Rolling Thunder

#1
I liked the rolling thunder presentation by Scott I am just not sure I understand or agree with the philosophy of the strategy at least not in the current market
What I mean is that he started out with the idea of buying a put spread to hedge off a long position or long deltas which was fine but than he switched to trying to eliminate the risk on the upside
It seems like he was trying to burn the candle at both ends or as he was saying you have to be bipolar
You can't have it both ways

So as SPX went down he sold put spreads to eliminate the risk on the upside which was fine but that reduced the hedge that he was trying to protect his long deltas and only has a small range where he is protected which in this market that can easily go out of the range in one day unless yo watch the market all day

Of course the students not knowing any better because maybe they don't see the big picture they voted to eliminate all the risk on the upside which looks fine if you only have that trade on without the long position
But what happened to the original long position ?
Now it is almost in the same position as the original trade except you gained $800 plus a chance to get more if it gets back and stays in the narrow condor tent
Now you have to start all over by trying to hedge of the long position almost like a vicious circle

It seems to me like if the idea was to hedge off the long position it would have been enough to have just the debit spread than you only have to worry about the sea of death which in this market it's not likely that SPX will stay in this place for too long and he briefly mentioned that if SPX goes up it will eliminate the loss on the debit spread

It might be interesting to try it as a stand alone strategy without the long position in which case you do have to worry about the upside
Also I probably would not be able to do it at my other brokerages outside of TOS because they don't offset the debit with the credit so it would require a high margin
 

DGH

Member
Staff member
#2
For interested subscribers only: I use a modification of Scott's Risk Reversal with carefully selected stock in which I take a definite directional bias. I buy a DS (approximately 55 delta long strike) and sell a far OTM credit spread on the opposite side (short strike near the expected move range). Then, I try to reduce the risk of the "dead zone" (credit spread side) by converting the DS to a condor by adding a farther OTM credit spread to the DS such that the "dead zone" risk on the original credit spread side is then minimized. Of course, this approach introduces the possibility of blowing through the condor, so I choose the "condorization" strikes carefully. I usually choose a cycle with 20 DTE or so to further reduce risk. This strategy works quite well with consistent returns, but usually does not make "big bucks". However, the yield is generally 5% or more based on margin requirements.
 
#3
Hi Dan,
It would be helpful if someone would do a presentation on this subject to get into more detail
Let me see if I understand the way you set up the trade
You say you buy a DS at 55 delta I assume that you mean a put spread so that would be very similar to what Scott did in the video
He had a 51 delta to offset 100 delta position
So as an example for a new trade I could do the Jan 7 2560/2540 for a -53 delta as a 10 lot so that is going to cost $5.50

Than you say you sell a far OTM credit spread on the opposite side I assume you mean on the call side so looking at the expected move I could do the 2700/2720 call credit spread on a 10 lot for $3.65 so that leaves $1900 at risk up to 2700 than the risk increases to $21900 and the delta of 103

Than I assume that you are hoping that the market goes down to get a good credit spread to offset the remaining $1900 left in the dead zone maybe the 2450/2430 which at the moment it's trading at $1.95 so you would get $50 above the dead zone and a condor further down but you also have $20K worth of risk on the upside

This is just my opinion but it seems to me that there is a lot more risk being taken and a lot of management is required just to get a condor hump
If the $20K risk is not an issue why not do just the call credit spread ?
It's still a directional trade and only 49 delta and there is no management required plus SPX can stay at this level and even a little higher and still make the $3650 at expiration
 

DGH

Member
Staff member
#4
I am not doing these on SPX. Here is a screenshot of my LOW position. I do these on selected stocks, using 1 or 2 lots. Low risk, and not intended to make big bucks. However, they have been netting 5% to 10% on a yield basis with only about 2 weeks of carry time.
 

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#5
Thanks for clarifying
I thought you were talking about SPX since you mentioned Scott but I see that you specified stocks
That's a lot less risky than if the intent is just to play around and not make big bucks

For me I don't think it's worth it as I don't have a discounted commission plus I don't like or have time to follow earnings and watch for company related news and this is not a trade type that I can walk away from the screen
Just for fun I looked at the p/l on that trade I mentioned above and it's up $5100 on $20k margin Of course that was with the weekend prices so the fill prices would have been different and also that was without any adjustments
It looks promising at the first glance but the market could easily have gone the other way as well and would have had a loss
So you have to be correct on the direction otherwise it's toss up if you are going to make or loose money

It would have been interesting to see a presentation on how to reverse the trade when the market turns around
I know there was talk about it and sounds easy in principle I have not seen anyone actually doing it
I am guessing it's because it might be easier to just close the trade and put up a new trade that goes in the other direction than trying to rescue a trade going in the wrong direction
 

DGH

Member
Staff member
#6
Agreed. It's often easier simply to close this trade rather than try to beat it over the head. This strategy is Scott's bread and butter, so he is good at it. If you are looking for a simple but profitable trade, stay tuned for Amy's Weekly Wide Credit Spread Service which should premier early next year. I have been trading it since mid October, and I'm up $3400 on one lots. My yields (on margin) range from 5% to 15% for (usually) 5 days in the trade, and I have only had 2 net losses (small).
 

