Tag Archives | iron condor adjustments

The Art of Making Decisions when Trading

One of my basic tenets in teaching people how to trade options is that rules and guidelines should not be written in stone and that there are valid reasons for accepting or rejecting some of the ideas that I discuss.

When I offer a rationale or explanation or a suggest course of action, it is because I have found that this specific suggestion has worked best for me and my trading. I encourage all readers to adopt a different way of thinking when appropriate. The following message from a reader offers sound reasons for taking specif actions regarding the management of an iron condor position. My response explains why this specific reasoning is flawed (in my opinion).

The question

Hi Mark,

I have some questions on Chapter 3 (Rookie’s Guide to Options) Thought #3: “The Iron Condor is one position.”

You mentioned that the Iron Condor is one, and only one, position. The problem of thinking it as two credit spreads is that it often results in poor risk-management.

Using a similar example I (modified a little bit from the one in the book) traded one Iron Condor at $2.30 with 5 weeks to expiration:
– Sold one call spread at $1.20
– Sold one put spread at $1.10

Say, a few days later, the underlying index move higher, the Iron Condor position is at $2.50 (paper loss of $0.20):
– call spread at $2.00 (paper loss of $0.80)
– put spread at $0.50 (paper profit of $0.60)

I will lock in (i.e., buy to close) the put spread at $0.60 for the following reasons and conditions:
1. it is only a few days, the profit is more than 50% of the maximum possible profit
2. there are still 4 more weeks to expiration to gain the remaining less than 50% maximum possible profit. in fact, the remaining profit is less as I will always exit before expiration, typically at 80% of the maximum possible profit. so, there is only less than 30% of the maximum possible profit that I am risking for another 4 more weeks.
3. the hedging effect of put spread against the call spread is no longer as effective because the put spread is only at $0.50. as the underlying move higher, the call spread will gain value much faster than the put spread will loss value.

Is the above reasoning under those conditions ok? Will appreciate your view and sharing. Thank you.

My reply

Bottom line: The reasoning is OK. The principles that you follow for this example are sound.

However, the problem is that you are not seeing the bigger picture.

1. There is no paper loss on the call spread. Nor is there a paper profit on the put spread. There is only a 20-cent paper loss on the whole iron condor.

2. When trading any iron condor, the significant number is $2.30 – the entire premium collected. The price of the call and puts spreads are not relevant. In fact, these numbers should be ignored. It is not easy to convince traders of the validity of this statement, so let’s examine an example:

Assume that you enter a limit order to trade the iron condor at a cash credit of $2.30 or better. Next suppose that you cannot watch the markets for the next several hours. When you return home you note that your order was filled at $2.35 – five cents better than your limit (yes, this is possible). You also notice the following:

  • The market has declined by 1.5%.
  • Implied volatility has increased.
  • The iron condor is currently priced at $2.80.
  • Your order was filled: Call spread; $0.45; Put spread; Total credit is $2.35.

Obviously you are not happy with this situation because your iron condor is far from neutral and probably requires an adjustment. But that is beyond this today’s discussion — so let’s assume that you are not making any adjustments at the present time.

That leaves some questions

  • Do you manage this iron condor as one with a net credit of $2.35? [I hope so]
  • Do you prefer use to the trade-execution prices?

If you choose the “$2.35” iron condor, it is easy to understand that this is an out-of-balance position and may require an adjustment.

If you choose the “45-cent call spread and $1.90 put spread” then the market has not moved too far from your original trade prices, making it far less likely that any adjustment may be necessary.

In other words, it does not matter whether you collected $2.00, $1.50, $1.20, $1.00, or $0.80 for the put spread. All that matters is that you have an iron condor with a net credit of $2.35.

3. You should consider covering either the call spread, or the put spread, when the prices reaches a low level. You are correct in concluding that there is little hedge remaining when the price of one of the spreads is “low.” You are correct is deciding that it is not a good strategy to wait for a “long time” to collect the small remaining premium.

If you decide that $0.60 is the proper price at which to cover one of the short positions, then by all means, cover at that point. (I tend to wait for a lower price).

