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Category Archives for "Trading"

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November 3, 2014

The Floater Trade

Mallard Duck Image

Jim Riggio put an SPX trade on about two months ago when the SPX was at 2000. Jim put a 90-day (DEC expiration) 1975/2000/2025 butterfly on. Nothing fancy or unbalanced. I put the same trade on the next day.

Jim and I took two different approaches to managing the trade

Jim was a “set and forget” while I started making the trade a broken wing butterfly as the market started moving down. My trade made a $1256 profit in just short of two months on about $7500 of margin used in the trade. That’s a return of +16.75% in two months.

But what does this have to do with that duck?

The way I managed the trade was to lift the downside and lower the upside. I was “floating” the expiration profit/loss up and down, as the market moved. Just as a duck floats on the water and goes up and down with the tide, I was floating my expiration profit/loss lines up and down.

Does it work when the market goes up?

Of course. I put the next floater trade on about a week ago with SPX around 1958. SPX is now at 2018 and I’ve “floated” my call side up above $0 profit at expiration. Let me show you.

Trade Entry

OptionVue Matrix: SPX was at 19582014-10-27 Floater Entry Matrix Image
2014-10-27 Floater Entry Chart
Notice how narrow this butterfly is. The probability of profit at expiration is only 12% if you don’t make any adjustments. Also notice how much time premium is in this trade. Because you are selling at-the-money options, you collect a huge amount of time premium to play with.

The First Adjustment

The next day, SPX starting roaring to the upside. I made my first adjustment by simply adding a bull call spread at 1950/1925. I’m generally trying to use the same strikes. It doesn’t matter if I use calls or puts. Vertical spreads at the same strikes are the same. One is a credit and the other is a debit, but the risk/reward is identical. I’m also trying to use strikes at major price levels as those strikes are more heavily traded.

2014-10-28 Floater Matrix Image

Notice how the symmetric butterfly has changed to a broken wing butterfly
2014-11-02 Floater 10-28 Chart Image

Fast forward a few days to Oct 30th.

SPX kept rising and I floated my call side up and the put side down a little more. This was because SPX is now well above the expiration break even and I needed to keep flattening the T+0 line. Here’s what the trade looked like at the end of the day on Oct 30th:

2014-10-30 Floater Chart Image

Current Position

SPX is now at 2018 and I’ve floated the call side up and the put side down a bit more:

2014-10-31 Floater Matrix Image

2014-10-31 Floater Chart

Notice the call side expiration profit is now above zero. The put short strike deltas are at -19.2 so the probabilities are shifting in the trade’s favor. The probability of profit in 33 days is about 80%.


This is a trade in development in my “test kitchen.” I need to spend some time back testing this. (I wish QuantyCarlo was ready to go). I need to develop a set of rules for the trade, but at the moment, it’s a trader’s trade. The main goal is to keep the T+0 line pretty flat and the risk under control.
I like this trade for several reasons:

  • You start with a lot of time premium to play with so you can make a good number of adjustments without ruining your profit potential
  • The trade starts market neutral. You let the market tell you which way it wants to go and you react to that.
  • If the market goes sideways, you start with good theta so you can make a profit relatively quickly.
  • Risk is very low. The T+0 line is FLAT. My 10 lot butterfly was only $2000 in margin to start with. If we had a flash crash, that’s the most I could lose.
  • Because I’m starting farther out in time, short term movements don’t need to be reacted on in the same way with a shorter time frame trade.

What do you think?

I’d love to hear what your thoughts are for this trade. Either reply in the comments below or join us in the forums to discuss this trade at
October 12, 2013

The Weirdor: A Weird Looking Iron Condor

NOTE: Jim Riggio’s modified Weirdor is the JEEP trade. Jim did a presentation at Options Tribe about this recently. The replay and slides are available at Capital Discussions.

Dan Harvey is a retired Sheridan Options Mentoring mentor who has been trading iron condors for many years.  Dan is a retired medical surgeon who has done surgery on the Iron Condor to modify it to address several problems he saw in traditional Iron Condors.

What’s wrong with the Iron Condor?

  • Iron Condors are short Vega and volatility normally goes up as the underlying price goes down.  This pushes the P/L curve down from volatility while you are losing money from price action at the same time.
  • As you move from the center of an Iron Condor, gamma kicks in and makes the T+0 curve “bend” and change relatively quickly so you tend to adjust fairly soon.
  • There is more time premium in Puts than Calls so you have less distance to your upside short strike (assuming you are selling the same delta for the Puts and Calls).  Markets tend to rise so you spend many expiration cycles fighting the Iron Condor on up moves.

