The Importance Of A Good Mentor
Adjusting Option Trades With Bill Ladd
Bill Ladd, a full-time, independent option trader, spent 20-some years in the pharmaceutical industry (Burroughs Wellcome, which became Glaxo Smith/Kline) as a certified internal auditor and a certified fraud examiner. Ladd was one of the early students of 22- year CBOE veteran turned teacher Dan Sheridan, regarded as one of the foremost option mentors.
When he’s not trading, Greensboro, NC–based Ladd volunteers for the Service Core of Retired Executives (SCORE) organization and also at a local retirement community. He agreed to answer some questions on August 22, 2008. The interview was conducted by STOCKS & COMMODITIES contributor John Sarkett.
B ill, when and how did you begin trading? I was interested in options for several years before I began trading. After I left the pharma- ceutical industry and began my own consulting business, I started to trade covered calls on stocks I currently owned, but only had limited success.
How did you come in contact with Dan Sheridan and his option mentoring ser- vice?
Some of Sheridan’s students seem to spe- cialize in condors. Is that what you do? No, but I do trade high- and low-probabil- ity iron condors, calen- dars, and broken-wing butterflies. Each strategy has its own entry and exit rules. Managing trades once they are on is the heart and soul of option trading, and that only comes with experience. Managing trades once they are on is the heart and soul of option trading, and that only comes with experience. ket is more volatile, I scale into the trades. In addition, if there is extreme volatility in the market, I reduce the allocation per trade amount, and in some cases, I just stay out of the market until it settles down.
I met Sheridan through OptionVue. I was using OptionVue software and their representative told me about his mentoring program. So I was introduced to his style of monthly income strategy
trading that way.
ABOUT CONDORS An iron condor is a four-legged credit spread, most easily conceptualized as a put credit spread below the market and a call credit spread above the market. A high-probabil- ity condor has a “high probability” of the underlying not hitting the short strikes. Typi- cally, strikes with deltas of seven or so are sold, with the next strike further out — that is, the wings — bought as protection. This might equate to something like RUT (Russell 2000 index) at 700, 600/610/800/810, that is, buy the 600 put, sell the 610 put, sell the 800 call, buy the 810 call.
What position size do you typically trade? Do you adjust the trade size month to month based on results?
I use a set dollar amount per trade each month to determine the number of contracts for a given trade. If the mar-
The low-probability condor is sold closer to the underlying at 12–15 deltas. This might be something like 620/630/780/790 condor. It generates a higher credit, but with it, greater likelihood of an adjustment. But that’s not necessarily bad; for Dan Sheridan’s top students, like Ladd, “adjusting,” whether rolling up, rolling down, adding debit spreads, or additional calls and puts to the underlying condor, is almost as natural as breathing. (See the sidebar, “Option adjust- ment,” for more on the method Sheridan teaches to trade these two kinds of condors.)
What is your entry methodology?
It depends on the strategy. Each strat- egy has its own entry methodology and risk management rules. For example, a high-probability iron condor has dif- ferent entry methodology than a low- probability iron condor, and they each have different risk management rules. Calendars have their own entry and exit methodology.
Where did you learn adjustments?
When I first started trading, I would just get out of a trade or roll the trade up or down. I learned from Sheridan how to effectively adjust and manage trades, and that being able to manage trades is the key to being a profitable trader. There are maybe four or five different