Selecting Condor Strikes - A Study

As I have outlined in another thread, people who trade iron condors are usually taught to select short strikes at one standard deviation from the current price action.

As I am developing a conversation elsewhere, I think extrapolating option volatility to "monthized" levels is not optimal.

What I want to do in this thread is select hypothetical strike levels, assuming that an iron condor is put on on the expiry Friday of the previous cycle. Some people like to initiate ICs with 2 months to expiry, so we'll have a look at that too.

I'll be using historic volatility, just so it can be automated.

I'll report on how these strikes are threatened or not as time goes by, to test how well this selection process works.

Note that this does not represent any trades I may be doing, it is just an exercise.

On the chart the red lines are 1 standard deviation (68% theoretical probability of staying inside).

The Blue lines are 1.28 SDs (68% theoretical probability of staying inside), which you would probably never get enough premium to trade.

The Green lines are at 0.6 SDs and represent what a low probabilty condor trader might select. It is presumed this trader is prepared to adjust more aggressively.

The top chart with heavier dotted lines is to represent a trade initiated 16 Oct with Nov expiry. (1 Month)

The 2nd chart with lighter dashed lines is to represent a trade initiated 17 Sept with Nov expiry. (2 months)

The 3rd chart lighter dashed lines is to represent a trade initiated 15 Oct with Dec expiry. (2 months)

I have also posted this at http://www.internationalstockforums.com/index.php/topic,29.msg64.html#msg64 That will be an easier place to follow allong as time goes by. Comments most welcome there.

Click to expand image.

Counting My Chickens

Those of us who like to try and trade normal wave structure (whatever that is) must be feeling as if said wave structure had been cancelled indefinately... at least as far as the stock indicies are concerned.

We've all stared disbelievingly at the SP500 for several months now so no need for me to post a chart, but just in case you've been visiting Venus or somewhere over the last months, it's gone pretty much straight up without a breather.

I like to write premium over the indicies in the form of strangles/condors and suchlike and leg into them off what I think may be swing points. More recently, because of the pathetic volatility and relentless boomage, I've tried to have a mixed gamma position in the form of put backspreads written at a credit (My thinking was to position for a correction but still profit if it just kept going up). This has worked pretty well, if not unspectacularly, but at some stage I want to get back to short gamma again...

...and I've done that this expiry. So far the momentum in the SP looks to be slowly abating and looking a tad toppy, to me at least. This first trading day had me thinking I'd have to defend the short calls... then.... a selloff! OMG!

Could this be the start of a long overdue correction? (in the normal wave structure style?). The Dow is still green as I'm typing this but the other indicies are red after being up quite strongly.

I might be counting my chickens, but I think the top is in for this expiry. It will make a nice start for this year if this short gamma position goes out with a whimper.

My $0.02