How can we address these problems?

The first step is to add a put debit spread near the money.  This helps reduce the Vega and reduces Gamma so as price moves down and volatility moves up, the Put debit spread is flattening your T+0 curve and reducing the negative effect of Vega.

To flatten the T+0 curve on the up side, we sell less call credit spreads.  If you are selling 12 to 15 put credit spreads, a typical Weirdor will sell two or three.  This makes the upside risk much less from the beginning of the trade and it’s easy to manage.

If the market is moving up, the typical Weirdor defense is to take the calls off if the price of the short call increased 50% to 100%.  Because there are so few calls, taking the calls off doesn’t hurt the profit potential of the trade very much.  It also eliminates risk to the upside.

Why did Dan Harvey call this trade a Weirdor?

Dan said the graph has a “weird” looking shape but it’s really a modified Iron Condor.  When you combine “Weird” with “Iron Condor” you end up with a “Weirdor.”

Let’s see an example of a Weirdor

With RUT at 1047.70 and 37 Days to expiration, here is a typical Weirdor:

Put debit spread
+1 RUT NOV 1040 PUTS @ 26.40
-1 RUT NOV 1020 PUTS @ 19.60

Put credit spreads
-12 RUT NOV 920 PUTS @ 4.30
+12 RUT NOV 900 PUTS @ 3.20

Call credit spreads
-2 RUT NOV 1135 CALLS @ 1.85
+2 RUT NOV 1155 CALLS @ 0.80

This example is at 37 days to expiration.  Most Weirdor traders start 45-60 days to expiration.  Don’t start a Weirdor with less than 30 days to expiration.

What does this trade look like?

Weirdor risk chart

Weirdor Risk Chart

As you can see, there is little risk on the up side from the beginning of the trade. Typically a Weirdor will have +3% profit on a move up.  If the market goes sideways, you can usually get a bit more than +3% because the T+0 line actually goes above the expiration line a little bit near the end of the trade.

If the market falls, the debit spread can provide a nice boost to the profit and end up with +8% or more.

What are the characteristics of the Weirdor?

That varies from trader to trader, but typical traders win about 85% of the time.  This is similar to an Iron Condor that you are selling 8 delta options.  The trade has a very smooth equity growth chart compared to an Iron Condor due to the lower drawdowns and the Weirdor has a higher expected return than conventional Iron Condors.   Dan Harvey’s results have been:

  • 87% wins
  • Average winner 6% to 7%
  • Average loser -3.5% to -4.0%
  • Expected return of +4.6% of margin
  • Probability of Ruin  0.0000%

Risk is easy to manage with zero or one adjustment per trade being typical.

What vehicles can you trade the Weirdor?

Almost anything.  You can trade indexes, stocks or futures options as long as there are enough strikes available.  Lower priced stocks probably aren’t suitable.  Make sure you check the open interest and option volume.

Does this mean you shouldn’t trade an Iron Condor?

Not necessarily.  The Iron Condor will make more money if the market goes sideways or up a little bit.  The Iron Condor requires more adjustments than the Weirdor.  If you are late adjusting, you can put yourself in a hole too deep to dig out of very easily.  People do trade the Iron Condor and make money, but you have to have a good trading plan and risk management to make it work.

The biggest problem of the Iron Condor compared to the Weirdor are the larger average losses.  This is what makes the equity growth chart choppier.

My initial experience so far

I have been trading a mini-Weirdor on the RUT in the last two months.  I was in the first trade for 31 days and made +3.26%.  I’m still in the second trade.  It weathered the recent market sell off and reversal quite easily.  I added one extra Put debit spread that smoothed my T+0 line and reduced my Vega.  The margin on the trade is $11,000 and my maximum unrealized loss was -$560, or about -5%.  That was primarily due to volatility spiking up and pushing the T+0 line down.  If I didn’t have the additional debit spreads, I think I would have been down over 10% at one point.

When the market reversed, I simply took off my additional Put debit spread for a small loss.  I did sell one additional put credit spread below my original put credit spreads to offset this loss.  My margin increased to $13,000 temporarily but is now back to $11,000 and my Weirdor has no risk to the upside as I took off the Call credit spreads already.

If the RUT stays above 1070 (currently at 1084) the Weirdor will net +3.93% and if the RUT goes below 1060, it will net +13.36% if I leave it on until NOV expiration in 34 days.

