In this final installment (for now), I’ll share more of my ideas about trading, and options trading in particular.  The purpose is to provide guidance for readers.  I’m not suggesting that you agree with, and adopt, all (or any) of these ideas.  Instead the purpose is to get you thinking about your own philosophy of trading and why my ideas may or may not be appropriate for you.

The bottom line is there’s more to option trading than merely slapping on a position and then waiting for the options to expire.

1) Make the best decision you can at the time the decision must be made.  Do not berate yourself if it turns out not to be the winning decision.

2) Stay within your comfort zone.  Never ‘hate’ any position you own. It’s easy to exit and find a better trade.

3) “It’s not good enough to find winning trading techniques; one has to continually adapt these techniques to an ever-changing environment.” So says, Dr. Brett – and I agree.

4) Don’t depend on ‘hope’ to salvage a bad position.  Use your intelligence to make a good trading/risk management decision.

5) I find that it’s too risky to try to earn every every last nickel from a trade.  Exiting a position early locks in profits and gives you a quiet period with no risk.

6) Don’t sell naked options.  The exception is for investors who want to buy stocks as prices decline.  For those investors only, writing naked puts is a satisfactory strategy.

7) Don’t use options to gamble.

There’s always more to say on any topic.  If you are so inclined, please share any of your basic trading tenets.

MW: I discuss iron condors more often than any other strategy in this blog.  Do you have
any comments specific to adjusting iron condors – perhaps deciding when to
adjust?  Or perhaps a favored method?

PB: As you know I was a big trader of Iron Condors for several
years when the VIX was in the 10 – 20 range and did them monthly with very good
success until Aug 2007 when the whole market volatility environment changed
dramatically.  When I did Iron Condors
exclusively from 2003 – 2007 I tried to make strike selections where adjusting
was not something I would have to consider often.  However, as you know markets will
occasionally make large moves and threaten the short strikes.  My experience has been that adjustments for
Iron Condors are quite limited and most either eat into your credit
significantly, or increase risk.

The only adjustment I really considered was based on time to
expiration. One common adjustment “regime”
I would use if the Put side was threatened, for example, was to close the put
spread and roll it down and close the calls and roll them down as well as long
as I still maintained a total net credit.
The goal was to simply give me more space in the time remaining for my
options to expire worthless or get to a point where I could close for a
profit. I only considered this though if
time to expiration was short. If there
was 4 weeks left to expiration then the adjustment would still leave me plenty
of time for the position to move against me while reducing my credit. However if there was 1-2 weeks and I felt the
market had a good chance of moving back away from my threatened strike then I
would do the adjustment to sort of buy me more cushion to wait out the
market.

If the market kept coming at me, I would have to accept the
loss and bail. I found in my experience
that you really only have one adjustment in an IC to give you some cushion, and
if market still will not cooperate then you get out and look for next
opportunity.

Thanks Phil. I enjoyed this conversation and am pleased to have you as my first interview. ]]> http://tradenakedoptions.com/2009/06/interview-with-philip-budwick/feed/ 0 http://tradenakedoptions.com/2009/06/volatility-of-vix/ http://tradenakedoptions.com/2009/06/volatility-of-vix/#comments Fri, 05 Jun 2009 10:44:08 +0000 http://tradenakedoptions.com/?p=428 Daily Options Report this morning showed a video from optionMonster discussing the VIX options with two weeks to go show higher volatility than at the same point in May.

Jamie here notes something interesting. June volatility is about 15 points higher than it was in May at about this juncture in the expiration cycle.

Well it was 15 points higher. Jamie also notes some sellers in the June calls knocking it down a bit to about 10 points higher.

But let me just clarify something first, since this is the most difficult product to explain, ever. Jamie is referring to volatility OF the VIX options, not VIX itself. In other words an ATM option on the VIX, call it the June 30’s, is trading 15 volatility points higher than a comparable May VIX option was trading with 2 weeks or so to go until expiration.

Got that?

The VIX measures volatility expectations for the SPX. VIX options measure volatility expectations of that volatiltiy expectation. So it’s a bit rough to analyze what exactly that means.

I missed it when I was watching the video.

What does it mean? An increased uncertainty about how much SPX could move around. Take it to the extremes and see what it means. If the vol of the VIX were zero, the market knows exactly how much SPX will move around in the next month. If VIX vol were 100% the market is biting its nails expecting big changes in how much the SPX moves.