Closing an Iron Condor Trade

From a reader:


I'm not following why you are aiming
for a specific profit target on this trade. I think it would be more
educational to follow a trade that reflects how you actually go about deciding
how to close out a trade.

 

Roland

Hi Roland,

This trade
is an experiment.

I've always managed my iron condor portfolio on the basis of its
current risk and reward. I hold positions when the prospects for making money
from today forward are attractive (compared with the risk involved); and I
close or adjust when I feel risk has reached a point that moves me out of my
comfort zone.

Why the experiment?

Holding positions into expiration is
both extra rewarding – due to more rapid time decay – and extra risky – due to the
explosive nature of negative gamma as expiration approaches. (Money is lost
more rapidly when the short option moves into the money).

As an experiment, I want to consider opening a 5-week iron condor
position, hoping to close it in two weeks (maybe 2-3 days longer) – if and when
a specified profit is reached.  I believe
this is NOT as efficient as making decisions on a day to day basis, but in
return for that lack of efficiency, I would have no position during the last
two weeks prior to expiration. That benefit is worth a great deal to me because
risk minimization is my primary goal. 

Many traders prefer to own
positions as expiration nears.  That’s
why I want my readers to find their individual comfort zones when trading
options.

I cannot decide if aiming for a specific target profit is a winning way to
trade iron condors. For now, it's a small portion of my portfolio – and I'll see
how it goes before deciding whether to add this strategy to my
arsenal of methods.

I appreciate that you believe posting a different type of real
trade – one that I manage according to my current methods – would be more
educational.  The reason I haven't done
that is because when beginners see someone's trade online, they often blindly
copy that trade.

I don't believe that’s a good idea because the trade I initiate
suits my profit objective, my risk guidelines, and my
comfort zone. I prefer to encourage readers to find trades that suit their
individual comfort zones.

But your idea has merit. I'll look for a real world iron condor
position that I am considering closing – and discuss the reasons for closing in a future blog.

Mark

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6 Responses to Closing an Iron Condor Trade

  1. Roland 08/27/2008 at 8:01 AM #

    Hi Mark,
    I can understand why you don’t want to post the details of a trade. But to hear your reasons for closing a trade, as you mention above, would be very informative.
    You seem to be a very active trader. Are there ever times when you are completely in cash?
    Thanks,
    Roland

  2. Mark 08/27/2008 at 8:17 AM #

    Roland,
    I am never in cash, and I trade almost every day. One reason is that I currently have RUT iron condor positions expiring in Sep, Oct, Nov, and Dec. Not only that, but I have at least three different iron condors (opened at different times) in each of those expiration months.
    That would make moving to cash a difficult and expensive proposition.
    As described in The Rookie’s Guide to Options, I own insurance. That means I judiciously buy extra calls and puts to prevent an overnight disaster.

  3. JB 08/27/2008 at 9:56 AM #

    Hi Mark,
    As a work around to posting a current live position you could keep daily log of your thoughts on a trade and then post the trade and the log after the expiration. Just a thought. I think I, for one, would pay better attention and would learn more from reading your thoughts each day separately.
    All the best.
    JB

  4. Mark 08/27/2008 at 10:15 AM #

    JB,
    It’s a good thought, but this is the Internet. If I post a winning trade, there’s a good chance readers will not believe the trade is real.
    I am keeping a log today of trades for which I have entered closing orders. I already have one fill and posted that trade because it was a closing transaction for my experimental trade. Tomorrow morning, I’ll post today’s diary.
    That diary does contain my thoughts on the potential trades. This may not be as effective as following a complete trade, from beginning to end, but I’ll start here and take a look at comments.
    I will post a whole trade (despite my reluctance), if I get a few more requests.

  5. Roland 08/27/2008 at 12:51 PM #

    Do the requests have to be from different people? 🙂
    I don’t want you to do something you don’t feel good about. But I would love you to post a few trades and feel good about it.

  6. Mark 08/27/2008 at 2:00 PM #

    OK,
    Let’s start with one trade. It will be in a new blog post.
    When I see something I like, I’ll open the position and post the trade.
    But it won’t happen for at least one week. Going out of town for several days.