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How to trade SPY options? Need some help!
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How to trade SPY options? Need some help!

  #11 (permalink)
Trading Apprentice
Wichita Kansas/USA
 
Futures Experience: Intermediate
Platform: Think or Swim
Favorite Futures: Stock Options
 
Posts: 8 since Apr 2015
Thanks: 0 given, 1 received

Selling Options for Income

I love selling option premium for income, don't think there is an easier way to trade that allows you to be wrong about time and or direction and still end up with a profitable trade. I like to trade verticals and or iron condors on the SPY, SPX, IWM, RUT with strike prices that are 1 standard deviation out of the money (as close to 85% Probability Out of the Money) with $5.00 wide strikes with 30 to 45 days to expiration and once I've put on a trade, I manage them by buying them back at 25 to 50 percent profit of my original credit if it's a winner and if it's a loser I'll either close the position for a loss at 50% of initial credit I received and move on to the next trade or if I'm 2 weeks or less from expiration and the strike I sold is being tested I'll roll the untested side up or down to the tested strike price for more credit to cut my loss / cost basis and maybe out to the next month for duration if my directional bias or trade assumption hasn't changed.
Example = SPY currently trading at 207.28
Trade Setup =
Sell to open (10) contracts of the MAY 15 SPY 214/219/195/190 Iron Condor for $1.00 credit
Risking $5,000 to make $1,000 (Possible 20% profit) in 37 days
As soon as it's filled I place a GTC order to buy back the trade at .50 credit (50% profit) and if it's a winner I look to make a new trade and I also place a mental stop loss to close the position at a 50% loss of the amount of credit I received on the trade if it immediately trades against me within the first 2 weeks. I monitor the trade daily. Once I've been in the trade longer than 2 weeks theta decay is working in my favor and if the trade violates one of the strikes I sold, I'll usually roll the untested winning side to the tested strike price for more credit / duration depends on how the market is reacting at the time, like is it moving steady or is it crashing. Markets usually continually melt up but crash down. I usually give myself more downside room than upside like in the above example.

How do you trade? Let's bounce trade ideas off of each other........I'm always looking for a better way to trade!!!


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  #12 (permalink)
Trading Apprentice
College Station, TX
 
Futures Experience: Intermediate
Platform: ToS, Metastock
Favorite Futures: options
 
coolway's Avatar
 
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I've been selling iron condors further out, about ninety days, with the goal of getting out after a couple of weeks or so and capturing some theta decay. I place my short positions equidistant from atm, with the short call having a delta of about .07-.10. This doesn't give me a lot of depth, but plenty of width.

I don't care for having the wings on my condors too close, as inevitably one side or the other (or both!) get threatened. That's why I'm going further and wider.

I'm curious about how it works for you with rolling the profitable side up. Using your example above, say that the market rallies toward your 214 strike; Do you buy back the 195/190 and sell at 214/109? Or something lower?

What do you do then when the market falls back to your newly moved strike?

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  #13 (permalink)
Trading Apprentice
Wichita Kansas/USA
 
Futures Experience: Intermediate
Platform: Think or Swim
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Posts: 8 since Apr 2015
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Selling Options for Income


If the stock rallies to my 214 strike, I'll immediately buy the puts back for .05 cent debit and then sell another put vertical to cut my cost basis for a smaller loss or hopefully a scratch. I would move the put vertical much closer to the tested 214 strike, such as 212/207 or 210/205 for additional credit wherever it makes the most sense and if the market is moving up incredibly fast I might also sell the 214 call for a loss and let the 219 call run / collecting some additional value to offset any losses. I'll most likely sell 2 or 3 times as many puts to offset the losses as well when I move them in closer to my tested side. And if there just isn't enough credit available for a good risk / reward I'll close the position all together for no more than a 50% loss on that trade and move on to the next trade. I don't chase losing trades if there isn't significant enough credit available to make it worthwhile because each time you make an adjustment you are just putting on more risk and if there isn't enough credit available to at least scratch the trade, I won't pursue it anyfurther. I'll just accept the loss and look for a new opportunity.

