When some brokerages calculate margin on complex option spreads, they don't allow for the fact that it's impossible for an out-of-the-money bull put spread and an OTM bear call spread on the same underlying both to expire at maximum loss—so they withhold margin on both spreads independently. Options-centric brokers (like the ones who autotrade our newsletters) don't require double margin on a balanced iron condor or butterfly (i.e., where the vertical spreads are equal and all contracts have the same expiration date)…but thanks to a regulatory crack-down in the wake of the 2008 credit crisis, it's increasingly likely that any deviation from a balanced iron condor or butterfly will cost you margin on both sides…
The iron condor newsletter returned about 4.3% in the first quarter this year, slightly beating the 4.2% return for the VTY benchmark. The newsletter did not outperform the S&P 500 on either an absolute or a risk-adjusted basis, which, based on the prior history of this strategy, says a bit more about the market than it does about us. In the review for Q4 2009, I mentioned the most common misconception about iron condors, namely that they are only suitable during…
For an options trader, one of the most remarkable aspects of the 2008 financial crisis was that it featured months in which many options closed in or near the money when, even weeks before, they were deep out-of-the-money (DOTM) and “worthless.” The lesson is that ostensibly overpriced options are totally devoid of value, until they aren’t. This is not a new lesson: academics have spent decades creating and testing different models (Hull and White, Heston, Dupire, etc.) to better accommodate…
One of the most popular posts I’ve written is “The Bucking Gamma Bull,” in which I said:
Think of your deltas as a mechanical bull, and your gammas as the rate and intensity at which the bull throws you around. The ride starts off quietly, but as time goes on the bull gets increasingly difficult to ride, and eventually you’re likely to be thrown. That’s exactly what happens during an expiration week in which the underlying makes an unexpected move: option…
The unrelenting August rally put some pressure on the call side of our iron condor positions. However, we were able to close out the month with flat-to-positive performance for the newsletter trades due in part to our ability to stagger trade entries based on volatility and delta exposure and to size positions on a risk-adjusted basis – both techniques that we teach on the members area of the site. We are nearing the end of the September expiration cycle and…
Thursday, June 24, 2010
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