the monthly income system? Of that, what portion do you reserve for initiating positions and what percentage for adjustments?
ANS: I use about 20% of my total available capital on initiating monthly incomes trades. I set aside an additional 10% for adjustments.
4) What has your experience been in terms of being exercised? Has it happened very often? If it does happen I’m a little fuzzy on how to deal with it. Could you clarify?
ANS: You will not get exercised unless your short option has less than
.25 of intrinsic value or it’s close to a dividend payout. It doesn’t happen very often and actually almost never with etf’s. If it happens I simply sell the shares and close my long option position.
5) After reviewing the Theta Scalping video on module 11 I just want to be sure of what you’re doing. If I understand correctly you initiate a position 30-40 days prior to expiration, then adjust if necessary for the next couple of weeks and then in the final 2-3 weeks you will buy/sell deltas using the underlying to remain delta neutral. Is this correct?
ANS: When scalping theta you have to make adjustments when your deltas tell you to. You can’t wait until the last 2 weeks, you have to adjust when it’s necessary. The goal is to adjust as little as possible so that you make more money from the theta you collect than the losses you’ll have from adjusting deltas.
6) During especially volatile periods like late 2008/early 2009 do you still put on monthly income type trades or do you wait for volatility to wane a bit first?
ANS: Please see the Market Report 11-22-08
1. When it is best to put an Iron Condor and when it is best to put a Double Calendar? Is there any circumstance that favors one or other strategy?
ANS: Please see the Market Report 11-22-08
2. On the SPY Iron Condor adjustment, why roll the put spread? If the lower breakeven wasn’t reached, why roll up the put spread? I mean, /when it is worth /to roll the spread that wasn’t touched?
ANS: The side that is being threatened will lose more (as your short option goes in the money) then the side that is making you money so you need to adjust to balance the deltas.
3. Also on the Iron Condor Adjustment, should we roll it every time the market gets near to one of our breakeven points? You said that if the market moves close to one of the breakeven points in a couple of days it is best to take off the position, because the market has changed its mood. Is there any other situation when it is not worth adjusting, either the Iron Condor or the Double Calendar? When?
ANS: I guess it depends on your tolerance and your ability to determine market direction. If you believe there’s no danger in holding your position then keep it. In general, you’re better off making at least one adjustment when the market gets near your short option.
4. I noticed that you put the DIA Iron Condor a few days after the SPY Iron Condor. I think (correct me if I’m wrong) that DIA and the SPY are very correlated, I mean, they move very close to each other. If you had put the DIA and the SPY on the same say, you probably would had to adjust the DIA positions too. So, my question is: That space between the placement of the Iron Condors on the DIA and on the SPY was any kind of “legging” into an Iron Condor on 2 correlated markets ? Understand?
ANS: Yes, I like to stagger them based on time and price. That is a form of diversification.
5. And, by the way what is your opinion on legging into (no out) a position?
ANS: I do not like to leg into a position or out of one. When I put it on I close it as a position and do not leg in and out of them.
6. Speaking of legging, when it is best to put a Double Calendar and when it is best to put a single calendar and then “adjust” it by putting another calendar (hence, creating and “adjusted” Double Calendar)?
ANS: I have no preference and both work OK for me when volatility is relatively low. As mentioned in the report attached I would only do put calendars when volatility is rising.
7. We want to put position 30 to 40 days before expiration. But it there any best hour of the day to put the positions?
ANS: No. I enter my order at the open and at the price I want and hopefully I get filled during the day.
Q: So far so good on my first month of condors…..2 weeks in….still delta neutral. Haven’t had to adjust yet…..but ready to if threatened.
I want to try the back-ratio type of trade to protect against a huge downstroke in January, but for the life of me I cannot get the analysis chart to look like it does in your video.
I have 10 grand in cash in the account with 2 grand in margin already on.
I made sure I am set for “1st triggers sequence”.
I insured I am set to “single symbol” and double check that no other positions or options are checked.
I check the dates……+1 at X, N/A, P/L open……etc…..I’m looking very closely and making certain my screen looks exactly like yours does in the video. I’m making sure I ‘buy’ the distant OTMs and ‘sell’ a single near month ITM. It just isn’t working.
I’m playing around with the strikes and months…..but for the life of me I cannot get the graph to look like yours does in the video. It always shows that the risk amount is roughly half of the margin required……not the 50 bucks or so that you show in the video.
I thought it might be possible that you have to have at least 25 grand in the account and satisfy the day-trading margin requirement and without that it won’t work right…..but I just don’t know.
A little help here? What could I be doing wrong? Thanx in advance if you can help….
A: The victory spreads only work
when the volatility is high.
