Iron Condor Diary: Closing a Trade

There
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:

A
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.

A
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.

As
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.

 

RUT
closed last night at 720.54

September
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
spreads.

 

Trading diary, Wed Sep 27,
2008

I
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.

NOTE:  Closed
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
holding today?

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.

Bought
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
position.

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.

Trade:
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
expire.

I
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.

72

9 Responses to Iron Condor Diary: Closing a Trade

  1. Roland 08/28/2008 at 6:49 AM #

    Great post Mark.
    There is a lot here I don’t understand.
    >>Sometimes I cover iron condors, but most of the time I buy in either put or call spreads.
    Does this mean that most of the time you only close out the leg that is going against you?
    >>The short put is 80 points OTM, and has a delta of -5. That’s too risky for me to hold
    Is it the Delta that you find too risky?
    >>RUT Oct 590/600 put spread
    Did your profit come from time decay or something else? How long were you in this one?
    Thanks for this very helpful post.
    PS: I wish there was a way to post here without having to go through the image verification each time.

  2. dave 08/28/2008 at 7:27 AM #

    how do you feel about opening condors that are wider with more time to go ? Say october expiration? Not neccisarily with the goal of actually going to october.I know there is a school of thougt that says they should never have more than 4-5 weeks to expiration.

  3. Mark 08/28/2008 at 9:18 AM #

    Dave,
    I much prefer more time. In fact, I open the majority of my iron condor positions with three months to go. Right now, I am looking to add positions in Nov and Dec (For future reference, Sep expiration is 3 weeks away).
    As far as ‘wider’ is concerned, to me that’s a comfort zone decision. I only like to use 10-point spreads. This is my reason: If I find myself holding the position longer than I prefer – if expiration nears, I feel naked short when my long, protective, option is 20 or 30-points away. Nothing wrong with wider spread, they just make me uncomfortable. But, there’s a limit. I do not consider 100- point spreads to be spreads at all.
    You can find a school of thought to support anything you want. People I respect prefer to buy iron condors that are much closer to the money than I choose. Reason: Less cash at risk. Me – I’m more comfortable with a higher probability of success coupled with being a bit further OTM. No right. No wrong. Just individual suitability.
    As far as 4-5 weeks is concerned, that’s where my experimental trade come into focus. Aiming for a quick exit, this may prove to be viable for me.
    But, front-month spreads are inherently more risky , and come with greater rewards. I prefer to be more conservative. But please understand – I don’t suggest appropriate time periods for anyone else – it’s an individual decision.
    Mark

  4. Mark 08/28/2008 at 9:30 AM #

    Roland,
    1) I close the winning leg when it gets down to my ‘low’ price. that price is roughly 5 cents per week, before expiration. I’m bidding 35 cents for some October spreads.
    2) I close losing spreads when they violate my comfort zone.
    3) It’s not the -5 delta that is too risky. What is too risky is that I can only make 20 cents by holding, but in an overnight disaster can lose $9.80. To me that’s a very foolish investment.
    In addition, options with a 5 delta do finish in the money once every 20 times. Too little reward for me to take that chance.
    4) Regarding the Oct 590/600 put spread. I’ve held this position about 6 weeks. It profited from time decay – after all, it is very far out of the money – and also from a higher market. This is the strike I would have sold when RUT was much lower. I don’t sell options that are 150 points OTM.
    Sorry about the image verification, but too many robots post messages on random blogs and that’s a nuisance to be avoided. To make it worse, I must go through the same verification to respond!! Amazing.
    Mark

  5. Roland 08/28/2008 at 10:09 AM #

    Thanks Mark. That is very helpful.
    I don’t understand what you mean by “I close the winning leg when it gets down to my ‘low’ price. that price is roughly 5 cents per week, before expiration”. Does that mean if there is 3 weeks to expiration and the trade only has around 15 cents of unrealized profit then it isn’t worth staying in the trade?

  6. Mark 08/28/2008 at 10:27 AM #

    “Unrealized profit” is not at all what I mean. That term is reserved for positions you can close NOW that have a profit of 15 cents in total profits, but the position is still open. What I am referring to is the possibility of earning a maximum of 15 additional cents profit from the position.
    For me and my comfort zone – I am willing to pay 30 cents for ANY call or put spread that was part of an iron condor position – when there are 6 weeks remaining before expiration.
    I am willing to pay 25 cents for ANY such spread with 5 weeks of time left.
    If there are 3 weeks left, I will pay 15 cents for ANY spread – no matter how far OTM. In fact, I’ll pay 15 cents with one week left.
    I have learned that trying to make the last few nickels is simply not worthwhile over the long term.
    Mark

  7. Roland 08/28/2008 at 11:33 AM #

    I really like this approach. It is quite elegant. 🙂

  8. TR 09/02/2008 at 3:39 PM #

    Mark
    Interesting responses to the questions.
    What would you suggest in a situation where the winning spread price has declined to the point where it is less than 5 cents per week but the short option on the losing spread is not threatened? And for the sake of clarity on this question let’s assume that if I close the entire position the profit will be very little.
    In this case when I buy back the winning spread for pennines, that will leave me with a single spread left, and now will have a directional bias. Should I sell another spread that is closer to the money to replace the spread I just sold to take in cash and be more market nuetral again?
    Rgds
    TR

  9. Mark 09/02/2008 at 11:40 PM #

    TR,
    1) If you can buy back the winning portion of an iron condor at a price that is ‘low’ to you, I suggest doing so. Why? Because there is so little to gain by holding longer.
    2) If you get the opportunity above, that has NOTHING to do with the other side of the position. There is NO REASON to close the ‘other’ side when you close the winning side – unless you are uncomfortable holding. I never suggested you do anything with this half of the original trade.
    3) Yes you would have a directional bias. But it’s essentially the same bias after you buy in a spread for $0.25 as before.
    4)If you PREFER to sell another spread – and if you can collect a reasonable premium – and if selling that spread gives you a position that fits within your comfort zone, then by all means sell another spread. Don’t sell that spread just to ‘do something.’ It’s tempting to ‘bring in more cash’ but it’s not free cash – there is risk involved.
    The new spread does not have to be in the same month. You may prefer to begin your next month position at this time, and complete it later.
    You may decide to sell FEWER such spreads. The theory being that you don’t want to get clobbered when the market reverses direction. Remember – when you close early, you give up very little. That’s the point of closing early.
    If you prefer to go after every last nickel, that’s not unreasonable, but it’s not for me. Is it for you? That’s your decision.
    Mark