Expiration and iron condors

This question arrived Friday 11/5/2010 and because it was time sensitive, was answered immediately via e-mail. 


I sold [I prefer the term 'buy' – but this is not the time to quibble. MDW] a Nov IC in early Oct which included a RUT 750/770 call spread.

Delta is climbing every day, and with 2 weeks left and 16 points between current and short strike, I'm trying to decide the best route to save this with the least amount of red.

On the potential reversal side, volume is dropping on RUT, A/D line is over 200, and RSI is through the roof. So some professional feedback would be great.

Here are my current thoughts. 1) Close down shop and possibly roll up to higher strikes next week for less credit. 2) Close half the position now, and open additional contracts next week farther out. 3) Roll all 750 shorts up to 760 which is 10 points above April high. 4) Wait it out and pray. Least likely scenario. 5) Move half shorts to 760 and the other half to 780 and keep longs open. 6) Buying back a few shorts. 7) ??????????

Thanks for your feedback.



I can provide feedback on trade ideas, but I have no clue on market direction and have nothing to say about A/D or RSI.  I believe risk must be managed by what we see and how we feel about it. 

A trader who is confident that the market will decline, may feel comfortable with your position.  But lacking a crystal ball, WYSIWYG.  And risk is what we see. 

1) Closing is often, but not always the best choice.  Howeve, it is seldom a poor choice. By closing, you avoid making a poor trade in an attempt to 'keep hope alive.'  And do not ignore the emotional benefits of getting out of, and no longer having to manage, an uncomfortable high-risk position.

I agree with your attitude: looking to minimize losses.  Refusing to acknowledge that you are uncomfortable with this position is not a winning philosophy, in my opinion.

Rolling should be a separate decision.  If you find a Dec (or Jan) trade that suits, then sure – open it after taking care of the Nov trade.  RVX is rather low right now (25), and you may not like the premium available for new iron condors, but there is no reason why IV cannot move much lower. 

2) Reducing position size is very similar to exiting the entire trade. If you cannot quite get yourself to exit, then this is a good compromise.  However, there is one condition: Is holding half (or any other portion) of the position 'comfortable'?  The answer may be 'yes' when half the risk has been removed.  However, if you hate holding this, then don't.  The potential reward is obvious when expiration is near.  However, recent trading tells us that this call spread can be ATM in a single day.  Only you know how queasy that makes you.

This is not 'better' than shutting down the trade.  It is making the same trade in half the size.  In other words, I don't recommend worrying about the difference between these two choices.

If you decide to buy back the Nov call spread, then the next decision is 'how many to buy.'

3) Buying the 750/760 call spread is viable.  If you prefer to hold a position in the front-month options, then this is a good compromise choice.  It reduces risk, and that's the primary objective when making an adjustment.  The problem is that 10 points is not much protection.

How to decide on this alternative:  Cost.  Are you willing to pay the price required to gain 10 points of protection, when you may be forced to close the trade in a few days?  This is a difficult decision. However, it's one that you want to learn to make in a matter that suits your needs – because this situation is going to happen again

4) NO.  There is no praying in options trading. 


One of the problems with exiting when 'pray and hold' was considered and dismissed is deciding how much worse you will feel if this spread moves to it's maximum value. Compare that with how much worse you will feel if you exit and the market reverses.  It may seem foolish to be concerned with this comparison, but psychological factors are important to a trader.  You do not want to destroy your confidence, but neither should you be willing to take more risk than is appropriate.

It's best when you can make your choice and then ignore what might have been.  Not everyone can do that.

I am NOT telling you to exit, but do not shut your eyes.  Make a reasoned decision.  If that decision is to hold, then that is never a final decision.  You will be facing the hold/close decision several times every day – for as long as you hold this position.

5) Once again, if you cover the 750 calls and keep the 770s, you have a choice as to which options to sell.  And how many to sell.  There is nothing special about 'half' other than it's a middle of the road decision.

The specific trade mentioned leaves you short the Nov butterfly. 

6) I like this idea as a general method for reducing risk.  It provides major protection. 

There are two problems. 

  • The first is cost.  Are you willing to pay the cost?  That's why most traders who buy the 750's prefer to sell something against it to reduce cost.  (And if you choose to sell the 770s then you are closing some spreads)
  • Second: Analyze the remaining position.  It's a front-month back spread.  You own more calls than you are short and thus, cannot be hurt with a gigantic upside move.  However, a rising market can kill you when time passes and the value of your 770s disappears.  As 'good' as this trade (buying some 750s) looks, it's vital that you examine the new position and be certain you are happy to hold it.  I prefer making this trade when dealing with options with a longer lifetime.

Right now the 750s don't cost a bundle, and covering some of them makes the risk graph look much better.  But it does give you that back spread.

Future consideration:  Consider a kite spread.  Buy one (or more) 740s or 750s and sell 2 or 3 of a farther OTM call spread.  Perhaps 780/790 – although that is probably too low priced to consider when time is so short.

7) You covered the major possibilities.  Almost any position that picks up positive delta and some gamma is a good idea here.  However, if you plan to hold this position into expiration week (or to the bitter end) be absolutely clear about the fact that the 770s will most likely cease to serve any purpsoe other than to limit losses.  And those losses can be substantial. 


The big decisions remain: 

  • How much are you willing to spend to 'defend' this trade? 
  • Is it worth defending? 

It's a personal decision and I cannot tell you how to play it.  Honest I can't.  I don't know enough about you, your investment goals or how much risk you are willing to take.  I don't know if you are 65, using your retirement money or 25 using extra cash.

I recommend closing if you are seriously considering that possibility. 2nd choice, buy 750/760 spread – but not if price is above $5.  If these were Dec options, I'd recommend buying some 750 calls.

If you choose to hold, monitor closely.

Remember your goal:  You are seeking to earn money over the longer term, not only in the Nov 2010 expiration cycle.



$12 in .pdf format

, , , , ,

Comments are closed.