If you want to pay more to cover the “low-priced” portion of the iron condor when you get a chance to do so quickly, there is nothing wrong with that. However, do not assume that covering quickly is necessarily a good strategy because that leaves you with (in your example) a short call spread — and you no longer own an iron condor. If YOU are willing to do that by paying 60 cents, then so be it. It is always a sound decision to exit one part of the iron condor when you deem it to be a good risk-management decision. But, do not make this trade simply because it happened so quickly or that you expect the market to reverse direction. If you are suddenly bearish, there are much better plays for you to consider other than buying back the specific put spread that you sold earlier.

4. The differences in your alternatives are subtle and neither is “right’ nor ‘wrong.”

The main lesson here is developing the correct mindset because your way of thinking about each specific problem should be based on your collective experience as a trader.

Your actions above are reasonable. However, it is more effective for the market-neutral trader to own an iron condor than to be short a call or put spread.

You are doing the right thing by exiting one portion of the condor at some “low” price, and that price may differ from trade to trade. But deciding to cover when it reaches a specific percentage of the premium collected is not appropriate for managing iron condors.

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Expiration and iron condors

This question arrived Friday 11/5/2010 and because it was time sensitive, was answered immediately via e-mail. 

Mark,

I sold [I prefer the term 'buy' – but this is not the time to quibble. MDW] a Nov IC in early Oct which included a RUT 750/770 call spread.

Delta is climbing every day, and with 2 weeks left and 16 points between current and short strike, I'm trying to decide the best route to save this with the least amount of red.

On the potential reversal side, volume is dropping on RUT, A/D line is over 200, and RSI is through the roof. So some professional feedback would be great.

Here are my current thoughts. 1) Close down shop and possibly roll up to higher strikes next week for less credit. 2) Close half the position now, and open additional contracts next week farther out. 3) Roll all 750 shorts up to 760 which is 10 points above April high. 4) Wait it out and pray. Least likely scenario. 5) Move half shorts to 760 and the other half to 780 and keep longs open. 6) Buying back a few shorts. 7) ??????????

Thanks for your feedback.

JV

***

I can provide feedback on trade ideas, but I have no clue on market direction and have nothing to say about A/D or RSI.  I believe risk must be managed by what we see and how we feel about it. 

A trader who is confident that the market will decline, may feel comfortable with your position.  But lacking a crystal ball, WYSIWYG.  And risk is what we see. 
 

1) Closing is often, but not always the best choice.  Howeve, it is seldom a poor choice. By closing, you avoid making a poor trade in an attempt to 'keep hope alive.'  And do not ignore the emotional benefits of getting out of, and no longer having to manage, an uncomfortable high-risk position.

I agree with your attitude: looking to minimize losses.  Refusing to acknowledge that you are uncomfortable with this position is not a winning philosophy, in my opinion.

Rolling should be a separate decision.  If you find a Dec (or Jan) trade that suits, then sure – open it after taking care of the Nov trade.  RVX is rather low right now (25), and you may not like the premium available for new iron condors, but there is no reason why IV cannot move much lower. 

2) Reducing position size is very similar to exiting the entire trade. If you cannot quite get yourself to exit, then this is a good compromise.  However, there is one condition: Is holding half (or any other portion) of the position 'comfortable'?  The answer may be 'yes' when half the risk has been removed.  However, if you hate holding this, then don't.  The potential reward is obvious when expiration is near.  However, recent trading tells us that this call spread can be ATM in a single day.  Only you know how queasy that makes you.

This is not 'better' than shutting down the trade.  It is making the same trade in half the size.  In other words, I don't recommend worrying about the difference between these two choices.

If you decide to buy back the Nov call spread, then the next decision is 'how many to buy.'

3) Buying the 750/760 call spread is viable.  If you prefer to hold a position in the front-month options, then this is a good compromise choice.  It reduces risk, and that's the primary objective when making an adjustment.  The problem is that 10 points is not much protection.

