My Top 10 Lessons In Options (So Far….)

2 weeks into the new year. I was humbled by few options positions that went sour but I managed to control the loss position. Did not go well for short iron condor positions in BIDU and PDD. It is time to reflect on the lessons learnt thus far in my 1st year of options trading.

Lesson 1: If you have a small account like mine (~USD5K), one should consider defined risk as opposed to undefined risk. One of the defined risk options strategies is iron condor. Since it is difficult to adjust / roll a defined risk position like an iron condor, one should consider a higher probability e.g delta 15/16 (or mild tilting on directional bias) if you are selling an iron condor. Sometimes one should not follow the rule of thumb to get credit of at least 1/3 of the option width. Higher probability matters more if compared to credit received in a defined risk position.

Lesson 2: Tastytrade recommends 21DTE as a focal point to do your adjustment / rolls. Personally, if the price of the underlying has tested the short side or delta increased to +/- 40, better start thinking on how to adjust (do not need to wait for 21DTE before things turn for worse). There are two thoughts on this – (1) let the probability plays out ; (2) do active management on winners or losers. If you are taking a defined risk position and selling the position, if the price of the underlying has tested the long position and way exceeds it, this is not the time to let probability to play out. In sum, if the price of underlying has clearly exceeded the long side of the option position, it may not be smart to let probability plays out whilst you have some extrinsic value that you can still extract.

Lesson 3: If the underlying has a clear trend (up or down), do not establish an iron condor positions (even if the IV rank is high). Directional assumption matters, do not ignore this.

Lesson 4: When things have gone wrong, if you can’t roll up / down / out for a decent credit ( ~min $0.30?), close it early when DTE is less than 21 days

Lesson 5: For small accounts, if you want to put a debit trades, consider a defined risk of not more than $1 (in terms of width). Debit trades are more logical if IV rank is less than 30% (unless IV is above 40%).

Lesson 6: If things have gone wrong, try to adjust or roll till max or actual loss less than 2 / 3% of total portfolio value or initial capital (at 21DTE).

Lesson 7: Before selling an option position, have a view on direction. Reversion of volatility may not be able to offset the loss incurred when the underlying goes against your directional assumption.

Lesson 8: If you roll up or down the strike of the untested leg (for an iron condor), it will be harder to make a profit when the spread (between put / call) is narrow.

Lesson 9: To consider iron fly or not (as a result of adjustments / roll), try to leave some space and decent credit. When the underlying is going down, the volatility tends to go up. You may not need to consider an iron fly in this instance. However, if the underlying goes up, the volatility goes down and this may necessitates to consider an iron fly option in order to fetch a decent credit (in order to offset the overall loss position)

Lesson 10: Do not forget about the transaction costs / commissions. Any strategy or roll / adjustment has to make sense, taking account of the transaction costs.

My options trading framework for 2021 will be as follows:

  1. Have a view / directional assumption
  2. Target DTE = 45 days
  3. IV rank at least 30% to sell options. Even if IV rank is low, I may consider to sell the options if the IV is above 40%
  4. Target debit spread = $1
  5. Target vertical spread = $2
  6. Target iron condor spread = not more than $5
  7. Take profit 50% on winners / at 21D DTE / directionally clear
  8. Target credit premium – ideally 1/3 of width (but delta matters – e.g iron condor = 15/16)
  9. Debit delta at least 70%
  10. Credit condor delta = 15/16
  11. Vertical spread at least 30
  12. Adjustment for vertical spread credit = roll forward or create an iron condor / fly
  13. Iron condor = roll closer strike or iron fly (to re-establish orginal delta)
  14. Manage losses so that not more than 2/3% of total portfolio value or initial capital

Disclaimer: Please refer to the general disclaimer of this blog. This post is not an investment / trading advice or endorsement. If in doubt, please consult your licensed financial planner / adviser.

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