Questions about the Greeks

QUES: In your trading experience with both the iron condors and double calendar spreads have you found it any more advantageous to theta scalp if I have time daily to monitor?

ANS: I don’t theta scalp a double calendar or an iron condor since they already have long calls or puts that protects your position while theta is collected. I will typically only theta scalp by selling a straddle or strangle. Then buy or sell the stock or etf to offset the delta/gamma risk.

QUES: My own experience is that theta scalping (even at 250 or 300 delta
intervals) have not routinely produced _greater profitability_ vs adjusting via spreads near/around the break-even zones.

ANS: I agree. It is not as profitable as adjusting spreads at break-even points.

QUES: I am a very active gamma trader and have been employing my own gamma/theta/volatility algorithm to adjust my gamma positions.

ANS: I have recently been using a formula that has helped determine when to adjust deltas based on volatility and estimated moves of the stock rather than intervals of 250-300 deltas. I have found it to be excellent. Feel free to test it for yourself.

I’d be interested in your algorithm, if you’re willing to share.

The formula I’m using is simply this: E= ([V/16]*St)*R

16 is the sqrt of 256= the average number of trading days in a 1 year period.
V= Volatility (expressed as a percentage), E= Estimated Move of the Stock or ETF on any given day, St=Stock Price, R=Risk Tolerance (the amount of risk you want to assume above an estimated one day move in the stock before hedging deltas. This can be 1,2 or 3 or 4. I don’t recommend a R value above 4)

If I was selling a straddle:
V=.2054
St=50.00
R=2

Then
E= ([.2054/16]*50)*2
E= 1.28

So, on this day, I would make an adjustment only after a move of 1.28 based on a R value of 2 on the stock or etf on that day and recalculate for the next day based on price change and volatility change.

Closing is easy. I close the position when the theta collapses.

Options Trading Questions

1) I understand that you initiate your positions 30-40 days prior to expiration but you also talk in your videos about adding to your positions. Are you referring to adjustments that may become necessary due to a breakeven being threatened? If not, could you explain?

ANS: I only add to positions to increase my profits and if I feel confident that the adjustments will result in a better trade.

2) How do you decide whether you should structure an Iron Condor or Double Calendar for a given ETF?

ANS: If volatility is high and falling I will use an iron condor. If volatility is moving sideways I will use a DC.

3) I’m wondering what your capital allocation guidelines are. Of your total investment capital, what percentage do you allocate for the monthly income system? Of that, what portion do you reserve for initiating positions and what percentage for adjustments?

ANS: I use about 20% of my total available capital on initiating monthly incomes trades. I set aside an additional 10% for adjustments.

4) What has your experience been in terms of being exercised? Has it happened very often? If it does happen I’m a little fuzzy on how to deal with it. Could you clarify?

ANS: You will not get exercised unless your short option has less than
.25 of intrinsic value or it’s close to a dividend payout. It doesn’t happen very often and actually almost never with etf’s. If it happens I simply sell the shares and close my long option position.

5) After reviewing the Theta Scalping video on module 11 I just want to be sure of what you’re doing. If I understand correctly you initiate a position 30-40 days prior to expiration, then adjust if necessary for the next couple of weeks and then in the final 2-3 weeks you will buy/sell deltas using the underlying to remain delta neutral. Is this correct?

ANS: When scalping theta you have to make adjustments when your deltas tell you to. You can’t wait until the last 2 weeks, you have to adjust when it’s necessary. The goal is to adjust as little as possible so that you make more money from the theta you collect than the losses you’ll have from adjusting deltas.

6) During especially volatile periods like late 2008/early 2009 do you still put on monthly income type trades or do you wait for volatility to wane a bit first?

ANS: Please see the Market Report 11-22-08

Iron Condor Questions

1. When it is best to put an Iron Condor and when it is best to put a Double Calendar? Is there any circumstance that favors one or other strategy?

ANS: Please see the Market Report 11-22-08

2. On the SPY Iron Condor adjustment, why roll the put spread? If the lower breakeven wasn’t reached, why roll up the put spread? I mean, /when it is worth /to roll the spread that wasn’t touched?

ANS: The side that is being threatened will lose more (as your short option goes in the money) then the side that is making you money so you need to adjust to balance the deltas.

3. Also on the Iron Condor Adjustment, should we roll it every time the market gets near to one of our breakeven points? You said that if the market moves close to one of the breakeven points in a couple of days it is best to take off the position, because the market has changed its mood. Is there any other situation when it is not worth adjusting, either the Iron Condor or the Double Calendar? When?

ANS: I guess it depends on your tolerance and your ability to determine market direction. If you believe there’s no danger in holding your position then keep it. In general, you’re better off making at least one adjustment when the market gets near your short option.

4. I noticed that you put the DIA Iron Condor a few days after the SPY Iron Condor. I think (correct me if I’m wrong) that DIA and the SPY are very correlated, I mean, they move very close to each other. If you had put the DIA and the SPY on the same say, you probably would had to adjust the DIA positions too. So, my question is: That space between the placement of the Iron Condors on the DIA and on the SPY was any kind of “legging” into an Iron Condor on 2 correlated markets ? Understand?

ANS: Yes, I like to stagger them based on time and price. That is a form of diversification.

5. And, by the way what is your opinion on legging into (no out) a position?

ANS: I do not like to leg into a position or out of one. When I put it on I close it as a position and do not leg in and out of them.

6. Speaking of legging, when it is best to put a Double Calendar and when it is best to put a single calendar and then “adjust” it by putting another calendar (hence, creating and “adjusted” Double Calendar)?

ANS: I have no preference and both work OK for me when volatility is relatively low. As mentioned in the report attached I would only do put calendars when volatility is rising.

7. We want to put position 30 to 40 days before expiration. But it there any best hour of the day to put the positions?

ANS: No. I enter my order at the open and at the price I want and hopefully I get filled during the day.