Discussion on Position Sizing

IncomeLab Forum Forums Income Lab Discussion on Position Sizing

This topic contains 4 replies, has 4 voices, and was last updated by  Igor 2 years, 6 months ago.

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  • #4995

    Igor
    Keymaster
    #4982

    Igor
    Keymaster

    Hi Igor,

    Do you use de 25% of your account on each trade or how do you manage it?

    Thanks!

    #4983

    Igor
    Keymaster

    This is a very good question that comes up often, so this should be a good discussion.

    For this model portfolio I want to hold no more than 4 Iron Condors at any given time. I dont believe that holding 20 different Iron Condors at any given time provides diversification because when the market sells off and IV spikes, so do premiums across all positions. Therefore, a good starting point is to take total capital allocated towards trading ICs and splitting it into 4 sleeves. I also picked 10 contracts for each IC because on a smaller number of contracts initial directional exposure (NET delta) is very insignificant and if a trade gets to a point where I need to adjust, I will have to use options that are very far OTM as hedges and that will make it very ineffective (for smaller size trades, I’d use SPY options as hedges because SPY is 1/10th size of SPX). So when someone says “Do you use 25% of your account for each trade?” The answer is No. First you need to understand how much of total capital will be allocated for Iron Condors. Then you want to understand how many positions can you balance at once without feeling like you’re getting overwhelmed. These two factors are different for every trader but should be the starting point deciding how to deploy capital in income trading.

    #7501

    Igor
    Keymaster

    Igor

    I can see how you can be hedged with four different positions at different strike prices.

    However, do you try and protect yourself against a big drop in the stock market like for example the 22% drop on Black Monday in October 1987, the over 770 point drop in one day on September 2008 or even the flash crash?

    #7502

    Igor
    Keymaster

    John,

    These are black swan events and odds of this happening are very very small. However, there are usually signs that show market weakness. When we reach delta on the put side around mid 20s we’ll buy an OTM option(s) to cut downside exposure. In that event, if the market was to move 5% lower in a day, that OTM option would actually save the position from getting blown out.

    Now, about being hedged with 4 positions. Having 4 positions at once really doesn’t hedge or diversify. When the market goes down and volatility spikes all 4 positions will need to be adjusted or closed. We had several positions on in August 2015 when the market ‘crashed’. We managed to close one for a small loss while the other position hit our stop and the loss didn’t come from a big move down but a pretty sharp reversal higher. My point is that upside risk is still greater than the downside risk for Iron Condors, in my opinon.

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