How to decide on this alternative:  Cost.  Are you willing to pay the price required to gain 10 points of protection, when you may be forced to close the trade in a few days?  This is a difficult decision. However, it's one that you want to learn to make in a matter that suits your needs – because this situation is going to happen again

4) NO.  There is no praying in options trading. 

Krw_theres_no_crying_in_baseball_shirt-p235755374894111485uyeb_400

One of the problems with exiting when 'pray and hold' was considered and dismissed is deciding how much worse you will feel if this spread moves to it's maximum value. Compare that with how much worse you will feel if you exit and the market reverses.  It may seem foolish to be concerned with this comparison, but psychological factors are important to a trader.  You do not want to destroy your confidence, but neither should you be willing to take more risk than is appropriate.

It's best when you can make your choice and then ignore what might have been.  Not everyone can do that.

I am NOT telling you to exit, but do not shut your eyes.  Make a reasoned decision.  If that decision is to hold, then that is never a final decision.  You will be facing the hold/close decision several times every day – for as long as you hold this position.

5) Once again, if you cover the 750 calls and keep the 770s, you have a choice as to which options to sell.  And how many to sell.  There is nothing special about 'half' other than it's a middle of the road decision.

The specific trade mentioned leaves you short the Nov butterfly. 

6) I like this idea as a general method for reducing risk.  It provides major protection. 

There are two problems. 

  • The first is cost.  Are you willing to pay the cost?  That's why most traders who buy the 750's prefer to sell something against it to reduce cost.  (And if you choose to sell the 770s then you are closing some spreads)
  • Second: Analyze the remaining position.  It's a front-month back spread.  You own more calls than you are short and thus, cannot be hurt with a gigantic upside move.  However, a rising market can kill you when time passes and the value of your 770s disappears.  As 'good' as this trade (buying some 750s) looks, it's vital that you examine the new position and be certain you are happy to hold it.  I prefer making this trade when dealing with options with a longer lifetime.

Right now the 750s don't cost a bundle, and covering some of them makes the risk graph look much better.  But it does give you that back spread.

Future consideration:  Consider a kite spread.  Buy one (or more) 740s or 750s and sell 2 or 3 of a farther OTM call spread.  Perhaps 780/790 – although that is probably too low priced to consider when time is so short.

7) You covered the major possibilities.  Almost any position that picks up positive delta and some gamma is a good idea here.  However, if you plan to hold this position into expiration week (or to the bitter end) be absolutely clear about the fact that the 770s will most likely cease to serve any purpsoe other than to limit losses.  And those losses can be substantial. 

Conclusion

The big decisions remain: 

  • How much are you willing to spend to 'defend' this trade? 
  • Is it worth defending? 

It's a personal decision and I cannot tell you how to play it.  Honest I can't.  I don't know enough about you, your investment goals or how much risk you are willing to take.  I don't know if you are 65, using your retirement money or 25 using extra cash.

I recommend closing if you are seriously considering that possibility. 2nd choice, buy 750/760 spread – but not if price is above $5.  If these were Dec options, I'd recommend buying some 750 calls.

If you choose to hold, monitor closely.

Remember your goal:  You are seeking to earn money over the longer term, not only in the Nov 2010 expiration cycle.

829

Lessons_Cover_final    

$12 in .pdf format


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Adjusting iron condors: Choosing among the alternatives

Mark,

Making the "right" adjustment, at the "right" time is, by far, the most difficult part of trading iron condors, as far as I am concerned. In my real trading, the only type of adjustment I dare try is to close part of (or all) the position or roll over. All other types of adjustments seem too difficult to manage for me.

Most probably I am asking too much but , if not, and if other visitors of your blog also find it helpful, may I suggest that for a period of one or two weeks, you set up a simulation game where every day you give us a specific position (IC) and the necessary data (price of underlying, volatility, the Greeks etc) and we are asked to make a decision whether we need to adjust or not and if yes what strategy we choose, and then, the next day you give us your own proposal. I fully understand that everybody has his own comfort zone but it would be a great opportunity to see in practice how all the different adjustment strategies are used and why.

