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January Trade Cycle

This is an example of an Iron Condor trade together with virtual portfolio insurance (in case the RUT moves steeply in either direction) which we put on three weeks ago. 

Please note that based on your account size you can adjust the number of contracts you trade.

The above is the original trade and the execution prices. This is an Iron Condor position (established three weeks ago, from today 12/28/2010), with virtual portfolio insurance and all executed simultanueosly as one trade.

Sell  RUT Jan 11 840 Call Quantity 55

Buy RUT Jan 11 850 Call Quantity 55

Sell RUT Jan 11 685 Put Quantity 55

Buy RUT Jan 11 675 Put Quantity 55

Gross premiums per contract  is $1.20

Total Gross premiums taken in is  $1.20 * 5500 = $ 6, 600

Virtual Portfolio Insurance

Buy RUT Jan 11 860 Call Quantity 15   gross cost $.40 * 1500 =  $600

Buy RUT Jan 11 670 Put Quantity 7 gross cost  $.70 * 700 = $ 490

Total Insurance Cost =  $ 1,090

Net Gross Premiums = $6,600 – $1,090  =  $5,510

Margin Maintainace Requirement  $55,000

Net Return = 5,510/55,000 = 10.02% return

Position Performance as of today 12/28/2010

Virtual Portfolio insurance performance as of today 12/28/2010

The graph above depicts our current position and the strike price range that we want the position to remain in for the duration of the trade. Our risk management parameter dictates that we try to maintain the position within the range (680 < or = Price = or  < 840 ) depicted at all times till expiration.  As the index price approaches either price point and based on how large the overall delta of the position gets , we will need to readjust the position to keep it within a new range that does not breach the strike prices.

The above is the overall Profit and loss for the position as of market close today 12/28/2010. It also gives all the Greeks of our positions, showing a positive Theta of 147.82 and negative Delta of -97.39.

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  1.  I like these ideas, and I’m interested in putting trades like this on, but a few questions:
    1.    This trade is three weeks old; are you advocating doing this for January, or is it better to move to the February cycle?
    2.    I’m comfortable with this size (55 contracts), or maybe a little larger….any advice on how to calculate position size of the this type of trade, in relation to one’s total portfolio?
    3.  What is your methodology in determining the number of contracts in the "insurance" side of the trade?

  2. Great stuff!  I run a $500k+ portfolio on just buy-writes (Phil style) and short strangles (ETFs and indicies) and include insurance hedges. I will be following your ideas closely.

  3.  Good stuff- will be following , however, cannot read the screen shots. 

  4.  Can you elaborate on how you pick the strikes? Is there a formula or guideline? 
    For example, when selling index strangles, I generally look at = +8-10% for the short call and approx. -15% on the put leg.
    Also, how do you select the insurance strikes and how do you calculate the ratio of insurance to position? 

  5. escohen5

     Thanks for the compliment, we appreciate it.

    1.The current trade is for the January expiration. Depending on market conditions, we normally put up our trades for the next expiration just a week before the end of the current expiration cycle. Specifically, we prefer to put up the trades 31 days before expiration. The next trade will be for the February cycle.

    2. We try to aim for a position size which will take up about half of our capital at stake. Depending on market conditions, when the market is in a high volatility environment, we tend to get more credit for the contracts that we put up so in situations like that, we can put up more contracts for the capital / margin held by our brokers. In a low volatility environment, the opposite is true. Hypothetically, if we have a $100K portfolio, we will put up contracts that will take up a margin of up to about 50K. We normally try to get a credit of about $1.2 per condor, so if we have a 100K portfolio, we can put up 55 contracts, get a credit of $6,600 (without commissions), with a margin of $48,400. That is a return of about 13% if we stay in the trade till expiration and are successful.

    3. I would say for every 10 contracts, I will put up  1 for insurance, but this also depends on how volatile the market is. As we progress through our trades, you will see when and how to put up the insurance. For risk management purposes, we always like to maintain a delta in the range of -200<0<200. If our overall delta’s exceed the range we reduce it by buying some insurance to cut the delta into half. This is more practical than theoretical and will be better explained when you follow the trades.

  6. neverworkagain

    Thanks for the compliment.

  7. pstas

    Thanks. We are working to improve the screen shots.   

     Thanks for the compliment.

    The process of picking the strike price is statistical in nature and we try to be two standard deviations from the price of the index when the trade is initiated. We also take a lot of other variables into consideration.

    The process of selecting the insurance is a function of the prevailing volatility environment. As you follow our trades you would begin to get a sense of it. There are some trades that we put up without insurance, so it is a much more dynamic process and more practical than theoretical.