I found the adjustment to be quite easy.  I entered the additional Put Debit spread manually, but if I had a job and couldn’t be at the computer, my adjustment could have been put on automatically with a contingent order.


The Weirdor is a low stress alternative to a conventional iron condor.  It has a very high win percentage with very little upside risk.  Downside risk is easily managed by adding wide debit spreads.  The Weirdor consistently attains yields of 5% to 8% with smaller drawdowns than conventional iron condors.  The low drawdowns is what makes the equity growth curve so smooth.

Next Steps

You should back test and/or paper trade any new strategy.  When you start live trading, trade very small until you prove to yourself you can successfully handle the trade.  Then start scaling it up in size.

Post your questions or comments about your experience with the Weirdor in the comments below.

Amy Meissner's Weirdor Trade Alerts banner

August 9, 2013

Trade Simulator

I’ve coded a trade simulator for you at   The trade simulator works for any trading system including stocks, futures, currencies and options.  All you need are your win and loss percentages, average profit, average loss and slippage rates.  You can then simulate how these numbers would perform over time.

The trade simulator takes your system parameters and performs random trades and applies your numbers to them.  The result is a simulated performance result of how those trades did.  I find it very instructive to look at the equity chart to see if the equity growth is smooth (ideal) or choppy.  Choppy curves normally mean the results have draw downs.   The bigger the dip, the bigger the draw down.

You can see the exact draw down on the numbers on the right.  I typically like to see these numbers VERY low.  10% of less is my threshold.

The other piece of data I look at is the Probability of Ruin.  I want that as close to 0.0000% as possible.

There are two modes you can use

The first mode is for single trials.  This mode shows more complete data for the trial.  You will see a moving average on the chart.  This shows what the average equity is.  You want this to keep going up.  One technique for managing ANY trading system is to plot a moving average of your equity.  If the equity falls below this moving average, switch to paper trading the system until the equity is above the moving average.  This will get you out of a system that is not performing very quickly and get you back in when it starts making money again!

The second mode lets you do multiple tests.  For example, instead of doing one test for 1000 trades, you can do 10 tests of 100 trades.  This mode plots the minimum and maximum equity and an average of all tests.  For these tests, I want to make sure the minimum values all had a good growth curve.  The tighter the lines are together, the less variation a system has, which is a desirable situation.


TradeToolA  TradeToolB


I hope you enjoy using the trade simulator.  It’s a good sanity check to see if your trading system numbers make sense or not!

August 9, 2013

What Everybody Ought to Know About Option Synthetics

Albert Einstein

Two definitions of the word “synthetic” are:

  • produced artificially
  • devised, arranged, or fabricated for special situations to imitate or replace usual realities

These definitions can describe “Synthetic Positions” in option trading. To understand synthetic option positions (or “synthetics”), we have to understand the basic relationship between puts and calls:

K + C = U + P + I – D

K = Strike Price
C = Call
U = Underlying stock price
P = Put
I = Interest
D = Dividends

For most situations, we can assume interest and dividends are small enough to ignore and we will simplify our equation to exclude them. However, there are situations where interest and dividends do affect this equation such as high interest rates, long time periods or large dividends for example.

Simplifying our equation, we now have

K + C = U + P

Since the strike price is arbitrary and a constant, let’s remove it from the equation to see what the relationship is between the Call, Put and Underlying security price boils down to:

C = U + P

Long is positive and short is negative. So we have

  • +C = Long Call
  • -C = Short Call
  • +P = Long Put
  • -P = Short Put
  • +U = Long Stock
  • -U = Short Stock

Jumping DogsThis simple equation let’s you derive the six synthetic relationships quite quickly. All you have to do is think back to your algebra class and solve what synthetic you need by putting that variable alone on one side and moving the rest to the other side of the equation. Remember, when moving from one side to the other of the equation (“jumping the fence as my 8th grade teach used to say”), you change the sign. So, we can now show the six basic relationships, solved using basic algebra. They are:

  1. Long Call = Long Stock + Long Put     (C = U + P)
  2. Short Call = Short Stock + Short Put     (-C = -U – P)
  3. Long Put = Long Call + Short Stock     (P = C – U)
  4. Short Put = Short Call + Long Stock     (-P = -C + U)
  5. Long Stock = Long Call + Short Put     (U = C – P)
  6. Short Stock = Short Call + Long Put     (-U = -C + P)

How can we use this knowledge?