DGH

Member
Staff member
#8
Hi Bohdan. I am working with Amy on this Service to teach her my method. Basically, my strategy is an adaptation of Michael Shulman's method of selling naked puts. I trade options on carefully selected stocks (I use Power Options) with 4 to 7 DTE. I sell a very wide put or call credit spread, such that the long leg is purchased for no more than 15 cents. The short leg is one or two strikes OTM. If the stock moves against the option I will roll it to the next week, choosing the new short strike carefully. I monitor my P/L, and if I have to roll I want the net result to be break even or profit. Sometimes I have to roll as many as 3 times, but I have only had one loser since October. About 60% of the time I take my profit in the same week. I discussed this method in some detail, including showing my spreadsheet, in recent TG1 meetings. You can check it out there.
 
#9
Hello Guys,

IMHO, you can just make this perhaps simpler and less risky...:geek::giggle::unsure:

If you have a slightly bearish bias...

First, place a slightly OTM Put Condor.

Underlying price goes down? Good, you make money.

Underlying price goes up? Good, you add a Call Credit Spread past the expected move up, yet enough to pay for the Put Condor's debit (and then some, if you would like).

Viola! You now have a "risk free" Put Condor - sorta.

Underlying keeps marching up? NP, just use a rule list like:

a. If the underlying goes up to 1.5 x the credit received on the short Call, take off half the CC's position
b. If the underlying goes up to 2 x the credit received on the short Call, take off the rest of the CC's position
c. Or, simply take the full loss on the Call Credit side, if the underlying keeps marching up. You may only be ~2 x the risk you would have seen on the initial debit you received on the Put Condor to begin with.
d. Or, simply take off the Call Credits when the loss you see equates to what the original, by itself, Put Condor debit would have been.
e. You can roll up + add more Call Credits, but then you add more risk, etc...

  1. If you'd rather use a Put OTM Butterfly, good for you.
  2. If you want to lift the UEL some more and make a the Put Condor/Butterfly an Unbalanced Condor/BWB by placing an additional Put Credit on a down move, sure, that can be fine, too.
  3. If you want to time the Put Condor - CC campaign via technical analysis, good for you.
  4. Of course, if you bias is slightly bullish biased, replace the Call Credit with a Put Credit further down from the main structure, and push the main structure above the ATM & use Calls.

Regards,

Marc
 
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DGH

Member
Staff member
#10
Thanks, Marc. I think your rule-defined approach is robust and viable. That is essentially what I do (see above), although I tend to "slap on" the entire trade at the same sitting. Then, it either works (profit) or it doesn't (small loss). Your graduated approach is probably better.
 
#11
Hi Dan,

May not be better, but different.

As you know, the Put Condor/Put Butterfly is like a reduced cost Put Debit Spread, in a way. I say to myself, "how far is the underlying really going to fall while in trade? Probably not as much as I am fantasizing about; therefore, I cap off that further down potential with credits. Yes, the T0 lines are different, thus you can play around with the DTE to get a good compromise between the Condor/BWB vs the Put Debit performance.

Plus, since the Put Condor/Put Butterfly is much cheaper than a Put Debit Spread, that UEL has a much smaller distance to go to make the structure "risk free", and, therefore, there is only a light touch CC needed for that lift, if one only wants to "risk free" the thing. Of course, if one adds plenty more CCs and PCs, then you morph into something more like a Jeep, or an interesting looking Iron Condor... ;)

Marc
 

DGH

Member
Staff member
#12
Agreed, Marc. I like your rigorous and elegant approach to this type of trade, particularly in the current environment which begs for low risk strategies.
 
#13
I like the idea except for the call side
I have been singed a few times on a call side when doing Iron condors in the past so I try not to do any trades that involves calls
It may work fine for now in this bear market but I am not sure how that will work if the market turns around

I would rather add a credit spread further down to lift the upper leg but that would be more risky in a bear market
I started out with a ratio condor at the beginning of this year so that is even simpler
That way it's all in one trade The tricky part is to figure out where to place the put condor OTM how wide the legs , the separation between the legs and the ratio of of the higher spread to the lower spread to give me the risk vs reward that I would be comfortable with

Later on I simplified it even more by going further OTM around 2 times the expected move and not doing the condor but just a simple put spread and also shortened the expiration to 1 week It seems a lot risky but it depends on the market
If it goes down slowly maybe 15-20 points per day (this is for SPX only) by the time it gets close to the short strike it's close to expiration and it expired worthless A few times if it goes up I can get out with 80-90% of the credit in 3-4 days
I usually get at least 2% per week on margin
Ideally if I can do that each end every week I should get 100% on margin
It requires more work than the 60-70 DTE trades which may or may not work out but it's very consistent income
The risky part is when it goes up a lot than the expected move is smaller but than the market reverses sharply which is what happened in Oct and I had one loss
The other risky part is when the market moves down fast 80-90points in one day so I try to stay out of the market during that time

I am also curious what kind of trade will Amy and Dan come up with
I just hope it can be done on SPX as well and not just individual stocks
 
#15
Hi "Status1".

