A couple people vehemently disagreed with our post suggesting a cautious entry into gold this week. Maybe they’re right: maybe the commodity boom is over, maybe the housing troubles and liquidity problems are a thing of the past, and maybe the Fed is going to start getting tough on inflation at the next meeting and will start raising rates. And maybe Mount St Mary’s will beat UNC tonight and go all the way to the finals. But at least a few others also see a chance to start small in gold here. [Mark Hulbert, Peter McGuire]

Roger Ehrenberg at Information Arbitrage is skeptical of all those cheering the Fed:

I mean, a snap-back in the wake of hundreds of billions of Fed intervention was not particularly surprising, no? But read some headlines today and it is as if the Fed and Bernanke have won. Won what? A three-day reprieve from a long-term problem that is necessarily exacerbated by the Fed’s historic injection of liquidity to avert crisis? I mean come on. Can’t we even wait a few months before knighting Sir Ben and anointing him “Slayer of the Evil Commodities Bubble?”

Andy Swan of Mytrade (which includes us in their options section - awesome!) has started posting about the iron condors he’s trading, calling it a “Be the House” strategy. This is exactly right: the two best metaphors for trading iron condors have always been the casino and the insurance company. But the reason we really appreciate Andy’s post is that he takes the small-and-steady approach to position management:

And…this position is just getting started….I’ll end up with 8-10x this position by expiration day. 2-3 times per week I will add to the position by putting on a new vertical spread on the high or low side (depending on which way the markets are moving that day), slowly moving closer and closer to the live price of SPY over the next 3 weeks. For example, today I might sell options that are $7 or $8 out of the money, but next week I’ll be selling options $5 or $6 out, all the way up to expiration week where I will likely be putting on trades that are merely a buck or two out of the money.

After the big market swing in January, several people started asking why we don’t use hard stops in our trades. The answer is that iron condors already have hard stops built in, since they’re defined-risk positions. Andy gets this point right, too:

Despite ALL of that insanity, this position was profitable by being market neutral and taking advantage of premium-decay of the out-of-the-money options that we sold.

On the other hand, huge numbers of traders saw all of their directional positions STOPPED OUT FOR LOSSES during the violent swings up and down. That’s the problem with stops….they hit.

Instead, we sell premium and establish positions with a DEFINED RISK and therefore need NO STOP whatsoever. We can sleep at night because we know that the worst case scenario is already defined and acceptable to us!

In other words, you should ask whether you’re comfortable with the worst case scenario for any given trade. If you’re not, then that’s a crystal-clear signal that you’re over-allocating capital, and should consider diversifying across more trades, more strike prices, multiple months, multiple underlyings, etc. etc.