  8. Updownfinance:  I see on your blog you talk about 25+ straight positive months on this strategy but it looks like you’ve only been tracking via blog for the last few months. What kind of annual return do you think is reasonable on this strategy with the risk profile you’ve discussed in the previous responses?  How dependent do you think that is on VIX? And how do you think about the percentage of taking a big monthly drawdown? With my short strangle strategy, I mostly am taking downside hedges as a market crash has the added discomfort of a VIX spike while a big upside move (like the last 4 months!) leads to lower VIX and somewhat manageable rolls of callers.

  9. neverworkagain

    Yes, our 25+ is based on how long we having been trading this strategy and not how long the blog have been up. It is to point out our level of experience using this strategy. We evolved to the blog model initially to share our trading strategy and experience and now we are on here.

    As far as returns, our goal as we stated is a modest 2% to 8% per month and that will vary from month to month, with some months much higher than the upper band range of 8% and some months lower, depending on market conditions. The key to our way of income trades is risk management. You only take a big drawdown if your strike prices both on the upper and lower bands are breached. Our rule of thumb is that "There is no law against rolling over or readjusting or insuring or outright closing the position". Our stated goal is never to take a catastrophic loss and since we put up these positions initially two standard deviations (SD) from our strike and we monitor our Deltas aggressively we think we have mitigated the big loss scenario. Then again it is entirely possible that the market will open down 2 SD one day, but were that to happen, it is conceivable that it will not be in a vacuum and we would have some insurance in place that will limit our loss.

    Ultimately, our way of income trades is a skill that takes a while to be good at and as you follow us, we hope you would be able to enhance your skills when it comes to this strategy.

    Hopefully, in the future we are working on putting on a two day seminar, that would show participants the mechanics of income generation non-directional trades.

  10.  What brokerage do you recommend for this type of trading? I use Ameritrade and @ $.75 per contract the fees will eat profit quickly.

  11. dmci


    We like the " Thinkorswim" platform which is also part of Ameritrade. Depending on your account size you  can negotiate them down to about  $.50 per contract or lower.

    We are not active traders so commission fees should be a small part of your overall cost.

  12.  Is there a reason you use the RUT over IWM.   The reason I ask is that the options on IWM are much more liquid.

  13. Re.  IWM – also the margin req. seems to be lower so the trade would work better for small accounts.

  14.  I have been comparing the two RUT vs IWM.  Trading IWM kills you on the commisions to establish the same position.  For example.   

    Sell  RUT Jan 11 840 Call
    Buy RUT Jan 11 850 Call
    Sell RUT Jan 11 685 Put
    Buy RUT Jan 11 675 Put
    Credit per contract  is $120 – $5(commisions for me at TOS) = $115.
    same position is IWM requires

    Sell  IWM Jan 11 84 Call x 10
    Buy IWM Jan 11 85 Call x 10
    Sell IWM Jan 11 68 Put x 10
    Buy IWM Jan 11 675 Put x 10
    Gross premiums per contract  is $12 – $5(commission at TOS)  
    So to replicate the same position in IWM I have to pay $50 in commisions instead of $5.
    Replicating this strategy in IWM becomes impossible due to commisions.

  15. craigzooka


    I think you have answered your own question. So there is a reason why we use the RUT for our income trades.

  16. yshenhar


    In terms of small account sizes, that problem is easily solved by reducing the contract size. Let say we put up a trade of 50 contracts and  you have a $10k account. You can just put up the same trade with  5 contracts, which will require a $5k margin ( leaving the other $5K, in case the position has to be adjusted) and you get the same return as the 50 contract position.

    If the net premium per contract is $1.20, for 5 contracts, you take in $600 which works out to be a 12% return ("600/5000"), the same as the 50 contract position ("6,000/50,000"). Of course in terms of absolute dollar amounts the 50 contract position  takes in $6,000 because the position is putting more capital at risk and is compensated as such. But the returns irrespective of contract size are the same.

  17. Income trader:
    I plan to follow along with your recommendations, and the idea of a 2 day seminar sounds good. Can you point me to where I can see/ study your last few trades. With PM not being an issue, can this type of strategy/trade generate consistent monthly returns in the $7500 to $10000 range. To that end, what is the position size you recommend? Needless to say, this would be in addition to Phils B/W.
    Thanks in advance for joining up and educating the members of this board.

  18. jasu1

    You go can to our blog "". we did two adjustments for the December cycle, so please study that closely and let us know if you have any questions.

    Yes, you can generate $7.5k to $10k, depending on your account size. But we would not recommend that type of trading size for someone just starting out with this strategy. Just start small and go through a cycle where we do one or two adjustments. I suggest you start small ($5 to$10k) and as you get comfortable with the strategy and style, gradually increase the capital you allocate to it.  Remember the goal is to build your skill set with this type of trades and perfect your craft. Risk management is the first goal in trading and you should not try to make as much money within the shortest possible time.