Questions on Iron Condors and Credit Spread Options on S&P 500 and the Russell 2000 Indexes

In reviewing your iron condor options service so far, it appears very “transparent” and well thought out. A couple of questions:

Question: For the August expiration, the index credit spread options trades are not executing and you indicate to be patient in your recommendation. Do you have months because of the market direction that a put or call spread does not execute and is that an acceptable part of your strategy (i.e. not to “chase the market”)?

Answer: Yes, some months we are only able to open one side (either the top bear call spread or the bottom bull put spread) and that’s perfectly ok. We do not want to chase the market, like you mentioned above. For this month, I’m predicting that we’ll have a short term pull back over the next few days where we’ll be able to open our August bull put spreads…..and then if all goes well, once the market “takes a rest” we’ll see it climb a little further and this will give us an opportunity to open our bear call spreads.

Question: Is it acceptable to leg into a trade (I know there is more risk) in months like this that are not executing – any specific guidance for this?

Answer: If you are asking about legging into a separate credit spread, like first selling a naked put and then buying a put down a strike at a later time for protection….I personally don’t follow this strategy. It is more risky to open a naked short option without immediately opening a long option for protection. For the folks that do this for a living, it seems that they do fine for a while, and they do get higher returns, but then every 1 to 3 years they get completely wiped out. I’d rather stay a little more conservative.

Question: Worst case scenario situation (i.e. 911) is the maximum loss exposure the amount of the spread (less premium) times total shares on the options or is there some mitigation to this exposure in your approach?

Answer: Yes, total risk capital is the difference between the short leg and the long leg, less the premium collected. In the case of the RUT, we open 10 point spreads…..e.g. let’s say we open the RUT Aug 470/480 bull put spread. We have 10 points between the short leg (sell to open the 480 put) and the long leg (buy to open the 470 put). If the RUT crashes, our spread loses money until our long 470 put kicks in (we buy the long 470 put for protection) , and then our losses are capped at $1000 (10 points between short and long leg x $100) less the $80 or so of premium that we brought in; so we have $920 in total risk capital. If we were able to open both the top and bottom spreads for the month (i.e. we complete the iron condor) our total risk capital would be less; it would now be $1000 less premium collected for bottom spread, and less premium collected for top spread, which equals let’s say $870 in total risk capital. With this said, we usually are able to get out of our spreads early to reduce our loss since we focus on 90% probability credit spreads (more on 90% spreads at http://www.monthlycashthruoptions.com/90PercentVs70Web.htm) creating a “wide mouth iron condor” that is far OTM….so we usually have time to react. We have a pretty good track record over the last 4 years keeping our losing months below 10%; you can see the ROI track record at http://www.monthlycashthruoptions.com/ReturnOnInvestment.htm. For more on how to further manage our risk, please visit the Learning Center at http://www.monthlycashthruoptions.com/LearningCenter.htm and read the entries “what if the market surges unexpectedely how do we protect ourselves?” and “what if the market crashes, how do we protect ourselves?”. Once you read these please email me with your additional questions, or we can talk on the phone and we can discuss these scenarios in more detail.

Question: Sorry for the detailed questions but your system looks very good and I do have experience with options but I am looking to commit a large portion of my portfolio to this strategy and make sure I am aware of the risks, etc. Thx

Answer: Not a problem at all. I’m here to help and the questions keep me on my toes…..as you know we never stop learning in this business.