The best strategy for a market in
which we anticipate higher volatility
is put calendar spreads for monthly
Q: As I build my profit expiration tent i tend to like and use calendars. So thinking nov dec spy I saw that there is very small difference buying a 107 calendar call (sell nov buy dec)versus a 107 calendar put. Am i crazy? or is it ok say to do 107 105 103…etc all using call spreads? or should i use calls on the right side of the tent and puts on the left side?
A: When building calendars it’s important to realize that the maximum profit of a calendar spread is achieved when prices reach the short option at expiration.
So… if you are bullish then you would want to build your calendars with calls at gradually higher strikes 103, 105, 107 widening your tent to the upside potential, etc…
If you are bearish you want to do the opposite- use put calendars at gradually lower strikes…
103, 101, 100 etc…
This way you profit from the anticipated moves and it’s also why I spend a great deal of time discussing the movement of the general market and use technical analysis as much as I do in the daily reviews.
When I first created the course we were in a different type of market where volatility was relatively low (under 25).
Now things are different and the combination of technical analysis with income trades like calendars is the best possible system for profiting from the market.
Q: Thanks for the detailed video.
One quick question regarding yesterday’s video. You showed how to close the postion with synthetic options. Now, When we close the sell postion (in this case SPY call sell) by buying the SPY call, do we need to sell that as well? SPY call bought needs to be sold to clear the postion just like regular call you buy , you sell to close the postion?
I’m sorry for asking silly question but I’m newbee and in learning phase. Will the same closing works for other spreads like Iorn condor and Double calendar?
Thanks again for your wonderful support.
In future, if situation is suitalbe to buy spread like Iron condor and Double calendar, please do share.
A: Yes it works the same.
If you are ‘short’ an option then you must buy it back to close the position and if you are ‘long’ the option you must sell it to close the position.
Q: I was able to make it through some of the videos last night and this morning.
Pretty straight forward so far, I understand the criteria for placing the Iron Condors and Double Butterflys and also, the adjustments and when and why..
But I would like to see you do a video or tell me how to handle the rare case of getting exercised on either a short put or call. Especially how to handle getting exercised for the vertical spreads of a Iron Condor and also the shorts of a Calendars.
Perhaps this is just my lack of knowledge of this, but I know more than most about options and I still have question about closing out or handling my PUT/CALL shorts being exercised. I would expect this type of trading can result in several shorts being in the money before expiration.
Great videos, I will keep going..
A: As far as getting exercised goes… here’s the general
If a ‘short’ option is:
1) ‘in-the-money’ AND
2) there is less than .25 of extrinsic value left
… then you’re likely to get exercised.
3) you are MORE likely to be exercised if it’s a stock or etf and it pays a dividend and you’re short the option near ex-div dates if the option meets the criteria above.
The exercise happens overnight and if you meet the criteria above you will get exercised and you’ll see in your portfolio that the option position that was in the money is gone and you will have the stock in your account instead (long or short, depending if the option that was exercised was a put or call).
If you do not want the stock position you can sell it in the pre-market if your brokerage account allows trading in the pre-market.
Q: I’ve bought your online course & it’s really eye-opening to someone like myself who thought he has already known a lot about options.
I’ve gone through all your videos regarding the portfolio selection, the setup & adjustment of the “Double Calendar” and “Sale of an Iron Condor” trades and they were clearly explained.
However, I have this bugging question that I hope you could help me. That is, how do you adjust a “Double Calendar” or “Sale of an Iron Condor” position if the price goes against your position (ie. moved very close to your breakeven point) if it happened during the last 1 to 2 weeks before expiration and options premium have already gone down a lot.
Would laying another double calendar over an existing one or in the case of an iron condor, shifting the whole iron condor still be practical during these final 1-2 weeks before expiration with not much value in the option premium?
A: I mentioned on the videos that adjustments are really only a viable solution in the 1st or 2nd week you are in the position due to the fact hat option premiums are still relatively high.
So if you put a position on 4 weeks to expiration, trying an adjustment in the last week or two would not work due to declining premium.
One alternative is to adjust using the next month out where premiums are higher. There no rule that says your adjustment has to be made in the same month!
A second alternative is to simply close the position out, of course, and move on to the next month. In most cases this is the best option.
Q: I purchased your course and I’m enjoying it….I’m up to Module 5 right now.
Question for you: How do you choose between selling Iron Condors (credit) and buying Double Diagonal Calendars (debit)? Is there any criteria for favoring one over the other when building your portfolio every month? Or, do you simply try to mix it up?
A: I choose between Iron Condors and Double Calendars by using volatility as a guide.
When volatility is high and coming down I want to add Iron Condors with a slightly positive delta because it means the market is probably rising as volatility drops.
When volatility is low and rising I want to add put Double Calendars to my portfolio because I make money on the ‘vol spread’ between the front month and the back month. Said another way, if volatility is rising I only want to purchase put Double Calendars because the market is probably trending lower.