Two Out of Three

The following are ideas from the book "Profiting with Iron Condor Options", by Michael Benlifa.  I am summarizing the idea and trying to put in into practice in my Trading Plan.  Most of the time you cannot get the perfect trade three out of three considerations below.  You got to choose just two out of three.  Which two?

The three considerations when selling Iron Condors are :

1. Position : Delta 10s, outside previous highs and lows
2. Price: Credit of 20% of margin
3. Time : Expiration is in 4 to 5 weeks

Michael suggest the first two : Position and Price, leaving Time negotiable.

N225 Index Option Review

After decided not to trade HSI Index Option, I continue to explore another market/product for Option trading, the Nikkei 225.

Option Spec: (http://www.ose.or.jp/e/derivative/225options)

• Exercise Style : European
• Contract unit : JPY 1,000 per index point
• Minimum Spread : 125 point, ie JPY 125,000 (~USD 1221.42)
• Trading Hours : 9:00-15:15, 16:30-3:00 (Japan Hours)

Cost of Trading
1. Market Data JPY 200.00 (~USD 1.95)
- Osaka Sec Exch JPY 200.00

N225 Market Data cost is ok.  Not too high.  About on par with US Options.  For example, Korea is free, Singapore is SGD 1.00 (~USD0.78) and US Bundle (USD 10.00)  & US Options (USD 1.50) are waived when monthly commission generated reached USD 30.00 & USD 20.00 respectively.

2. Commission
- N225 commission is also not bad.
- 0.18% of option value, min JPY 100 (~USD 0.98) per order
- 0.2% of option value, min KRW 1,000 (~USD 0.93) per order

For a 10% premium collected from Credit Spread,
- N225 commission will take 1% away from the 10% premium received, ie for every $100 premium received, $1 will be deducted for commission.
- K200 commission will only take about 0.76% (depending on contract value) from the premium, ie for every $100 premium received, only about $0.76 is deducted for commission.

3. Margin
- N225 margin is good
- for a N225 Option 125pt Spread (min spread), the Initial & Maintenance margin is about USD 463 & USD 370 respectively
- for a K200 Option 2.5pt Spread (min spread), the Initial & Maintenance margin is about USD 637 & USD 510 respectively

For N225 Option, selling a 125pt Spread to receive say 15 pt (cannot do 12.5 pt. so, 12% premium) is about JPY 15,000 (~USD 146.57), I will need to tied up USD 463/370 initial/maintenance margin.  Return On Margin (ROM) is 31.65%/39.61%.

For K200 Option, selling a 2.5pt Spread to receive say 0.3 pt (adjust to 12% premium as N225) is about KRW 150,000 (~USD 139.90), I will need to tie up USD 637/510 initial/maintenance margin.  Return On Margin (ROM) is 21.96%/27.43%.

4. Option price spread and volume
As with K200, the bid/ask spead is very close, mostly 1-2 ticks wide.  Bid and Ask volume is also good.

Risk/Reward
1. Spread Risk
- min spread is 125 points, which equate to JPY JPY 125,000 (~USD 1221.42) 
- K200 min spead is 2.5 points, which equate to KRW 1,250,000 (~USD 1,165.39)
- this is about the same

2.  Support & Resistance
- as my selection of Strike is primary base on Support & Resistance (that may change), the validity of Support & Resistance is important
- N225 is in general similar to K200, with enough up & down (volatility) but at the same with good support & resistance.

3. Number of Strikes
One problem I have with K200 is the number of Strikes.  It is quite limited.  It is about 26 strike prices(current month) and 18 strike prices (next month).  This make adjustment kind of challenging at times.
N225 does not has this problem.  It has abundant of Strikes to trade.

4. Trading Hours
N225 Trading hours coincide with K200 for T-session (regular trading hours), where the Index is moving.  However, N225 has a T+1 session (non-regular trading hours) that you can continue to trade, even though spread and volume is not as good as T-session. 


Conclusion
N225 Option in many ways are comparable as K200, and better in some areas.  As such, I will be trading N225 in addition to K200.

Karen SuperTrader, February 11, 2014

There is a recent interview with Karen, the SuperTrader on February 11, 2014 on tastytrade.  I cannot find the YouTube version for this recent interview.  You can view the interview at tastytrade.  Need a account to login though.

https://www.tastytrade.com/tt/shows/tasty-extras/episodes/9236