Archive | We Get Letters

VIX Fixation

Wednesday, August 12, 2009

2 Comments

It seems these days that the entire world is gasping at, of all things, minor twitches in out-month VIX futures. Earlier this week, Bloomberg’s strength ebbed and I caught them as, overcome, they whisper’d, “VIX Signals S&P 500 Swoon as September Approaches.” Like any financial headline that calls to mind men in breeches and whooping cough, this one should be regarded with skepticism. In the first place, VIX futures are signaling no such thing: even if the VIX popped up…

When Not to Trade Iron Condors

Thursday, April 30, 2009

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Member K.S. poses some very good questions: Having read both parts on your comments about the best time to trade iron condors [Ed: here and here], I wanted to ask if you ever decide to do fewer condors at a time when you expect a strong move in one direction?  I know you did last fall when worried about a decline but what about a rally?  this market’s momentum is quite strong — an interesting battle between that…

Holding Options to Expiration

Tuesday, March 24, 2009

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A reader asked us recently about our preference for closing out option spreads prior to expiration.  To review, we usually close out any positions that are short gamma at least a few days – and often up to a week – before they expire, since the exponential increase in gamma near expiration makes those positions more difficult to manage.  The question was about the how the performance of our strategy would have been affected had we held all positions…

Option Spreads and Positive Expectancy

Thursday, February 19, 2009

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Reader Peter T. writes in with a very good question: Then are several places on the site where you mention that you prefer to let the probabilities play out and not adjust condors. I calculated the expectation of the latest IWM trade based on the probabilities. I did some minor rounding to make it easier to read. There is a 65% probability of making $50 which comes to $32. There is a 35% probability of…

VIX Futures and the Financial Crisis

Wednesday, January 28, 2009

2 Comments

On Twitter the other day, dvolatility asked: [W]ere VIX futures in contango pre banking disaster? Just to review, contango is a condition in the structure of a futures market in which spot or short-term prices for a commodity are lower than the prices for longer dated contracts.  For non-perishable goods, contango is a common state of affairs, since longer-dated contracts will include carrying costs such as warehousing and forgone interest.  Contango may also result from expectations…

The Bucking Gamma Bull

Wednesday, January 7, 2009

1 Comment

We’ve mentioned before that our preference is to close out short option positions before the dynamics of expiration week have a chance to kick in.  In a nutshell, while it’s true that theta declines more quickly as expiration looms, tempting option shorts to hold on as long as possible, it is also true that gamma rises more quickly closer to expiration, as shown below. There is no one right answer about how to trade expiration.  But if…

We Get Letters: Can a Butterfly Net a Bounce?

Tuesday, April 22, 2008

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Regarding Monday’s Bonus Trade, reader Carl M. writes: A May 50/55/60 call butterfly on GRMN at $0.60 or less leaves a very good potential profit range from 50.60 – 59.40. Any thoughts on that approach? We intended this to be a purely directional trade, with room to run on the upside – but recognizing that there’s a good chance any rally the stock might see could be limited, the butterfly strategy has a lot going for it: Maximum…

We Get Letters: There are Only Two Types of Option Spreads

Friday, March 21, 2008

1 Comment

Reader Tony L. asks about the plethora of names for option spreads out there: I’m not a novice trader, and I’ve read a few books on options. But to be honest it’s hard to keep track of all the different kinds of spreads out there, especially when you start doing trades with three or more legs. I mean I know the terminology: verticals, diagonals, butterflies, iron condors, double diagonals, calendars, etc. But how to keep them all straight in my…

We Get Letters: Commissions

Thursday, February 28, 2008

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Member R. writes in with a question that gets asked quite a lot: I noticed that your two current trades have a credit of around .60 to .70. Doesn’t a trade for this amount of credit generate a lot of commission expense? What do you do about commissions? Is that just part of the cost to do the trade? So yes, on the face of things, it does look like iron condors impose higher commission costs. But that’s an illusion…

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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