Option selling strategies with algo - how to manage risk?

algotrader

User: OptionsAlgo_Strategy
Subject: Option selling strategies with algo - how to manage risk?
Want to automate option selling strategies like iron condor and short straddle. Main concern is black swan events where losses can be unlimited. How do you guys handle risk management in automated option selling?

algotrader

Reply by: OptionsSpecialist_Hedger
Exchanges will implement kill switch mechanism to halt malfunctioning algorithms but dont rely only on that. Your algo must have multiple layers of protection: 1) Position sizing - never risk more than 2% capital per trade 2) Stop loss at strategy level - close entire position if loss exceeds threshold 3) Hedge with OTM options 4) Monitor VIX - pause strategy if volatility spikes 5) Time-based exits - dont hold positions through major events like RBI policy, budget etc.

algotrader

Reply by: RiskManagement_Prof
For option selling algos, risk management is more important than entry signals. I use dynamic position sizing based on market volatility. When VIX is below 15, take full position. When VIX 15-20, reduce to 50%. Above 20, dont trade. Also have capital preservation rule - if monthly drawdown exceeds 10%, stop algo for rest of month. Yes you might miss recovery but it prevents catastrophic losses.

algotrader

Reply by: IronCondor_Automated
Been running automated iron condor strategy for 18 months. Key learnings: 1) Dont be greedy with premium collection - keep enough distance from spot 2) Adjust positions when one side is tested - dont wait for stop loss 3) Have separate allocation for unexpected margin requirements 4) Track Greeks - if gamma gets too high, reduce position 5) Use backadjusted continuous futures data for backtesting, not spot prices. And yes, accept that some months will be losers - option selling is about consistent small gains with occasional big losses.