Iron Condors: Do I Take My Profit or Hold?

Mark,

Great post as always.

I've noticed that in the past, as here, you've
cautioned that milking a trade for the last ten cents is poor risk
management, which makes sense. But that decision seems relatively easy
to make at least in theory, if not in practice.

What about the trade that
is halfway there: say having gained 50% of the total possible profit
for a credit spread? It would seem to me that this is where the real
test of risk management lies and also the most difficult decision to
make in terms of closing or holding because this seems to be where the
most uncertainty occurs. How do you handle that decision?

Thanks,

Burt

***

Burt,

Good question.

Here's how I handle this situation.

I do not go through each of these
steps because I have done it enough times. However this is my thought
process.

1) I don't care how much profit has been earned so far on this (or any)
trade.
I know that this statement makes some readers believe I am
not telling the truth or that I am an idiot.

2) I look at the position I own right now and pretend I can exit
the trade at this price – paying zero commission.

3) Then I decide: Do I want to re-open this trade – at the same price,
and again for zero commission? Or am I happy to be out of the trade? I
consider the price, the date, the price of the underlying…You get it.
It's a new trade. Do I want it or another trade in its place?

4) It really is that simple. If I want to own it – I continue to hold
and do not exit.
If I am happy to be out, then I enter an order to exit the trade at my
price.
If undecided, I cover a portion. How much to cover depends on
the reason for my indecision. This rarely happens. I find it easy to
decide if I want the position in my portfolio. That comes with
experience.

5) Burt – this is why I consider 'do nothing' to be an active trade
decision. Sure, everyone knows buy is an active decision. So is sell
or adjust. But doing nothing is not an act of boredom or disinterest.
It's an active decision to HOLD.

737


Small_logo

, , , ,

15 Responses to Iron Condors: Do I Take My Profit or Hold?

  1. semuren 07/10/2010 at 10:54 AM #

    Mark:
    Excellent post! Here you have perfect definition of comfort zone and realistic risk management strategy.
    Best,
    Semuren

  2. Mark,
    This has to be one of the easiest and clearest thought processes for taking a profit (or a loss). I like it!
    Thanks,
    J

  3. Mark Wolfinger 07/10/2010 at 12:25 PM #

    Thanks.
    This may not work for everyone, but it is simple and logical,
    The problem for most traders is that they think ONLY in terms of original cost and current profit.
    Neither of those items is important. The ONLY decision to be made is: Do you like this position at today’s price.
    Best to you

  4. Mark Wolfinger 07/10/2010 at 12:26 PM #

    Hey J,
    thanks

  5. JB 07/10/2010 at 10:42 PM #

    Hi Mark,
    Sometime ago I think I recall you mentioning (writing actually) that with the fast moving and volatile market we’ve been seeing over the past several years that it is necessary to continuously monitor one’s positions when the market is open. I tried several different search methods but could not find anything. Am I imagining this? And/or is it something you would agree with as necessary condition for sucessful option trading?
    All the Best,
    JB.

  6. Mark Wolfinger 07/10/2010 at 11:12 PM #

    Hi JB,
    I don’t recall mentioning this specifically, but if a trader is unable to keep tabs on positions in a volatile market, then I assume (and hope) that the trader has sized the trades accordingly.
    Inability to monitor positions for possible trouble adds risk to trading. Trading fewer contracts is a reasonable way to handle that. It’s far better than using stop orders (these do not work for option traders, in my opinion).
    Of course, some traders have positive gamma and are not threatened by a significant market move. However, they are not home free becasue of the chance of missing an opportunity to make a profitable adjustment. [Flash crash comes to mind]
    When anyone (who is not a passive investor) is busy during trading hours, I hope that is taken into consideration when deciding how much money should be invested at any one time.
    JB, I believe you can be a profitable option trader without constantly watching positions, but it does add to risk and that cannot be ignored. And anyone who wants to be more than profitable, i.e., be successful, must be willing to devote the necessary time. When the markets are open is by far the most important time.
    Regards

  7. Don 07/11/2010 at 10:18 AM #

    Mark, what is your personal definition of success in IC trading represented by return %. For an account that is trading over a 12 month period what would you consider to be a good vs. superior return. And would these same numbers be representitive on a year to year basis?
    Thanks, Don

  8. amit 07/11/2010 at 10:38 AM #

    Don,
    Don’t keep targets. Minimum, if successful, is just to maintain the same purchasing power. Trying to reach targets bankrupts your brokerage account, I got through twice because of that. This time I just try to have same purchasing power, have healthy respect for market, one false move each time did me in.
    Mark,
    Great things to cut out the insightful comment into separate posts, helps in searching through google etc.
    Thanks

