Coach Wolfinger


Hi Mark,

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.]

If
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?

Thanks

Dave

***


Dave,

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.

104

4 Responses to Coach Wolfinger

  1. Daniel Beatty 09/28/2008 at 8:55 AM #

    First things first a little jab in fun at you….
    There is no reason to use incorrect terminology. (sound familiar…lol)
    A “blog” is a website with a series of commentary from an individual or group of authors. Or it can be used as a verb to describe the action of writing a post in that series.
    The terminology you are looking for when stating “I’m turning your question into a separate blog” is “I’m turning your question into a separate post.”
    OK done with the teasing.
    I could not agree with you more and what you are describing here is risk management. You are doing the simplest of adjustments to lock in profits and reduce risk, which should be one of the goals of every trade that is placed.
    Do you just close the sold leg of the spread and let the bought leg ride till expiration in case of a reversal? For example, you have a bull put spread and the stock goes up leaving you with .10 left on the spread. Do you close the sold put leaving the bought put? Reason the bought put is not worth closing as it costs more in commissions than what it is worth and second if the stock reverses and drops in price the bought put will actually be worth something, if the stock drops enough, to close later for more of a profit.

  2. Mark 09/28/2008 at 2:35 PM #

    Thanks for sharing some of my thoughts on your blog!
    I dislike incorrect terminology, so I appreciate the correction. “Post’ it is.
    When one part of an iron condor must be closed because it has become a losing trade, I close the whole spread. I don’t keep the option I own, just in case the market reverses.
    Even when I close the profitable side of the trade, I don’t keep my long option. But that’s because I often close when my long option still has some significant value – say $1.00 and that’s too much to risk.
    But, your question is a bit different. Sure, if all I can collect for my long option is $0.05, I may hold it. If I pay $0.20 for my short with just a day to go, I surely want to sell my long for that residual $0.10. If there’s more time, and especially if my portfolio is exposed to more risk than I’d like, it’s easily worth that nickel or two to hold a very cheap insurance policy.
    Mark

  3. Daniel Beatty 09/28/2008 at 11:42 PM #

    No problem with sharing the information. We have a similar audience and so it is important for me to share with my readers, who are mostly beginning spread traders, information that is well written and covers the basics like you have here at your blog.
    I do not know if you remember what my little poke of incorrect terminology was referring. You had come to my blog in July when I had posted someone else’s opinion on selling calls against stock – correcting the terminology on a buy-write and an overwrite. I appreciated the comment and have been visiting your site on a somewhat regular basis since then.
    You have very good information here and I will be posting more of it on my blog and commenting more here. I really like what you are teaching here and how you write it.

  4. Mark 09/29/2008 at 8:16 AM #

    Thanks. Much appreciated.
    Yes I do remember. And I’m glad to finally understand that ‘post’ is the correct word. I’ve made that error more than once.
    Best regards,
    Mark