Guidelines for Couch Potato Trader Plays
For the benefit of newer subscribers, and as a refresher to our veteran members, I felt it prudent to publish the guidelines for the three strategies we currently trade. They are summarized below:
Basic guidelines for all trades:
- If the underlying has moved a one-day standard deviation in either direction, do not enter the trade until the movement is less than a standard deviation. If it remains over a one-day standard deviation, do not enter the trade.
- Exact entry time is traders' choice; it is recommended to wait at least the first hour before entering.
1) SPX Weekly Iron Condor
Entry: Friday for the next week's expiration cycle.
- Sell short Call and short Put with delta of approximately .10 - .14. Buy long call and long put 10 points above and below short strikes.
- Minimum Credit: Credit must be at least $1.25 to enter the trade
Maximum Risk/Margin: Width of wings less credit received. Using the example of the minimum credit of $1.25, the maximum risk would be $875 ($1,000 less $125).
The position is managed as a "no touch" strategy; remaining open until target gain is reached. The trade will be closed at target gain, if the pre-set max loss is reached, or if SPX reaches either short strike.
Target gain: 7% of margin/risk.
Max loss: 10% of margin/risk.
2) SPY Monthly Iron Condor
- Entry: Approximately 39 days to expiration.
- Sell a short Call and short Put with a delta of approximately .15 - 20. Buy a long call and long put 5 points above and below short strikes.
- Minimum credit: Credit must be at least $.80 to enter the trade.
Maximum Risk/Margin: Width of wings less credit received. Using the example of the minimum credit of $.80, the maximum risk would be $420 ($500 less $80).
The position is managed as a "no touch" strategy; remaining open until target gain is reached. The trade will be closed at target gain, if the pre-set max loss is reached, or if SPY reaches either short strike.
Target gain: 10% of margin/risk.
Max loss: 15% of margin/risk.
3) RUT Monthly Iron Butterfly
- Entry: Approximately 31 - 30 days to expiration.
- Enter even strikes only. Even strikes tend to have higher open interest than the odd strikes. Additionally, sometimes the odd strikes are not available when you have to adjust.
The trade is a 50 point wide, "at the money" Iron Butterfly. As an example, if the price of RUT were at 1200, the order would be:
SELL 1200 Call.
BUY 1250 Call.
SELL 1200 Put.
BUY 1150 Put.
Credit will vary depending on the price of RUT and the volatility at the time the trade is entered.
Additional Order to Cut Negative Deltas on Upside:
- BUY RUT Long Call
The exact strike of the extra long call will vary, depending on the size of the position. If the long call is purchased, the goal is to cut the position deltas in 1/2 to 3/4 at entry.
The extra long call will keep the T +0 line a bit flatter on the upside. The Iron Butterfly is negative-delta by nature so will get hurt more quickly with a move up rather than down. However, it is a trader's choice whether to add the extra long call; depending on your market opinion.
Note that because this is a 50-point wide Iron Butterfly, the gross margin requirements in a Reg-T account is $5,000 per contract. Your broker will deduct this amount, less actual credit received, from your account, plus the cost of the long call, when the orders fill.
Target Gain: 5% of the gross margin ($250 per contract)
Max Loss: 10% of the gross margin ($500 per contract)
Try to adjust once per day whenever possible, I usually wait until the end of the day unless the market is moving very quickly against the position. It is also recommended not to adjust on the day of entry if at all possible.
- When the price of RUT moves up or down 10 points from the center strike of the Iron Butterfly, roll the "threatened" side up 20 points if it is an upside move, or down 20 points if it is a downside move. This results in a 20 point wide Iron Condor. This adjustment is made in one order; it is a Condor Roll of all calls or all puts, depending on the side being adjusted. At times, depending on the strength of the move, it may be necessary to roll more than 20 points.
Please also note that when the adjustment trigger is reached, it may be acceptable to wait a bit longer before adjusting, depending on position deltas and status.
- The second adjustment is recommended when RUT reaches either short strike. The recommended adjustment if this trigger is reached is to roll the threatened side up or down 20 points.
Depending on the cost of the second adjustment, it may be necessary to roll down the "non-threatened" side for additional credit in the trade. However, this does open the door for the classic "whipsaw", so I recommend only doing this if more credit is required to attain target.
If necessary and RUT continues to move in the same direction, it is a traders' choice whether to roll the threatened side once again another 10 or 20 points, or exit the position. Quite often if the third adjustment trigger is reached it is a better risk management decision to exit the trade and move on.
Please feel free to email me at any time with questions on these guidelines, or any specific trade. It is my goal to help you become more and more successful as a trader, practicing tight risk management, to reach your annual goals.
As always, trade carefully,