When it's time to adjust a position, most of the time, it's easiest to exit the trade and find another. At other times there are multiple – and all satisfactory – choices. Let's consider one example.
The market has been marching higher in recent times, so iron condor traders may be facing a difficult time with their call positions. In today's example, I'm looking at a portfolio that has two trades:
Position one: An iron condor that is in trouble. In fact, many traders would have closed this position long ago. But a good number would still be holding because the short call is still out of the money.
Index is currently priced at 850, after a nice rally
Bought 10 (not recently): Oct 720/730P; 860/870C iron condors
Position two: A pre-adjustment, bullish spread with a naked long call, bought earlier
Bought 2 Oct 850 calls; sold 8 Oct 880/890 call spreads.
Paid $1,000 total debit for this trade.
Net credit: $2,250 (10 x 325 – 1,000)
Where do things stand:
a) The October put spread was covered by paying $0.20. Cost $200
b) The 860/870 call spread is in dangerous territory and your action may depend on how much time remains before expiration; your market outlook (if you have one); your comfort zone; the size of your portfolio (is this a large or small position for you?), etc. There is no 'one-size fits all' solution.
c) The 850; 880/890 (1 x 4 x 4) spread looks great. This position never loses more than the original cash debit (if all options expire worthless), and has unlimited upside profit potential – above 890.
With your long call being ITM by 10 points and the OTM still away, this is a profitable position (at least right now).
You have two basic choices. Manage these positions separately, or combine them and use the total Greeks to help manage risk.
There's no set of rules for anyone, but I prefer to combine the trades and make a single position.
1) Cover the 10-lot of call spreads that remain from the iron condor. To pay for those spreads, sell your two long 850 calls.
The advantage of this trade is that: Your 'naked' call spread position has been moved from 860/870 to 880/890 and the number of short spreads is now only 8, rather than 10.
You used your 2-lot of long calls to good advantage. You sold them to pay for the losing side of the iron condor trade. There should still be some cash left over, after these closing transactions.
If you want to refine this position further, you can close the 8-lot 880/890 call spread to exit the trade; sell an 8-lot put spread against the calls to create a new iron condor; hold the call spread, knowing that you may be forced to close it at a higher price later.
2) This is an example of rolling down the position.
a) Cover the 10-lot of 860/870 spreads and roll down by selling 10-lots of the 880/890 spread. Your position is now short 18 of these call spreads.
b) Roll down the 850 calls
If it's more important to you to bring in some cash to offset the roll, then sell the 850/870 call spread 2 times.
If it's more important to have a less risky position, then sell your 2-lot of 850s and buy 3,4, or 5 of the 870 calls.
Rolling both positions down is likely to cost cash out of pocket, making it more difficult to end up with a profit by the time expiration arrives, but I prefer to ignore that. If your position makes you uncomfortable and you must make a change (or exit), then that takes priority over taking extra risk in an attempt to salvage a profit.
c) It's always reasonable to reduce the position and you can do that here by cutting each position in half.