Do you tend to let you bear/bull spreads run or do you adjust based on what you see on the charts?
Mostly I let them run unless they hit my adjustment point, which are based on a number of criteria, some of which includes looking at the charts.
Sometimes I will also take profits early if say 80% of the potential profit has been made in the first week or so. No point holding on for another 3-4 weeks to make that last 20%. Does that make sense?
You seem to have chosen Iron condors as your favorite investment tool for options trading. I have talked to/read others who favor ‘Bull put spreads’ as one of the better tools. I do know that a bull put spread is part of an Iron condor, but I was wondering what your take is on using a Bull put spread instead of Iron condor or vice versa. It appears to me that the Iron condor has the potential to double the profit, but also carries double the risk and is double the work of keeping an eye on. I’m sure there’s a lot more to it, and I’d love to hear your take on it.
Your understanding is correct. I find with iron condors you don’t have to be correct on the direction of the market. Also with iron condors, you don’t have to enter both sides at the same time, this is called “legging in”. i.e. you enter the bull put spread first and then when the market rallies, you enter the bear call spread.
How do you decide which strike price to buy when trading bull put spreads and bear call spreads? I am interested in your opinion on this.
I generally look at delta of the short option. A rough rule of thumb is take the delta of the short option away from one and that is your rough probability of success on the trade. E.g. short delta 0.10 is a 90% probability trade. Typically I focus on deltas between 0.05 and 0.10.
The other way to it is look at the standard deviation. The basic argument being that a stock will stay within a 1 standard deviation range roughly 68% of the time.
If sell a BHP 30 put what strike put would I buy? Would it be a 29.50, 29.00 or a 25 as most examples tend to show a $5 strike difference.
It’s personal preference really. For indexes like RUT I use a $10 difference in strike price, but sometimes you can get a higher premium while only risking the same amount by doing $20 apart and half the number of contracts.
For stocks under $100 I would use anything from a $2 to a $5 difference.
From my experience in the past, stop-losses were relevant to trading of stocks but it was impractical to options trading. Can you explain a little about stop losses for options?
Yes, stop losses are an important part of options trading. I typically don’t use them that often, because I am watching the markets all day anyway and can react quickly. But, if you want to use stop losses here is a quick summary for you.
When we place a credit spread order, we are selling to open, so your stop loss would be a buy to close. If you use a Stop Limit, you specify a stop price and if that price is hit then your limit order becomes active in the market. Let’s say at you want to set your trigger price at $1.50 and your limit price at $1.60. If the spread trades at $1.50, your buy to close limit order for $1.60 then becomes active. Now, the problem with stop limit orders with options is this. Let’s say at the end of Friday the spread was trading at $0.50, but the market crashes over the weekend. Your spread opens up at $4.00 – $5.00. Your trigger price has been breached which means your buy to close limit order becomes active in the market. Problem is, you order is for $1.50 and the spread is trading around $4.50 so there is no way you will get filled.
If you use a Stop Market order, you again set a trigger price, but once that price is triggered your buy to close market order gets submitted, which will get filled straight away at whatever price the spread is trading at. So in the example above you would have to pay the full bid/ask spread and would get closed out at $5.00, but you would be out of the position and the damage would be limited.
Like I said, I typically don’t use them, but they can be good for peace of mind, or if you’re not going to be at your computer for a few hours / days.
The other thing you can look into is conditional orders. This is where, say you’re trading a RUT 700-690 spread like we have now, you can set an order that if RUT breaks below 710, you submit a market order and get closed out (but again, paying the full spread). Or you could use a conditional limit order and hope it gets filled.
Let me know if that makes sense? Your broker should have information / tutorials on these types of orders.
Would you ever consider using weekly options for calendar spreads. I see Facebook is up on an otherwise down day. Would there be an opportunity to short the upcoming weekly 33 call and long the 3rd Friday 33 call? I am not an expert on calendar spreads and I was wondering.
Personally, I’m not a fan of trading stocks that have had a recent IPO. Too much risk for me. Keep in mind also that FB are set to release their first earnings report on July 26 which could cause some movement in the stock.
When do index options settle and where do I find the settlement values?
Index options can be traded right up until 4:15pm on the Thursday before expiry (that’s 15 minutes after the stock market closes). Settlement values are calculated based on the Friday opening prices of all the stocks in the index. You can find the settlement values on the CBOE website around 10:30 – 11:00am on Friday. For more information on index options, you can read this post.
It seems you can make great money trading weekly options, are there any downsides?
Yes! Weekly options are very risky and a large market move can wipe you out very quickly. I would recommend beginners stay away from weekly options. don’t get me wrong, you can make fantastic money trading them, but if you don’t understand gamma risk, you are inviting disaster. They don’t call the last week of an options life “gamma week” for nothing! I’m keeping a count of the number of people that contact me with some variation of the story – “I was making great money trading weeklies, then 1 losing trade wiped out 6 months of gains”. So far the count is 6.