Adjustments: Selling Puts in a Rising Market


I wanted to get your thoughts on a RUT put spread I sold yesterday [Jan 11].

A few weeks ago I sold a RUT call spread with the intention of selling
a put spread to complete the iron condor at a later date. Shortly after,
though, RUT jumped more than 20 points in less than 2 weeks and I never
got around to selling the put spread.

Monday afternoon, I became concerned that good earnings
reports could skyrocket the indices and I'd have to take a loss on my
call spread and roll it. To hedge myself, I desperately sold a put
spread for much less than I felt it was worth in the closing minutes (I
had to lower my ask price several times before it finally sold).

Do you feel it was worth selling that put spread for less than I
felt it was worth in order to balance my call spread before earnings?



This is not an unusual story.  Even traders with the best plans can have trouble sticking with those plans when a small (hopefully it's small) sense of panic is felt.

1) My biggest concern with your question is not the dilemma you state, but the phrase: 'I'd have to take a loss on my
call spread and roll it.'

a) You do NOT have to roll it.

b) Exiting with a loss is a perfectly acceptable risk management technique.  I hope you believe that this is true.

c) Rolling is a fine alternative when one condition is met.  It's a simple condition, but important.  DO NOT ROLL unless you like the new position and prefer to have the position in your portfolio.  If that condition is not met, simply exit (or otherwise adjust) and wait until you find a position you do want to own before making the trade.  As a constant roller (over a period of years) I finally woke up one day and recognized the serious errors I was making by rolling a position in an attempt to prevent a loss. 

The loss cannot be 'prevented.'  It has already occurred.  It is not essential to get back to even on this trade.  Take the loss and make money on a good trade when you find it.

2) Ask yourself this question:  If your fear is a rapidly rising index, how much extra protection did you get when selling the put spread?  Not very much, was it?  If you had been able to get a better price – perhaps even the price you thought it was worth, would those extra dimes have made a meaningful difference?

I understand that you had not yet sold any put spreads, so this was not a trade that doubled your downside risk.  But it gave you downside risk when you had none.

My answer to your question is: No.  It was worth neither the risk nor the potential reward (of course, if you collected $4 for a 10-point spread, that makes a difference.  I'm assuming you sold a spread for not too many bucks.)

3) From my perspective, it's not that you sold the spread for less than fair value that's the problem.  If the sale is a good idea, those extra dimes do not matter that much. 

But this was not a trade you needed.  It was a trade you felt you wanted.

That raises these questions:  Are you truly comfortable legging into iron condors?  Would you be better off selling the second leg as soon as you are filled on the first leg?  Or better yet, why not just trade the whole iron condor in a single order?  You may miss out on some good legs, but please ask yourself – the only person who knows the answer – whether you make enough on the good legs to make up for all those times you never get to sell the second leg – or even worse, sell it at a poor time.

My guess is that you will be better off if you forget the legs. Especially call legs.  If you are wrong and the market rises, the IV decrease makes selling a put spread much more difficult.

4) There are many adjustment methods available to a trader.  As usual, I'm not trying to tell you which is best, but I have a strong belief that the worst possible adjustment is the sale of more options to collect some cash.  I know this is a popular strategy and that some traders love it.  But perhaps there is more to their methodology than I am aware.

The cash collected is seldom enough to  provide the needed protection.  Thus, if that 'adjustment' trade works, you gain little.  And if the market reverses, you did not receive sufficient compensation for the additional risk.

5) Sometimes it's necessary to take the loss and move on.  It may not be easy to know when that time has arrived, but your upset stomach, queasiness, and general discomfort, along with a possible inability to sleep will tell you when your position sucks.


8 Responses to Adjustments: Selling Puts in a Rising Market

  1. Steve 01/15/2010 at 10:21 AM #

    Scaling in is a reasonable choice. Buy just a few lots and add within time to acquire your final position. You could add to one side or the other as things change or until your reach the level you want.

  2. Mark Wolfinger 01/15/2010 at 10:32 AM #

    Sometimes he prices get better and sometimes they get worse.
    Scaling is a good idea for many traders.

  3. Andy 01/16/2010 at 1:56 AM #

    I plan on taking your advice and next time will just sell both spreads at once… whenever the market decides to stabilize. Hopefully soon.
    Thanks to today’s activity I found myself (barely) in the green for once; I was tempted to escape by closing the condor but decided to stay in. I haven’t felt such ups and downs since playing blackjack in Vegas last year… I think trading will always feel a little like gambling to me, but hopefully with some experience I can keep anxiety out of my decision-making process.

  4. Mark Wolfinger 01/16/2010 at 9:32 AM #

    You don’t think the market is stable?
    Are you serious? Ah youth!
    It was just 14 or 15 months ago when the SPX was moving up or down by 5% EVERY OTHER DAY, on average. Now, that’s an unstable market.
    To the extent that you use money that grows when one thing happens and shrinks when another thing happens – that is gambling. However, when investing, you have opportunities to hedge effectively, exit the trade at any time, increase your monetary involvement at any time (such as, after the race has already begun). You also get to do research and gain some information that may give you a better shot at winning. There are also more strategies that simply buying a ticket a a parimutuel window.

  5. Andy 01/17/2010 at 1:58 AM #

    heh, I appreciate the “youth” euphemism, though “inexperienced”, “naive” or “headless chicken” may be more appropriate adjectives.
    It seems I have a tendency to over-rationalize the market, probably a trait common among neophytes… I wager that eventually I’ll realize most things simply can’t be predicted.

  6. Mark Wolfinger 01/17/2010 at 9:49 AM #

    Well said.
    However, most things can be ‘worried about’ anyway.

  7. Mike 01/18/2010 at 11:04 AM #

    Hi Mark,
    Thank you so much for this blog, and for your education material; it is greatly appreciated.
    I have discovered that I learn best by doing, so in trading options I am taking extremely small positions (compared to account size) and just learning to trade by trading. Please tell me if what I am doing so far is acceptable in the long run, if the desire is to grow my account size:
    I have taken several Iron Condor and several Double Diamond positions for February’s expiration (5 weeks to expiration). I have figured that I will simply close these positions at a loss if they approach my short strikes, or close them during the last week (or let them expire worthless) if they are in clear profit.
    The percentages of all these trades to expire worthless was above 60, most of them were around 70. The risk/reward, if closing out for a small loss before reaching the short strikes appears to be very good on all trades, somewhere around 1.1.
    So if I close them out at a small loss, or allow them to take close to max profit, because of the risk/reward, it seems that I will do well in the long run. This seems too simple, and I wonder if I am missing something.
    Obviously I am new, so I know I am missing a lot. I don’t even know how to “roll the position” yet, I only thought to simply close the trades if they get close to the strikes, which is far less of a loss than the max loss.
    Any thoughts you have would be greatly appreciated.
    Thank you again for this blog and education site.

  8. Mark Wolfinger 01/18/2010 at 11:29 AM #

    Excellent question and a learning opportunity for others.
    Because here is no urgency in your question, I’ll reply in a blog post. This week.
    Your approach is reasonable, but I have some suggested changes.