If this is not realistic, is it possible to publish in "Expiring Monthly" a new "Follow that trade" like you did last March?

Thank You

Dimitris

***

It's not realistic because of the huge amount of time required.

However, what you ask is not nearly as beneficial as you may believe it is.  Asking for the greeks?  Isn't that easy enough to do yourself?  However, that's not the point.

As a rookie, you cannot always expect to read about something and immediately put it to use.  Sure, that happens part of the time, and one example is becoming aware of the risk associated with trading too much position size.

However, not everything is so easy.   Adjusting iron condors is complex.  There is much to understand.  You cannot expect to examine a few example and then know what to do.

 

Your job

You have two main tasks: understand the adjustment method and then practice.

Understand:  Think about the reason for making an adjustment of the type under consideration.  Decide if it makes sense to you.  Try to guage the amount of risk reduction to be gained vs. the cost.  Compare with alternatives.  Decide if the whole deal fits within your comfort zone.  When you find something suitable, it's time to go to work.

Practice:  Use a paper trading account.  There's more detail on this idea below.

When

You know that I have no idea whether you should adjust when the underlying is 5% OTM, 3%, 1% or any other number.  How can I know your tolerance for risk or your investment objectives?  Or just how much you understand and how much of a beginner you are.  Each of these items, and much more must be considered when adjusting an iron condor,  Remember that there is no right answer.  There is merely something that is good for you, and hopefully you choose something very good, or even 'best' for you.

Then if you decide to adjust, I don't know if you should exit, reduce by 10 to 30%, buy a debit spread, buy a kite spread, roll, etc.  I'll go further:  If I were to tell you what to do, and not teach you how do make that decision for yourself, then I would not be fulfilling my goals. No one knows what you should do. 

I have no idea what is right for anyone but myself.  Even then I may have a difficult time making a decision.

 

My job.

I cannot show you what to do.  What I can do is offer a list of suggested strategies and try to explain why each may be a good idea, depending on conditions.  I can be certain you recognize the risk involved.  That's all I can do.

If you cannot make a good choice from the information – and I understand that as a rookie it's far from easy – then you must practice.  You suggested that I undertake a specific task.  Instead, you do it.

Each day for a week, open a new iron condor in a paper-trading account.  Each new IC should be require an immediate adjustment. Because you don't know 'when' to adjust, try this.  Open the trade based on this assumption:  It was a good, netutral trade at one time,  but now the calls (or puts) are 2% OTM. It does  not matter how much premium you collected.  It does not matter how long ago you made the trade.  Today the position is uncomfortable for you to hold.  Thus, an adjustment is in order.

Pick one adjustment method.  If you don't know which to choose, buy some credit spreads.  Guess how many.  Guess which stirkes – based on what I have previously suggested.  Try to be comfortable with the cost.

Make an adjustment.  Follow the trade.  Determine how well you like the adjustment method being tested.  They try again with another straegy.
 

Follow the trades.  Record your thoughts and collect data.  Gain experience.  That will be far more useful to you than reading my opinion on specific trades.  My objective is to teach you to think for yourself.  I know that as a beginner, you want to learn everything NOW,  That is not going to happen.  You must have some patience and learn at your own speed.  Here, practice trades offers the best learning experience.

Over several months you will collect much data and have many entries in your trade journal.  Some trades will be comfortable for you, some will not.  Be certain to record which adjustment types fall into which category. 

Among the comfortable trades, try to decide which seems to work best for you.  This is not to be determined by which makes (or save) the most money, but that is one consideration. 

Use that startegy as your primary adjustment method, but at the same time, continue the paper trading to gain more experience with other iron condor adjustment methods.  It's an ongoing proposition.

You may want to view my Oct 12, 2010 one hour webinar at TradeKing on this iron condor adjustments.

A lengthy example may be educational, but it's not a substitute for doing the work yourself.  I'm here to help or offer guidance.  But this request is more than I can handle

822

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Recent Iron Condor Trading Activity

Iron condor traders have faced some interesting decisions as the market continues to rally.  Those who adopted very bullish stances have fared well.  Those who trade market neutral iron condors have faced adjustment decisions.

