Thanks for an excellent comment. This was very timely reading for me (post entitled 'Get Even").
I am trying to learn about iron condors and I loved the explanations you provided in your book "The Rookies Guide to Options". It was my first introduction to what I think could be a great options strategy for me in the future.
I have been surfing the web on IC's and trying to pick up additional knowledge. I don't want to jump in too fast. I am starting to paper trade, but I feel like I am not even ready to paper trade yet, because I want to be clear on my personal game plan for how to use IC's
I think I more or less get the piece on the starting position. I like your idea of trying to collect about 30% – 40% of the spread in total premium when the options expire in about 90 days. I may even be more comfortable going further OTM and looking for 20% in premium.
What I am not sure about is adjusting the position (I suspect skilled adjusting is probably the key success factor for investors who make money over the long term). A couple of web forums have recommended having a game plan defined – when I will adjust and how I will adjust. I feel I don't have clue as to how to come up with this game plan.
Can you give me some guidance on coming up with the game plan for trading IC's. some questions I have are: Should I plan to adjust the position as soon as the stock gets close to a a short strike price (say 1% OTM)? Is it better to wait until it goes past the short strike? When adjusting is rolling both spreads always a good option vs. closing the position completely?
Also, after reading your chapter on advanced risk management, I could not decide whether pre insurance was a good idea for maximizing long term growth (which is my personal objective). what are you thoughts on this?
1) Paper trading is the best thing for you right now because it allows you to get comfortable choosing strike prices. It also allows you to see how you make or lose money, depending on how the market moves. And the best part is that you cannot make mistakes. If you see that you did something that you would do differently next time, take notes and be glad that you learned your first lesson. To gain experience faster, open more than one or two different iron condor positions. Use different months or different underlying indexes.
I gave a very careful, detailed explanations in the the book, but there's no substitute for hands-on experience. And paper trading cannot cost you a dime.
2) It's good to have a personal game plan. But, it takes some experience to know how to formulate one. Thus, don't be concerned that you don't have one right now. A good game plan for beginners is: "Don't allow positions to make me uncomfortable or make me afraid of losing too much. If that happens, adjust or close the position." You will get there after some practice trades. You will learn what makes you uncomfortable, and that will dictate your game plan.
For right now, I suggest a very broad game plan – then you will refine it as time passes. Such a game plan might (please choose your own plan – one that fits your comfort zone) be
a) Close all big winners (one side – not the whole iron condor) when it can be bought in for $0.25 or less.
b) Close a losing position when it…
There are many possible choices, and you mentioned a couple in your question. Closing when near the strike is very reasonable. Holding out until the strike is breached is also okay. If you do the latter, your losses will be larger, but there will be fewer of them.
Remember this: There is no single 'best' method. You have two goals when adjusting: First, to get out of positions where the risk of further loss is too high. Note that 'too high' is a relative term and each investor must decide the place when that occurs. That's where experience comes in and paper trading helps.
Second, don't get stubborn. You must not allow losses to get so large that they overwhelm your profits. Sure adjusting is not fun, but is is essential for long-term survival.
3) 'Always' is not a good word, in my opinion. Yes, when adjusting the losing side of an iron condor, it's often the right move to do something about the winning side. Why? Because if you are adjusting the puts, then the calls are probably cheap enough to buy in. Then you can sell a new call spread to go with the new put spread and you will have a new iron condor.
4) Pre-insurance is NOT for everyone. I'd skip it for now. When you have been trading iron condors for several months, you can revisit this idea and decide at that time.
Afterword: After posting, I thought it would be a good idea to add: Because you want to maximize long-term growth, I believe it's essential for you to take the idea of risk management very seriously. It only takes ONE disaster to wipe out months or years of earnings – depending on how much risk you take. Those who want maximum gains tend to take more risk than the average investor. If you decide to take that path, you must own protection against that disaster. But, after paying for insurance month after month and noticing that it was not needed, you may decide that it's not worth the cost. If you do, the chances are very high that you will live to regret it.