  9. Mark Wolfinger 07/11/2010 at 11:37 AM #

    Don, You must understand that my personal definition is very dependent on how much risk I am willing to accept. Thus, I ask: How can this answer have any value to you?
    More complete reply tomorrow

  10. Mark Wolfinger 07/11/2010 at 11:44 AM #

    Amit,
    I agree. Don;’t set targets.
    I disagree: If it satisfies you to maintain purchasing power, that is not likely to suit anyone else. Unless already wealthy, that is not a reasonable target for any investor.
    Amit,
    I find that good questions and comments make for excellent post ideas. They give me chance to express my views on how to do better as a trader, and they cover topics of interest to readers – and that’s the main goal.

  11. amit 07/11/2010 at 1:09 PM #

    Oh, I mean minimum target is to maintain purchasing power while learning along. Once in a while the account jumps up, and once in a while it goes down. An investor should strive for that minimum goal, learning how to manage risk-reward and then betting on more returns.
    Point is: asking on a month to month or year to year target when you are in such volatile markets is insane. Both longs and shorts are being made to work hard in this market. Time to fruition of our targets can change at any time. Nobody can guarantee any sort of return every year.
    A acceptable return on 12 months is just maintaining your inflation adjusted money.
    A good return might be 5-20 %.
    An excellent return might be 50+%.
    Also, even if you are well diversified, for some time all of your positions might become underwater leading to margin calls. Remember that post you talked about a few days back about mark to market nightmare? Never experienced this myself yet.
    I hope you get my point!

  12. Mark Wolfinger 07/11/2010 at 1:17 PM #

    Amit,
    I get your point.
    I think it’s tempting for traders to want to compare themselves with others. I know we agree that this serves no purpose. However, human nature sometimes demands that we be emotionally rewarded for success. people like to keep score.
    And beating others who play a similar game is one way to get that gratification. It’s the same for baseball players who want the most home runs or highest batting average. It’s the same for CEOs who want to be rewarded with the highest salary.
    Traders want to make more than other traders – even when they have no idea how much risk others are taking.
    Regards

  13. amit 07/11/2010 at 1:36 PM #

    Mark,
    Exactly, I would be hugely satisfied if and when I can live off options for a year, then two, then multiple years. I don’t care what Bill makes or what Warren makes or what you make.
    Failure has taught me not to keep score. I do admire the guys who manage to live on their own solely by their courage. To me its similar to going hunting in the jungle with spears, sure you might bring something back. There’s a period of time you will be in your prime. But there’s always the risk of a bum leg/arm, cutoff limb, or even complete destruction. Every time we go out there we have to be careful and not keep score, focus on getting some meat without losing any. 🙂 Thats very important!
    Thanks

  14. Don 07/11/2010 at 2:14 PM #

    Those are very interesting comments, thank you for sharing them! I know that everyone has different ideas, goals, rsik tolerances etc…so nothing can be that specific. My concept is that after 33 years in business Mark knows alot more than I ever will, if he considers 10,15, or X% a year that makes a difference. If that is a maintainable figure managing IC’s I doubt if I will know better, he probably had forgot more than I will know! I know that in stock Buffet looks for companies returning 15% IRR knowing that there will be 30% years and 0% years- if you took a 5 or 10 year average return on IC’s that is information that I find useful from someone who knows as much as Mark.
    Thanks again, Don

  15. Mark Wolfinger 07/11/2010 at 5:27 PM #

    Don,
    First most of those years were spent as a market maker on the floor. Thus, I learned a lot and traded in huge size, but I learned nothing about what an average retail investor should or could earn. It’s a totally different playing field.
    You may not ‘know better’ but what is important is that you may ‘do better.’ I don’t poll others and I can only go by what I see with my eyes. I know there are those who promise 10%/month, but I know they are not telling the truth.
    But what about the guy who promises to take your money and grow it by 3 or 4% per month? Is he/she lying also? I think ‘yes’
    But I don’t truly know what others earn.
    Don, statistically kind markets are kind to iron condor traders. Volatile markets are not – but that depends on just how volatile and just which strike prices you sold. There is much luck in this game. My goal is to manage risk carefully and take what I can get.
    I do not always manage risk carefully. That leads to high profits and high losses. Believe me, better to take the slow and steady route. Or at least, that’s my experience.
    The trouble with a long time average is that one huge loss makes recovery difficult. Lose 50% one year, and it takes four years at 20% each to get back to even. Large losses are long-term killers.
    Regards