I understand that my personal trading results differ from yours, however we may have faced similar decisions.  This is how I'm currently situated.

I own RUT iron condor positions with Nov and Dec expirations.  I own a very small January position because I decided to save my free margin for position adjustment, rather than for making new trades.

Each trade was initiated with a minimum premium of $300.

a) I bought all of my Nov put spreads when they became available at $0.15 and $0.20 per spread

b) I've already covered some Dec put spreads at the same prices

c) Not predicting, but fearing a large market selloff, I did not open fresh put spreads when covering those cheapies.  In retrospect, that has cost real cash, but it's not my style to sell new spreads when covering the original trades.

This (idiosyncrasy?) violates the principle of remaining delta neutral.  Thus, I have been trading with short delta as the market has been rising.  To avoid large losses in the rising market, it's necessary to stay ahead of the game and adjust positions.  In some situations, it pays to exit the trade and take the loss as the adjustment.

d) Thus, the bulk of my activity has been concentrated on protecting my call spreads.

Here are two sample (the volume mentioned below represents the lowest common denominator, not the actual trade volume) trades:

i.  Kite spreads. Here is one example

Buy one Nov 710 call; sell three 740/750 call spreads

This provides a much better upside, if the market surges.  It adds current + delta and gamma.  That's all good.  However, if the whole position is held into expiration week, the negative gamma becomes worse near RUT 740. 

This type of kite allows for the sale of four 740/750 spreads, but I'm selling only three to reduce risk

This trade was made when RUT was near 690

ii. Buy one Dec 730/740 call spread;  Sell two Dec 760/770 call spreads.  Traded when RUT was near 710

This type of trade is not appropriate for all.  It works under two conditions.  The first condition is that your account is not already exposed to major risk.  By that I mean that current risk – before and after the above trade is made – is within your comfort zone.

It is a poor risk management technique to convince yourself that although the 730 strike appears to be vulnerable – that 'surely the 760's are safe.'   When the market moves as it has been moving, you never know how far the move may extend.  There is no sense making predictions. 

Because I have extra room (by choosing not to open January positions), I'm using some of that extra margin (and risk) availability to make this trade.

Iron condor traders may choose among many types of trades to reduce risk,  Tomorrow I'll discuss some possibilities.

820


 

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Establishing a Maximim Loss for a Trade

Hi Mark

I know you always refer to the comfort zone to decide when to exit a losing trade, but to me, that concept is too vague.

If possible, I'd like to know if there is some ratio that allows the approximate calculation of the maximum price you can repurchase a spread (considering the other half of the iron condor is cheap) when the market is attacking the strike price.

Sorry to be insistent, but I have the idea that to be successful in long term, your losses   shouldn't be too big.   The underlying price usually touches one of the short strikes of the iron condor when you open a new position every month.

Anyway I'd like to know what is the amount you consider as the limit to repurchase one spread – if threatened out of your comfort zone -  to compensate with good trades.   I don't need you to say a particular number, I'm asking about the way of calculating the maximum losses to benefit in long term.

Yours, Antonio

 ***

Antonio,


I re-worded a portion of your question for clarity.  I hope you don't mind.

I truly have no good reply, but will offer the following advice:

Let's assume I make an almost identical iron condor trade every month.

There is no easily calculated set number that represents my maximum loss.  Here are some reasons:

1) If I trade one 10-point iron condor and collect $100, I can lose as much as $900.

If my plan is to make $100 most of the time, I cannot afford to take a loss of $900, even if it occurrs only once per year.  The remaining profit would be too small.  So far I know you agree.

Considerations

I must set my maximum loss at a price that takes into consideration the following:

  • If I exit when the price reaches $300, I will never lose more than $200 per trade
  • If I exit at $300, I will not collect my $100 profit as frequently
    • I cannot know in advance how often my spread will reach that $300 exit price
    • I cannot know, in advance, how often to expect to earn my $100
  • I must gather data by paper trading and make this trade many times before I know the best exit price to choose.

