has been a discussion in this blog concerning the decisions involved when
closing a position. I do not believe
there is a single ‘best’ method that suits everyone. In an effort to share my thoughts and hoping
those thoughts will be helpful:
position should (IMHO) be closed (or
adjusted in some other way) when any of these conditions are met:
1. There is too little
potential profit remaining in the position.
2. The risk of loss (from the
investor’s perspective) is too large compared with the profit potential.
3. The risk has increased to a
level that the investor is no longer comfortable holding the position.
Note: the total dollars at risk
is not the only deciding factor. If you
trade small (one- or two-lot spreads), there will not be a lot of dollars at
stake, but the potential loss must be considered in relationship to the total
potential gain when deciding if you are comfortable with the position.
position can be considered as a
candidate for closing when:
You believe you earned sufficient profit and don’t want to risk
losing that profit.
You don’t want to increase the size of your iron condor portfolio, but
you found a new position with a better risk/reward profile. It’s often a good idea to close the current
position and move into the new trade.
promised in a previous blog,
below are some positions from my current portfolio that I’m working on closing
– today August 27, 2008. I include the
reasons for eliminating the position from my portfolio. This blog will be
published Aug 28, before 6AM.
closed last night at 720.54
expiration is 24 days in the future and October expiration arrives in 52 days.
NOTE: Sometimes I cover iron condors, but most of
the time I buy in either put or call
Trading diary, Wed Sep 27,
know I may not be able to cover the following positions at my price today, but
I still enter the orders. I’ve had some
very surprising fills in the past and there’s nothing to lose by placing bids.
1. RUT Sep 630/640 put spread.
The short put is 80 points OTM, and has a delta of
-5. That’s too risky for me to hold, if
I can bring it home for $0.20, or perhaps $0.25. There may only be a one in 20 chance that
this option finishes ITM, but there’s always the chance that it threatens to move ITM and I may be
forced to cover to protect myself against a significant loss. Right now I’m bidding 20 cents, but am prepared
to raise the bid a nickel. I intend to
bid $0.20 for the remainder of this week, and will continue to bid – never less than 15 cents, even into expiration week.
Filled. One hour before the close. Not a great trade, but I feel better and that’s important.
Note to diary: Now
have room to sell more put spreads in Oct, Nov, or Dec. I’ll collect more cash
and be able to sell options that are further out of the money.
2. RUT Sep 780/790 call spread.
In the past, I’ve avoided paying more than 25 cents
to cover any front-month call or put spread, but currently it’s much more
important for my comfort zone to minimize exposure to a big market move that
may occur prior to expiration. Thus, I’m
bidding 50 cents to cover this call spread.
One additional reason for entering this order is that my upside risk is
worse than my downside risk. I don’t
believe this spread will ever represent an emergency (delta of the 780 call is
9), but I’ll feel better to get these spreads out of my portfolio and a 9-delta
option deserves respect.
This spread is part of my experimental
iron condor, and if I can get out of one side of the iron condor at a low
price, I’m willing to do that.
Note: I am not taking a ‘bullish
leg’ with the intention of buying in the put spread on a market rally. I have no idea if the market is going to
rally. All I know is that 50 cents is not
too much for me to pay today.
the experimental spread (see below) but am still bidding because I am still
short a significant quantity of this specific spread from a different iron condor.
3. RUT Oct 590/600 put spread
I’m bidding 35 cents for this very far OTM put
spread. Here’s why:
a. I sold at a much higher
price and it’s a good profit, but this is not relevant. What’s important is: Is this position worth
b. This position has almost 8
weeks of lifetime and I can make much more than 35 cents from another
position. Thus, I’d like to get out of
this one ASAP. In fact, I covered half
of my short spreads yesterday at $0.35, but was unable to buy the rest. Hence today’s bid.
c. Bottom line: Too little remaining profit potential – less
than 5 cents per week, and to me, there’s no point in taking the risk of
something going wrong with the position when there is so little to gain.
a 2-lot. Not much, but I cannot force
anyone to sell the spread.
4. Experimental iron condor:
Sep 670/680; 780/790
This iron condor is currently (market has been open
one hour, RUT is now 730.75) offered at $2.06.
That’s a good profit (collected $3.00 to open) in a very short time. But, it’s not enough. I entered a bid of $1.90 to close the
I’m paying this much to close – to complete the
experiment. This spread feels right to
hold for at least a day or two longer.
Paid $1.90. Experiment completed successfully. Earned $110 per iron condor with $700 at
risk. Return is 15.7% in 8 calendar
days. I’m sure I could have done better,
but this is an excellent profit and best of all, this position presents no
further worries and there are more than three weeks to go before the options
don’t have any other positions that are under consideration for closing right
now, but I am constantly monitoring my portfolio, looking for opportunities to
enter orders. Although not mentioned, I
am also on the alert in case risk exceeds my comfort zone. If that occurs, I’ll cover some positions at
a loss – just to be certain my assets are protected. That is not a threat at the moment.