Papale on Fried Cereal and Condors

Fried Captain Crunch Berry Balls

OK, now I’m not a particularly accomplished cook.  I am pretty good at making about 3 things – homemade pasta (my grandfather was an Italian cook and it’s been passed down), sausage and peppers (again, Italian) and burritos (not sure where that comes from but my kids like them).  I have deep fried a Turkey and calamari on Christmas Eve but here is a new one.

It seems someone has decided to deep fry CEREAL.  Yes, someone came up with the idea of turning our moderately healthy breakfast into the equivalent of fried ham and bacon.  I just wonder if you add the milk before or after it comes out of the fryer.

One of the most popular non directional trading strategies is the condor.  Everyone is doing it and it gets tons of ink in the blogs and columns.  While the methodology is basically the same, there is some differences in placement and adjustments.   But the basic premise is the same – the greater the difference between long and short strikes in the verticals, the greater the risk and hence the greater the potential return.

There is, however, a concept I like to keep in mind.  The short option is how we make our money and the long option is it’s protection.  The farther they are from each other the less protection the long can give the short.  That means in markets that are well behaved the position with strikes farther apart is likely to earn a return faster as there is greater theta working than the positions with strikes closer together.  However, when things go bad and markets move significantly, the tighter vertical condor will lose less money.  Which one is preferable?  In the indexes there is plenty of liquidity at all strikes so I believe for the beginner it is better to place strikes closer together.  Expected and realized return will likely be a bit less than a wider spread but it provides a good way to learn placement and management without as much risk.  As experience and skill increase widening strikes can make sense.  Next week we’ll take a deeper look at strike selection and deltas.  As always, we are here to help.

Steve Papale is a mentor with DiscoverOptions, the educational arm of OptionVue Systems.  Inquiries should call 847-816-6610 or email info@DiscoverOptions.com.

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