    • This can be done, but it takes time and patience
    • Simultaneously, I would experiment with different exit prices
    • One year's worth of data may be enough to begin trading with real money, but I would want to continue the paper trading experiment to collect more data.  I may discover that $300 is not a good exit price.


2) If I collect $350 for my monthly iron condor, I will earn the maximum $350 less often than I would earn the $100 above. I still must know how often this trade will be successful.  I cannot use probability statistics because I don't know how often the iron condor will reach my exit price. 

If I decide to cap losses at the same $200, that means I would not allow the position to move beyond $550. Without a bunch of trades as history, I don't know how often to expect to exit, nor do I know how many times per year I would earn my $350 (or less if I decide to exit early at a low price)

3) Next consider this additional problem that must be considered to get the reply you want.  How much of the exit price do I reserve for the call and how much for the put spread?  When paying $550, clearly the spread in trouble is going to eat up most of that premium , but if I don't reserve enough for the spread that is not in trouble, I'm going to be forced to pay more or else remain short that spread – with little to gain and lots to lose.

4) Next consider this.  What hapepens when the market gets very volatile.  Say -3% one day, up 4% the next and then down 5% again.  The iron condor is not in any trouble.  It has probably moved only 2% (especially if it is a broad based index).  It is far from both strike prices and you feel calm (for the moment).

However, no one else is calm and the implied volatility of the options that comprise your iron condor has increased by 15 to 20 points.  That spread you traded for $100 is now priced at $300.  You are forced to exit by your methods at a time when you are not really in trouble.

It is true that it may be wise to exit an iron condor in a volatile market.  But if you prefer to hold, what can be your excuse?  What would your new exit price be?

5) Here's another situation for which it is difficult to use a formula. If you collect $400 for an iron condor, then the maximum loss is established at $600.  Would you really want to exit any lower than that?  You surely don't want to pay $8 for that iron condor when the risk is only $200 and the potential reward is up to $800.  So how can you make an intelligent stop loss decision?  Perhaps setting it at $200 would work, but I'd be afraid of reaching that point fairly often when collecting as much as $400.  As you know, when the premium is that high, the options cannot be very far out of the money.

Rule vs. Judgment

6) If you use a rule to make these decisions, you don't have much room to exercise your judgment as a trader.  If you want such a rule, I'd suggest the following – but please understand that this is my guess. 

Exit when your loss is between $150 and $200 if you trade iron condors at approximately $1 for a 10-point spread.  If you trade near $2, I suggest a maximum loss equal to the premium or perhaps $50 higher.  If you collect $300, my guess is that $250 – $300 should be the maximum loss.

However, market conditions affect my decisions.  I don't know about yours.


A different strategy

7) How about another strategy.  Let's say you buy a butterfly or an out of the money debit spread and pay $0.50.  Isn't that 50 cent maximum loss good enough?  Or would you feel forced to exit if it drops to 10 cents?  For that last 10 cents (you would have to pay commissions, so you would collect even less), doesn't it pay to take a chance and just hold the position?  There's almost nothing to lose, and every once in awhile a miracle happens.

My point is, there is no reason to establish a maximum loss when the cost is very low.  And yes, it's a very good idea to establish a maximum loss when potential losses are too high for you. Think about that: the loss is too large for you.  What does that mean?

That means the loss is outside your comfort zone.  If that remains too vague, by all means, establish a maximum dollar amount.  Perhaps that maximum will be based on a ratio that depends on the premium collected.  Perhaps it will be based on a specific dollar amount.

I do believe this is something you must work out for yourself. 

Unless some readers have ideas or experiences to share.  I'd love to hear from you.

803

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Iron Condors, Margin Efficiency, and Trading Small Accounts

Note: The most interesting part of the discussion often occurs in the comments. If you find the post of interest, visit the blog to read the comments and join the conversation.


Hello Mark,

Thank you very much for taking time to respond to people’s questions and giving your experienced points of view.

