Adjusting a Near-Term ITM Iron Condor

Mark,

This is my first time here. its great to find someone with good knowledge willing to answer questions. Thanks

I have some March IC's on SPY (trading approximately 114) in trouble. 112-116 top spread.
Have adjusted by adding some March19/March31 115 calendars which gives
some limited upside protection.

Can the kite spread help protect this situation? Is it too close to
expiration? I tried different strikes and months on risk graph. Can you
suggest certain strikes and months?

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Welcome to Options for Rookies.

1) Although adjusting with calendars is attractive, and is recommended by many, I don't like them.

a) The calendar is long vega, and unless you specifically want to add positive vega to your portfolio, I suggest avoiding calendars as protection.  Trading them as stand alone positions is a different situation.

b) Calendars have little value as insurance.  Sure they help when the market moves towards the strike – as has happened here.  But if SPY moves much higher, you not only lose more money on your iron condors, but the calendar spread also loses value.  It's very limited in its ability to help your overall risk/reward structure.

2) Each investor must choose a risk management style that works for him/her.  In my opinion, waiting until the underlying is halfway between your long and short strike prices is waiting too long.  But that's my opinion.  I'm not suggesting you did anything wrong.

3) A kite spread always helps because it adds a net long option – and that single option can play a big role in cutting losses

However, the kite spread is a relatively costly insurance policy and may lose its effectiveness as expiration approaches.  That occurs when the underlying is priced near your maximum loss (116 in this example).  That combination makes kites inappropriate for your situation.  You can buy an April kite.  That will show a decent profit on a continued rally, but you can use some March gamma, not April.

For best effectiveness, the long option in the kite (long one call; short 3 or 4 farther OTM call spreads) should be on top – that means it has a strike price lower than your short call (or higher than your short put).  In this example, I'd want to own the March 110 or 111 call as part of the kite, and it's too late for that.

But, there are always other choices.

4) You need some upside protection for this position.  To me, the best alternatives, in my recommended sequence are

a) Buy a small number of March calls.  110s, 111's or 112s.  You need quantity here, and I recommend more 112s rather than fewer 110s.

b) Cover some 112/116 C spreads

c) Buy 112/114, or perhaps 113/115 call spreads

d) Cover the whole position and call it a day

5) Not every iron condor position can be salvaged.  This a strategy in which losses are inevitable, and your main task is to minimize those losses.

6) Sometimes it's a good idea to buy a small amount of protection early.  That's the appropriate time for a kite spread.

636

EM_Button Contrib Ed


2 Responses to Adjusting a Near-Term ITM Iron Condor

  1. Jeff 03/20/2010 at 10:07 AM #

    Hey Mark,
    Thanks for starting and maintaining this blog. The blog and your books are valuable resources.
    I had a question about the position described in this post. I had a similar situation with 10 April SPX 1150/160 call spread, the put spread portion of the IC already having been closed.
    My question is, if I’m going to continue holding the call spread (adjusted by buying back 3 short calls) should I start a new put spread. This probably wouldn’t
    be called a roll, but would this be a good idea? It seems that adjusting when a position goes well would be a good idea and considering the fact that I will hold the call spread a bit longer (hopefully close early april), adding another put spread position would allow me to collect a bit more premium.
    I know this specific situation leaves very little time to open a new position and I’m unlikely to open a new put spread but please consider this question in a more general sense. Adjusting a good position vs moving on to a new position in a later month.
    Thanks,
    Jeff

  2. Mark Wolfinger 03/20/2010 at 9:17 PM #

    Good question. A perpetual problem.
    Reply Monday as a separate blog post (3/22/2010)