Just a quick question on something you said. You mentioned that
you buy back the option spreads [from an iron condor position] on RUT when there is .20-.25 left. [What I actually said was: I buy when it reaches my 'low' price, which is $0.01 per trading day remaining before the options expire; but I always bid at least $0.10.]
there was a sharp decline a few weeks into the position and the options
did get down to that level would you effectively turn the position into
a bull put spread [by buying in the cheap call spread]? How would you manage the remaining part of the iron condor? Or would you wait 'till the last part of the spread came
into the .25 level as well?
I'm turning your question into a separate blog post because I feel I must emphasize something I've said repeatedly:
I don't have good answers to this type of question.
There is no 'best' way to trade.
There is no 'best' way to handle iron condor positions.
I describe what I do so that you, and other readers, can consider how an experienced trader operates – and then think about whether that method feels right for you. I encourage you to think for yourself, then decide how to proceed. My goal is to teach you learn how options work and how you can benefit from using them. I am not trying to convince you that my methods are for you.
I don't claim to have all the answers. I do claim that I have learned a lot from my 32 years as a professional option trader and that I can teach you how to successfully begin an options trading career. For experienced traders, I offer insights that should be helpful. I'm your coach. I give you ideas. Some will work will well for you. You may decide to toss other ideas out the window.
Trading is a serious profession (investing is less time intensive, but still a business) in which you must think for yourself. Look at me as a teacher. I give you ideas – you make the final decisions by figuring out which ideas can place you within your comfort zone. It may take awhile to discover the boundaries of that zone. Be patient.
Now, on to your question:
I bid to close one side of an iron condor position at my 'low' price, regardless of circumstances. That suits my comfort zone. I don't want to take the risk involved with trying to earn the last few nickels. I cover the cheap spread, then consider my alternatives.
I have more than one choice. I could manage the remaining half of the iron condor as an individual call or put spread. That means I would close the position if and when it violates my comfort zone. I would also gladly close when it declines to a price I am willing to pay. Once the first side is covered at my low price, I am willing to pay a higher price to get rid of the remaining position (no need to wait for that 'low' price again) – especially if the spread expires in the front month. I've previously stated that I am not comfortable holding iron condors (or credit spreads) into expiration because of the increased risk of a disaster (due to the explosiveness of negative gamma as expiration nears). Again – that suits my comfort zone. Do you want to trade that way? Most iron condor owners don't agree with my stance and are eager to hold as expiration nears and theta (time decay) increases. Not me.
When I cover the cheap side of an iron condor, I prefer to sell new spreads to replace the ones just closed, but it's not always possible to find a suitable spread at a suitable price. Don't force the trade. Wait for a good opportunity.
NOTE: The new spread sold does NOT have to expire on the same date as the spread just covered. At least not in my zone.