A Little Bit Sloppy

These are certainly turbulent times for the stock market.  And as a premium seller (buyer of iron condors), this is type of market that usually results in losses.  But, I've been lucky because I followed the insurance-buying philosophy described in The Rookie's Guide to Options.

Yesterday was a very busy day.  As the DJIA rose by 300 points I was selling a few call spreads to replace the call spreads I had covered earlier, as they reached my buy-in level (I recommend covering short call spreads and short put spreads when they get 'cheap enough' for you.  My threshold is that I bid one penny for every trading day remaining before the options expire – with an upper limit of 35 cents – ok, I pay 40 cents when there are 10 weeks remaining). 

I never did sell enough – isn't that always the case?

When the market had reversed direction and was tumbling at the end of the day – to finish down 157 points – I was busy managing my put spreads.  Because I owned all those extra puts, I was in no financial trouble, but I still believe in managing iron condors as if I held no protection. 

Here's a shameless plug for my book:  The method of buying those extras is described in detail (chapter 20) in The Rookie's Guide to Options (use discount code: 3WMWRG).  Despite the fact that this method may be complicated for rookies, it's worth considering because it not only provides insurance, but on occasion (now for example) it affords profits under circumstances in which losses would be the normal result.  To read more about the book, click here.

Because I own naked long puts, I have the luxury of not closing those in the money iron condors.*  I can roll (close current position and open another) them to a lower strike or to an outer month.  I am fully protected from any major downside move.  At least for now.

*Addendum: Not covering ITM spreads is a bad idea.  Don't allow owning protection blind you to the risk.

Bottom line – I was busy with my portfolio consisting of many iron condors and neglected the small November iron condor position that has been discussed in this blog.  I now find that both the short and long puts are in the money.  Not a good situation.  If any readers copied that trade (despite my suggestion not to do so), I hope you took action.

My plan is to cover and take the loss.  If we gap down significantly, I may hold for awhile.  I don't believe it's a good idea to pay $7 to cover a 10-point spread when the markets are so volatile (the spread can easily move out of the money in a day or two and the worst than can happen is that is moves closer to $10.  The risk/reward odds favor holding – at least for now).

If I can pay a little above $5 for the puts spread, then I will close the iron condor and report the trade.  If the market gaps higher (now there's an unlikely dream) I will look to cover at a good price, even if the iron condor temporarily looks 'safe.' The bottom line is that I simply forgot this position and will take care of it when I can.  There's lots of other stuff going on.

NOTE:  If I had recommended to readers that they make the trade, I would have been watching more closely. (Another reason why I prefer not to mention specific trades.)  Nevertheless, I admit to being sloppy yesterday, by neglecting this position.

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