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  #14 (permalink)
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coolway View Post
I've been selling iron condors further out, about ninety days, with the goal of getting out after a couple of weeks or so and capturing some theta decay. I place my short positions equidistant from atm, with the short call having a delta of about .07-.10. This doesn't give me a lot of depth, but plenty of width.

I don't care for having the wings on my condors too close, as inevitably one side or the other (or both!) get threatened. That's why I'm going further and wider.

I'm curious about how it works for you with rolling the profitable side up. Using your example above, say that the market rallies toward your 214 strike; Do you buy back the 195/190 and sell at 214/109? Or something lower?

What do you do then when the market falls back to your newly moved strike?

Here's a study that shows results as to why you don't want your wing strikes to close to the strikes you sold. You will lose everytime per their study: https://www.tastytrade.com/tt/shows/market-measures/episodes/exiting-iron-condors-01-02-2015?locale=en-US

Main Takeaways from their study video: "We have recently found that closing an undefined risk trade when it is trading for over 2x the amount of credit that you received is a viable exit strategy. However, can this exit strategy be used for a defined risk spread as well, mainly an Iron Condor? Is there a way that we can structure these Iron Condors to make the strategy more effective?

Today, Tom Sosnoff and Tony Battista test closing an Iron Condor when it has reached a 2x credit received loss. First, they look at a 25 point wide Iron Condor in SPX. They test managing the trades at 50% of max profit, a loss of 2x the credit received, 50% of max profit or 2x the credit received or holding the trade to expiration. They find out that none of the strategies were profitable but by combining managing the winners and closing the losers at 2x, you had the lowest amount of losses.

Next, the guys take this one step further and look at 50 point wide Iron Condors. This strategy mirrors a strangle more closely. They find that when using at the same exit, the wider Iron Condors see the most profit when managing at 50% and closing when the loss is at 2x the credit. This reinforces that this strategy should be used for undefined risk trades and those defined risk strategies that attempt to mirror naked options!"

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  #15 (permalink)
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00Frenchy00 View Post
Here's a study that shows results as to why you don't want your wing strikes to close to the strikes you sold. You will lose everytime per their study...

I don't follow these guys, so I may be missing something about their trading methodology. Seems to me, though, that unless you have a crazy account to trade, then you've got no business putting on trades with undefined risk. That's why you won't see me selling any naked straddles.

That being said, I see their point regarding managing winners/losers. That's ultimately what we're in business for, right? However, their premise is based on either (a) holding a losing condor all the way to expiration, or (b) exiting the trade once losses are 2x the cost of the credit received. Anyone trading condors using those parameters deserves to have their account wiped out.

Once your short strike is threatened, roll it or quit it. To continue to hold beyond that point is ludicrous. If theta has been your friend, and IV hasn't dropped out, there's still a good chance of making money on the trade. If you do lose money, it's likely that IV has moved against you but you should still have nowhere near 2x the credit in losses.

If you listen through the entire presentation, Tom even hints at this, as he suggests they need to re-run the studies taking volatility into account. He also notes that the study was run over a period when volatility was low, making Iron Condors less likely to be profitable. While he's re-running his analysis, I'd suggest he add a study looking at the effect of exiting the condor near (and inside of) the short strikes. Now THAT would be a useful study.

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  #16 (permalink)
Trading Apprentice
Salt Lake City, UT/USA
 
Futures Experience: Advanced
Platform: TOS
Favorite Futures: Index options, Futures Options
 
Posts: 10 since Mar 2015
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Iron Condor Backtest Results

You might be interested in some of my iron condor backtest results posted on my blog.

After a pretty lousy 2013 trading an uneven, heavily hedged version of an iron condor on the RUT, I thought I'd look into how a plain vanilla iron condor would perform. I ran automated backtests on iron condors on the RUT, SPX, and NDX (using data from IVolatility from January 2007 through the date of my blog postings. I simply tested putting them on at a specified days to expiration (DTE), and taking them off at 8 DTE, with no management...a "no touch" trade.