It would take a very long journey up to hit the BE from the Call Credit or, if you want, a Call BWB. I don't know if the attached comes through nicely, but, it will take this IWM simple "risk free" Condor an ~11% up move before the BE is hit. That is a loooong way up.

Yet, you are right, there is risk in the trade; it's just merely swept under the rug/the can kicked down the road a bit. Being a bit of a long road up give me time to consider an adjustment I want to place, if any.

RISK FREE PUT CONDOR.png
 
#16
Hi johnyoga

I know that seems like a lot but once you cross over down below the expiration line on the upside you are not making money you are just waiting and hoping that it doesn't go any higher A lot can happen in 3 months and the call trade is less than 1 SD away so I would not consider that safe but with a 1 lot I suppose you will not loose too much

i would rather try to make 2% on margin per week than wait around for 3 months only to break even or maybe loose a little
Perhaps it will work out this time but if it goes up and volatility goes down you would have to get a lot closer to get this same type of trade on and than it will be a lot easier to reach the call side
 
#17
Hello Status,

Yesterday, I'd been in that trade for seven calendar days and up 27% on PM; today up 20%. Actually, it's higher than that if you simply look at the maximum loss on the Call side, which is $200, not the stated $300 as the "Margin Req.". A wide Butterfly would do just as well, I would guess, and for less commissions.

Also, there is no need to stay in the trade for three months, of course. And, there is no law that says I need to keep the CCs on. If the underlying drops, and I collect 50-75% of the premium, I can always take off the right side.

Yet, there is no need to downside hedge...ever. What a relief. Upside losses can occur, yet very far up. Sure, if IV is very low, everything would be closer. But that's true for many of the Put Condors, Iron Condors, BWBs variants...

Regards,

Marc
 
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#18
Hi johnyoga

That's fine if you are comfortable with it and keep a close eye on it and manage it at the right time
It seems to me like it's oversold so if there is a good reaction to the fed announcement tomorrow it can very easily start to go back up in 7 days to the point that you placed the trade and even higher if there is some tariff agreement

I understand that there is no need to stay in the trade for 3 months
So what is keeping you from taking the 27% and closing the trade ? Perhaps you can do another directional trade
Do you have a certain profit target or DTE that you want to achieve ?
In this position the theta is slowly loosing money so most of the gain is from the directional move

If all the concern was the downside hedge you could have done just the CC and would have been nearly in the same profit zone and had the theta in your favor
 
#19
Hello Again,

Yes, you could just do the CC (in this case I have a Call BWB on), yet I have double the profit of what the Calls alone would have ever provided. Plus there is a lot more profit potential in store, which would then allow me to unbalance the condor, etc. to lift up the UEL, if needed. And, you could take off the bottom side once you see the premium diminish enough.

There's Theta increase or decrease depending on where you are in the structure. And/or you could take off the topside if it gets to your premium capture level (e.g. take it off when 50% - 80% of the premium is captured).

This is a directional trade to some extent, yet the profit hump grows wide initially. The one I show above (and now below at the ~max profit width point) gets widened out to 6% ABOVE the current market price. And, you can always unbalance the thing if you want some juice to the topside.

Profit Target? Not my style for this structure. For instance, if I am nicely snug inside the Put Condor and the profit hump is nice and wide, I will stay in and keep milking it. If I am on the topside, and I see the Theta number starting to go stagnant or go in reverse, then I may get out.


As you know, the market goes in potentially one of five directions: Strong Up, Mild Up, Sideways, Mild Down, Strong Down. (Let's keep the IV factor out, we're just talking direction.) This structure works fine in 4/5 of those directions; strong up and you may get hurt, but that depends on when that strong up happens. But strong up in this environment? My belief is no...yet we are in a volatile environment...anything goes!

Regards,

Marc

Max width-ish of the Profit Hump (-33% to +6%, if I were smart I would have placed the Put Condor closer to the money...next time!) occurs around Jan 15th 2019, if you believe IIV in ToS:

PROFIT HUMP MAX.png


Good convo; I appreciate it!

Regards,

Marc
 
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#20
Same here
I hope your trade works out for you

I would not count on the strong down move to be shown accurately in tos
It usually slopes down much faster as traders buy puts for protection so your shorts will be inflated so you may not get the gains you are showing here but if you hang in there and don't close it in a panic and the market stops near the condor you will have some good profits
Good luck
 
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