I started selling cash covered puts and buying covered calls. I
didn’t lose money but I wasn’t very successful either, mainly due to my
inability to determine market direction and my account size, only 8k. I
realized that I needed more capital to view gains big enough to justify
the time spent doing research and follow up.

However, I then found the
great IC strategy and I fell in love quickly – non-directional strategy
and nice returns.

The only problem is that my account size doesn’t give me much room to
work with adjustments, because once the trade is open, margin locks up most of
my capital. Do you have any suggestions on what type of percentage
should I invest and what percentage I should keep for adjustments?

I
tried trading SPY with 2 point spreads, but the credit collected is not
big enough to close the position early and forces me to keep the trade
open for longer than I would want to. However, moving to bigger indexes
like SPX or NDX would mean trading 1 or 2 contracts and would not leave
room for stage adjustments, like closing 20% then 30% then 50%.

Thanks again.

Jorge

***

My pleasure, and please keep those questions coming.

1)  Compared with your former
trades, iron condors are margin friendly, but $8k is still a small account.  Not too
small, but it does limit what can be accomplished.

Don't ignore one advantage when trading small – it's an excellent time to gain experience and hone your skills.

2) 'Nice' returns are definitely available.  I must warn you that
certain markets are wonderful for iron condors, while others are
killers.  DO NOT GET OVERCONFIDENT IF YOU ARE DOING WELL RIGHT NOW. 

It's easy to state that warning, and I know it's difficult to accept – especially if you have a winning
streak going. But iron condors do not always work well.  Be vigilant.

3) My suggestion for most iron condor traders is to keep 10 – 12% cash available for adjustments. Small accounts may need a bit more ($1,500).  

I'm pleased that you recognize the importance of keeping a cash reserve.  But, this is one of
the unspoken problems when trading a small account.  Adjusting becomes a real headache.

If you choose to trade SPX (10-point spreads) in 3-lots, you will never be able to cover the 3-lot of calls and roll them to a new call spread with another expiration because that requires an additional $3,000 margin.  To make this trade, you must also exit the put half of the iron condor.

Covering the winning half is often a good move, but you may be forced into doing it, even when you feel the price is too high. 

There is no denying the fact that this is a ticklish situation:

  • Too little cash and you can't adjust
  • Too little margin and you cannot roll efficiently
  • If you want to avoid these problems, you must trade even smaller and keep more cash in reserve.  And I know just how difficult it is to do that – especially when you are earning profits.

If you do trade a 3-lot position, then you are almost forced to cover the entire iron condor when rolling.

This is a bigger
decision for you than for most traders.  Margin manipulation and
efficiency become very important when you have a small account.  Don't
do something stupid (risky) just for the sake of margin, but do be aware
when it's inexpensive to give yourself some breathing room. 

When you
'need margin room right this minute' is NOT a good time to try to exit
that low-priced, winning side of the iron condor.  I suggest setting a
price for yourself (assuming you elect to trade the big index) and buy
in the cheap spread when possible.  I enter those low bids every day,
just in case.  I fully understand why you cannot do that with the
smaller ETFs.

4) Be certain your broker does not require separate margin
for the call spread and the put spread of the iron condor (it's beyond
my comprehension, but some brokers do, and there's talk of more brokers adopting
that restriction).

When trading a small account, be certain your
broker's commissions are reasonable.  Trading is difficult enough
without giving all profits to the broker.

5) Two 3-lots are not difficult to manage, and you can have one spread in each of two different
expiration months.

If you do choose the big index, it will be far easier to pay a few nickels to exit the winning side of the trade.

6) You have one additional adjustment alternative.  The correlation between the big guy and the ETF is not 100%, but it's close enough.  If you have a 2- or 3-lot iron condor, you can adjust with a few lots of the ETF – and that's equivalent to making a fractional adjustment in the big index.  And it may not increase the margin requirement (depends on the trade).

7) Trading ETFs is much more
commission intensive.

My bottom line recommendation is to trade the big guys in 3 lots, adjust with ETFs when necessary, and see whether you find this convenient, or too messy.

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