Tag Archive | "risk management"

Options, Timing, and Risk Management

Tuesday, March 31, 2009


Today’s losing trade can be tomorrow’s saving grace. The graph below plots the risk profile for the trades we currently have open in our iron condor newsletter.  The curved white line represents profit/loss today at various SPY price levels; the other lines move forward in time, with the final line plotting p/l at expiration.  This graph doesn’t model changes in implied volatility, although since we are short vega, profits will rise inversely to implied volatility. We’re not shy about…

Holding Options to Expiration

Tuesday, March 24, 2009


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…

VIX Futures and the Financial Crisis

Wednesday, January 28, 2009


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…

Beta and Risk in Troubled Markets, Part 1

Thursday, January 15, 2009

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The old maxim is that when major market movements occur, all betas go to one.  We decided to look at the beta for a few stocks during 2008 to determine whether and to what extent that maxim held true. The reason we wanted to investigate the beta exhibited during 2008 – and especially during the fall crash – is that investors and traders use beta as a measurement of how risky an asset is relative to the market, with the…

Edge, Execution, Allocation: Pieces of the Trading Puzzle

Tuesday, December 30, 2008


We spend a fair amount of time on this blog looking for trading systems that have some discernible and consistent edge over the market averages.  And edge is important: if you don’t know where your profits will come from, you certainly shouldn’t expect to have any.  But an empirically demonstrable edge is just one of the three components that comprise any good trading system.  The other two, execution and allocation, are also essential to the success of any trading…

A One-Question Risk Management Quiz

Monday, December 8, 2008


Your only trading account is worth $10,000.  You wake up really late tomorrow, and the market has already been open for two hours.  You check on your balance, and discover that the account is up $500 on the day.  Are you: a) elated b) pleasantly surprised c) indifferent d) a little concerned e) terrified We’d go with e) terrified, because if your positions are such that you stand to make 5% in one session,…

Allocation in Abnormal Markets

Thursday, November 20, 2008


As we said to the members this morning, when all your historical studies are broken or unhelpful and the market is behaving inexplicably, there’s really only one sensible way to think about capital allocation: Look at the positions in your account this morning.  If each one of those trades closed at its absolute worst possible price – its “maximum loss point” – would you lose a minute of sleep?  If the answer is yes, your trades are too…

Calendars and Condors: Allocation and the Volatility Factor

Tuesday, November 11, 2008


We often refer to the complementary nature of iron condors and calendar spreads, in that the former benefit from falling implied volatility, while the latter generally get a boost from rising IV. So does that mean you should balance out volatility risk by allocating as much capital to calendars each month as you do to iron condors? Unfortunately, it isn’t that simple. First, it’s important to think about where implied volatility might be headed, especially when it’s at one extreme…

October Monthly Review

Sunday, November 2, 2008


Two types of traders really thrived in October – the uber-bearish, and the nimble.  Since our Condor Options newsletter follows a non-directional strategy, we aren’t poised to profit from market swings.  But we do try to be nimble, and subscribers were subjected to a rather unrelenting series of pleas for caution and for a move to cash throughout September and October. On September 12, we said that we were “trading small” and were “cautious – as we get…

Risk-Adjusted Trade Allocation

Thursday, October 30, 2008


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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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