Live: Thursday, Oct. 9, 2019

6:25 p.m. New York time

My options positions remained in the sweet spot, on Thursday gradually accumulating profit as they march toward expiration.

A recent discussion on TastyTrade — my go-to spot for deep analysis of the art of constructing an options position — delved into the question of how to position the wings of a short iron condor, my preferred structure in trading.

My trading rules say:

Short leg entry goal: delta 16 to 24, adjusted for greater risk (the high deltas) balanced against greater reward (the lower deltas)

But they’re silent on where to place the long legs — the wings that every iron condor relies upon to limit potential loss.

And where to place the wings was the topic of the two-party discussion, “Iron Condor Wing Efficiency”. The videos can be found here: Part 1 and Part 2.

Those who follow my trades have perhaps noted that I tend to set the wings at as close to 6 delta as I can get. “Delta” measures the degree by which an option’s price changes relative to change in the price of the underlying shares. At a delta of 6% (0.06), a $1 change in the share price produces a 6 cent change in the options price.

The long wings of an iron condor have a different impact that do the short wings.

The short wings, which by my rules are generally around 20 delta, tell me by implication the probability of profit — how likely is this position to be a winner and how large the premium — the prize — will be. The higher the delta, the lower the probability of winning but the larger the prize will be. It’s a classic risk-reward relationship, where the higher the risk (lower delta), the greater the reward (premium).

The long wings limit our risk. Each is an insurance policy against loss. The lower the delta, the lower the cost of the insurance, but also the lower amount the “policy” will pay out in the event of a losing trade.

So when I choose the strike prices of the short and long wings, I’m choosing how large a prize I want to compete for, how much uncertainty I’m willing to tolerate, and how big a penalty I’m willing to may if I’m wrong.

Fundamentally, when I set the wings of a short iron condor, I’m referring a battle between greed and certainty.

A fascinating subject at the core of what we do as traders, and none dig into it — backed by research — than the TastyTrade crew. So I highly recommend these two episodes.

One specific point they mention is the goal of setting the wings so that the premium is a third of the wing width. In my six positions having November expirations, the premium coverage ranges from 15.4% to 20.8%, quite a distance from the one-third goal. This tells me that my setup is conservative, lowering the size of the prize for greater certainty of winning. In the battle between greed and certainty, certainty is coming out on top.

When the time comes, on Nov. 5, to enter the options positions expiring in December, I shall experiment with ways of increasing the premium coverage without giving away too much certainty.

By Tim Bovee, Fukuoka, Japan, October 9, 2019


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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