New Risk Management Strategies

The markets are very volatile now and this makes Iron Condor Trading very challenging. My strategy is to make money every month but in early 2008, and probably most of 2008, this strategy will included these risk adverse steps:

1) Exiting open credit spread trades and Iron Condor trades when 80% of the return has been realized. For example if we open a trade and collect $20 a contract we will exit the trade when the debit, or ask, is $4. By exiting a trade early we eliminate any risk of the trade ever becoming ITM (In The Money) due to a market surge. I will be detailing the GTC exit trades we can process with our brokers that will automatically close these trades when 80% of the profit has been realized. This GTC exit trade is in addition to the contingent stop loss order that also automatically closes the trade when the index reaches and touches a trigger price.

2) Immediately after exiting a trade we will enter a new trade. Since our margin is released and we can enter into a new trade expiring in the same or next month. When we enter a new trade expiring the same month we earn an additional credit for the month. When you can enter a new trade 40-50 days away from the next expiration date in the next month you can earn a higher return because there is more time.

The key to steps 1 and 2 is to exit trades early so we eliminate any risk of trades being ITM in the future. This is a conservative strategy that is used by successful full time traders. Leaving trades open to expiration is very risky in a volatile market like we have now.

3) When the markets start a downward trend we will invest a portion of our credits in ETF Put options. Buying Put options when the markets start dropping is like buying insurance. I am creating a tutorial detailing this hedging strategy and will be posting these Put trades in future months. The only folks making money in the markets now are those who shorted the indexes and this is what we will be doing from now on to protect our losses.

Because we will be trading more often you have to use a broker that has low fees. Many subscribers are now using Optionshouse to process all their trades. They only charge $9.95 per leg no matter how many contracts you trade.

For February and beyond (2008) the monthly returns net of trading fees might only average 2%-3% and not 3%-5%. With the US close to entering a recessionary period we must implement these risk adverse steps to protect ourselves from realizing any losses. If we can make money every month when the Dow and S&P stocks are trading at historic lows we are doing OK. Someday in, maybe 2009, the markets will return to a normal, or neutral, trading pattern. This is when we can enter Iron Condor trades and forget about them because they expire worthless month after month.

This is much more material covering these steps that I will be emailing and posting on the members page throughout January and February. I want subscribers who lost money this month to have the opportunity to recover with an improved risk adverse options trading strategy. We all can benefit in the long run from these recent events as long as we modify our trading strategies and manage risk more effectively.