Condor Options

As you probably saw, the markets staged a broad-based rally yesterday on reasonable volume. The rally kind of came out of left field, as there is still a major divergence across the market indexes, and getting long here seems like a rather risky move.

For that reason, we do not plan to adjust our June positions at this time. There’s an old saying that “markets tend to crash down, not up.” But bromides aside, as we have written elsewhere, iron condors have hard stops built in, which means that we can manage risk more effectively by allocating capital appropriately at the outset, instead of relying on the inevitably emotional decisions that we might try to make during the life of a trade. In other words, defense is something you play before ever routing a trade, when you decide how much capital to allocate to a trade. Our rule of thumb for allocations is that no more than 1-5% of your capital should ever be devoted to one individual position; spreading assets across a larger number of trades with different underlyings, different timeframes, and different strike prices allows us to weather day-to-day fluctuations without ever being overly concerned about the status of any one individual trade.

We’ll send an email to subscribers this morning with some thoughts regarding advanced hedging techniques for our open positions.