Hedge an existing position.

Suppose you have a covered write on a stock but earnings are coming out and you’re worried the stock price might jump around a lot. Or you are going on vacation and don’t want to worry what the market is doing while you’re gone.

Since you know a covered write is identical to a short put synthetically, if you buy a long put, that should completely offset your covered write and completely hedge you while you go through earnings. No need to sell your stock and buy in your short call. Just buy a put. Here’s how that would look:

Long stock + Short Call vs Long Put vs Combination

Long stock + Short Call vs Long Put vs Combination

Notice how the blue line is completely flat. That’s the combined position of the long stock, short call and long put.

Reverse Market Directional Bias quickly

Suppose you are bullish on the market and have a Long Call. You change your mind and decide you should be bearish. If you sold your long call and bought long puts, you would have two commissions and two sets of slippage to deal with. Since we know a Long Put = Long Call + Short Stock, all we have to do is SHORT THE STOCK. This changes your position to a synthetic Long Put with one transaction.

This technique is also VERY useful in very fast market conditions. Option bid/ask spreads can really widen during fast markets so your fills closing your Long Call and buying your Long Put might really put you in a hole starting out. Since stocks are very liquid and have very tight bid/ask spreads normally, shorting the stock is a very useful tool to convert your Long Call position during a fast market.

Closing a position with illiquid options using a box
brown box
This happened to me trading 30 Year Treasury Bond futures options (ZB contract) last year. The bid/ask spread of the in-the-money options was really crazy. (Bid $4, Ask $6 for example). I had a profit in a position that had started out as a butterfly. I could close most of the position with good fills; however, I had some ITM options with very unfavorable bid/ask spreads. What did I do? I built a box!

I had these options I needed to close:

  • A long Put at 118 Strike
  • A long Call at the 113 strike

To create a riskless position, I did the opposite:

  • Short Call at the 118 Strike
  • Short Put at the 113 Strike

I ended up with:

  • A long Put + Short Call at the 118 strike = a synthetic Short Stock position
  • A Long Call + Short Put at the 113 strike = a synthetic Long Stock position
  • Which means I was synthetically Long AND Short the stock (which means there’s no risk left)

I hope you’ve seen how useful synthetic option positions can be. There’s more variations but as long as you understand the basic formula of

Long Call = Long Stock + Long Put

You can re-arrange the equation like in algebra class to put the one variable you need by itself and everything else on the other side of the equation to see what the synthetic is.

November 20, 2012

Are You Throwing Money into a Sinkhole?

Do you ever feel trading is like throwing money into a sinkhole?  Over 90% of traders lose money and are supporting the 10% (or less) who can.  Many look for education or try to learn it on their own.  Many fail.  Few succeed.

I work for Dan Sheridan at Sheridan Options Mentoring where we teach people to trade options.  It’s been a fun job and I was one of Dan’s students in 2006.  I’ve learned a LOT.

I wish when I was a student, I had a place to park my cash while I was learning. 

I occasionally get requests for recommendations for managed accounts so people can either have their money grow hands off, or generate some cash while they learn to do it themselves.

But where do you put your money?

I have a few acquaintances that do this kind of thing.  Since I get asked this question enough, I decided to put it in a post so I can refer people to this page 🙂 (programmers are lazy eh?)

On my list, I’ve known the first four for years and the one in Australia is a friend of a close friend I’ve known for about 10-years.  They are all great traders and great money managers.  If you don’t want to trade yourself, you should talk to each one and make your own decision.

While I personally know each of the principles at these managed account firms, you’ll have to do your own due diligence.

Each of these firms has legitimate traders that are trading their own accounts and are taking managed clients (as far as I know).

Without further ado, here’s the list:

  • Firm #1: U.S. based hedge fund.  Must be an accredited investor.  $100k minimum?
  • Firm #2: U.S. based hedge fund
  • Firm #3: Limited to 15 clients for now.  Requires PM account at Interactive Brokers. The trader was written up in TASC magazine.
  • Firm #4: This is for Non-U.S. clients ONLY!  Based in Switzerland with a 180-year old private bank and VERY interesting account management platform.  I think they specialize in trading Forex but I don’t their exact offer. $50k minimum
    Contact Chris for more information
  • Firm #5: Australia residents only!  Pool of Forex traders with up to 13-year profitable track record. $10k minimum

I hope you found the list interesting.  If you know of any similar firms, let me know and I can add it to the list (if I like it and I am confident they are  of very high quality).

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