I tested the iron condor at 80, 66, 52, 38, 31, and 24 DTE, using short strikes at 8 delta, 12 delta, 16 delta, and 20 delta...24 test runs in all per underlying (somewhere around 85 trades per run). On the RUT, the 66 DTE equity curves seem to look the best, but there are some big drawdowns because these were "no touch" trades. Even with the big drawdowns, most of the DTE variations have equity curves that move from the lower left to the upper right.

Since I'm new here, I can't post links, but you should be able to see my blog by clicking my name, or by sending me a pm.

Dave

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  #17 (permalink)
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Wichita Kansas/USA
 
Futures Experience: Intermediate
Platform: Think or Swim
Favorite Futures: Stock Options
 
Posts: 8 since Apr 2015
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dave01 View Post
You might be interested in some of my iron condor backtest results posted on my blog.

After a pretty lousy 2013 trading an uneven, heavily hedged version of an iron condor on the RUT, I thought I'd look into how a plain vanilla iron condor would perform. I ran automated backtests on iron condors on the RUT, SPX, and NDX (using data from IVolatility from January 2007 through the date of my blog postings. I simply tested putting them on at a specified days to expiration (DTE), and taking them off at 8 DTE, with no management...a "no touch" trade.

I tested the iron condor at 80, 66, 52, 38, 31, and 24 DTE, using short strikes at 8 delta, 12 delta, 16 delta, and 20 delta...24 test runs in all per underlying (somewhere around 85 trades per run). On the RUT, the 66 DTE equity curves seem to look the best, but there are some big drawdowns because these were "no touch" trades. Even with the big drawdowns, most of the DTE variations have equity curves that move from the lower left to the upper right.

Since I'm new here, I can't post links, but you should be able to see my blog by clicking my name, or by sending me a pm.

Dave

So after all that back testing, what is your conclusion? Does The Iron Condor Options Strategy Really Work?
What is the most profitable way to trade them? My conclusion is as follows:

Set it and forget it strategy:

Sell Premium / Iron Condors:

45-56 DTE (Days to Expiration) and without an earnings announcement in the near term.

IV Rank above 50% if its a stock, collecting at least 19.8% of the expected move in that respective time frame, without an earnings announcement in the near term
IV Rank above 35% if it's an ETF, collecting at least 19.8% of the expected move in that respective time frame, without an earnings announcement in the near term

Selling the 1-STD (Standard Deviation) OTM (Out the Money) Put and Call Strikes (84% OTM on both sides)

Buying the further out 2-STD Put and Call Strikes

Place a GTC (Good till cancel) OCO (one cancels the other) Limit Order where I buy it back if it gets to 50% of max profit.

Place a GTC (Good till cancel) OCO (one cancels the other) Stop Order where I buy it back if it gets to double what I received in credit or collected.

Let the probabilities work themselves out and "May The Odds Ever Be In Your Favor"


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  #18 (permalink)
Trading Apprentice
Salt Lake City, UT/USA
 
Futures Experience: Advanced
Platform: TOS
Favorite Futures: Index options, Futures Options
 
Posts: 10 since Mar 2015
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00Frenchy00 -

I responded to your question asking for my conclusion. I spent about 30 minutes writing my response, cross checking my data to be sure I gave you a correct answer. I also provided my personal choice of DTE and delta for the RUT IC as well as the SPX ICs that seemed to work the best. Unfortunately my two responses (one RUT, and the other SPX) were both deleted as self-promotion. Not sure why.

Sorry,
Dave

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  #19 (permalink)
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dave01 View Post
both deleted as self-promotion. Not sure why.

Because they were self promotion.

Let me google that for you

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  #20 (permalink)
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Posts: 10 since Mar 2015
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Mike -

I've done tens of thousands of options backtests and the results and background are huge. I only referred to my blog because I did not want to repeat myself. Also, I'm not selling anything and my blog is anonymous (I have a day job)...I'm not promoting anything, just freely sharing information. Not sure how that comes across as self promotion, but this is your blog and will follow your lead.

Dave

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