Getting Squeezed With Iron Condors

I just made a trade that I
thought would interest readers of this blog.

My position was short in a rising
market and I decided to move the position, just to be certain that nothing
horrible happens to me. It’s a trade I would
never make – unless I thought it necessary. But I was outside my comfort zone and becoming nervous about my
prospects. I’d like to believe the market
will turn around and head lower, making these trades unnecessary, but I have no
idea what lies ahead. Hence the
adjustment.

I was short the RUT Sep
740/750 call spread. I had already
bought in the put side of the iron condor when it reached 30 cents.

With RUT trading in the 732
to 733 range, I repurchased this call spread. Earlier, I decided what to do if I pulled the trigger on the call spread
and did not have to spend additional time making a decision.  I moved the position out to December. My alternatives using October options were unappealing,
and rather than wait more than one week for the November options to appear (as
they will, after the August options expire), I decided to trade Decembers
now. 

I bought a December RUT iron
condor (same quantity as the number of September call spreads I bought). 

Sold
the Dec 620/610 put spread

Sold
the Dec 800/810 call spread

I paid a small debit to make
this trade, but was anxious to reduce my immediate risk and probably could have
done a bit better on the prices. All in
all, I’m unhappy to lock in the loss on my September position, but my portfolio
is considerably safer, and proper risk management is the name of the game.

I really do practice what I
preach.

If you’ve had a similar
experience, feel free to share it.

54

One Response to Getting Squeezed With Iron Condors

  1. Hud 08/09/2008 at 3:44 PM #

    Hello Mark,
    After buying iron condors, I understand that people try to buy back the call spreads or put spreads when their remaining value goes down to a certain value (let’s say 35 cents). And, I understand that the logic behind this is to eliminate the potential loss should the market swing the other way.
    However, what if we were to leave those call spreads and put spreads open until we decide to close the entire iron condor?
    For example, let’s say that when XYZ is at 700, we buy an iron condor with strikes at 600, 610, 790, and 800, for a credit of $2.50. Then, as time goes on, XYZ move up to 750 and now the put spread is only worth 35 cents.
    Instead of buying back the put spread for 35 cents, how about if we kept the put spread open just in case XYZ continues up. That way, when XYZ goes high enough and we finally decide to close the entire iron condor, the put spread might only be worth 15 cents and we’ve saved ourselves an extra 20 cents. My reasoning for leaving the put spread open is that with XYZ at 750, it seems much more probable that XYZ will go the 40 points up to 790 than it is for XYZ to go down the 140 points to 610. And should XYZ trend downwards, hopefully the time-decay will reduce the value of the entire iron condor down to a point where you could close the entire iron condor for a profit.
    What do you think?
    -Hud