What is a BMIC?

Written on May 6, 2008 by OptionsRopeaDope

BMIC = Big Mouth Iron Condor. Learned that from the Insane Money Forums, after seeing it on Pete’s Options Blog. (Another good real-trades strategy blog.) It’s the name Jack Wong from Optionetics give to a condor with wide shorts, like Dan Sheridan’s “High Prob Condors.” After a little googling around the Optionetics forums (BMIC is discussed alot here), I was able to find some guidelines here:

Mike,

I can share some of my big mouth IC experience. I have started doing big mouth IC on NDX and RUT, and in particular I like NDX because I can create a 150 point (6 strikes) or a 200 point strike) IC and still aim at 10% ROI, taking into account the potential rolling, if necessary.

Typically, when I entered a NDX/RUT IC, I will ensure that the delta for the short put and call is less than 15, and for every $2,500 margin, if I can sell for a combined credit of $2.50, that’s 10% ROI. I will consider rolling in two scenarios:

1) When the delta of my short option hits the first alarm of 25, that’s the time for me to see if there is any need to roll up the bear call or roll down the bull put. To ensure that we are not in the mid May mini-crash problem, I set a rule whereby if RUT has a net change of 30 points on 2 consecutive days or NDX 75 points (i.e. 3 strikes), close the side that is in danger immediately to preserve capital.

2) If I see that either one side loses the hedge - that is when the delta of my short option drops to 2 or 3, I may consider rolling up the put side or rolling down the call side for more credit. This is a greedy move so I would exercise care before asking for more.

Since RUT and NDX have the last trading day on third Thurs of the month and have settlement price determined on third Fri morning, try to buy back the short options to remove the overnight gap exposure. E.g. I had a NDX short put of 1675 in Oct and the closing price on third Thurs last month was 1703 - so I was only 25 points safe. I could buy back the short put for $0.20 but for some reason, i did not. So, I was subject to overnight risk but I was lucky that I did not need to deal with the obligation. So, to remove the stress in case I am not lucky, now I make it a rule for myself that I will buy back the short put and call even if I have to pay $0.30 or $0.50. If I can buy back for $0.05 (the best case scenario), I will definitely do so especially now my broker does not charge any commission for buying back an option for a nickel - so why not?.

I hope the above little rules of mine are useful. Like you said, making a 10% per month consistently is not sexy but not a bad idea either.

Good trading!
Jack:)

So essentially, it is much the same as Dan Sheridan’s rules (later in the thread Jack says he actually looks for deltas < 10). The 25 delta is a bit high for me to adjust, as the loss starts to really accelerate before that point. Always good to read other perspectives though, and knowing the vaocabulary when it pops up.

Reading through the threads, it is a little offputting that there’s not any talk about volatility… in one case some says their spread widened significantly with little price movement, and no one stepped in to say that volatility increased significantly at that time. Also no discussion that, ideally, ICs work best when you expect volatility to decline. If it is at all time lows, your chances of getting burnt go up significantly.

Then again, I spotted a good rule… if the RUT moves 30+ points two days in a row, take the wing off that is in the direction of the move. That’s something I havent used yet, although Dan mentioned it in a seminar - taking the whole position off and waiting until there are 3 consecutive days of less than 1.5 Standard Deviation moves. Great to have rules like this in your toolbox.

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Posted in Dan Sheridan, Trading Rules, Iron Condors