Iron Condors: Manage Positions Individually?

Hi Mark,


I know you have a preference for sticking to a select
few indices versus trading a wide breadth of underlyings – something
I've learned the hard way works better for myself as well.

I do notice
that many of the discussions both on blogs and in the books I've read
often talk about managing individual positions, as opposed to just
managing your greeks as a book. I've generally found it much easier to
manage my positions by looking at my greeks (both on a month by month
break down and total breakdown) when I have multiple positions in the
same underlying than tracking each individual trade.

Are there any
dangers and pitfalls to my current approach? I'm not sure if I'm being
lazy and this may be one of those "whole is greater then the sum of its
parts situations". I trade primarily European style index options, so I
don't worry about being exercised if a strike is breached (as long as I'm
comfortable with my overall delta/gamma/vega).


Thanks,
Jason


***


Yes, there is a danger. At some point, bad positions should be closed
and new, better, safer positions opened to replace them.

When the strike is breached (or prior to that if you get uncomfortable
with the specific option being so 'dangerous') you cannot sit by and
watch this spread move to its maximum value.  Sure you can wait longer
than you would if this were your only position, but at some point, you
should do something.  Buy extras, roll, exit and take the loss – some
good adjustment is needed.  Exception:  If you want to gamble
(ill-advised IMHO), or if you are so sure the market will reverse
direction that you want to take the chance, it's your money.

Yes, your total deltas are fine.  Yes, it appears that losses are
minimal.  But pay attention to that gamma.  It is not your friend.

I thought the same thing in the past, and noticed that those ITM
spreads result in larger losses than expected – even with insurance in
place.  I now exit (with or without rolling) – and sell out some
profitable insurance at the same time:  that insurance is no longer
needed and I replace it with a new, less expensive kite (or other)
spread.

Yes Jason, there is more risk than is readily apparent.  You can take
more time and not panic – but you should find a way to handle those
really bad positions.

TWO NOTES:

You are never 'exercised.'  You are 'assigned' as in 'assigned an exercise notice.'

Never be concerned with being assigned when the 'strike is breached.'  Early exercise only occurs when an option is deep in the money and there is no residual time premium.  Unless there is a dividend to collect, exercising a call option any earlier than expiration, is a usually serious mistake by the option owner.

584


8 Responses to Iron Condors: Manage Positions Individually?

  1. Jared 01/18/2010 at 10:03 AM #

    I have read that if you have a 10 point wide credit spread in the RUT you should close it when you can for $.20. So by this logic we should close any 20 point spread under $.40, right? Would this be good risk management rule for a 20 point spread in the RUT.
    Thanks,
    Jared

  2. Mark Wolfinger 01/18/2010 at 10:10 AM #

    Not all ‘rules’ are applicable to every iron condor trader.
    Yes, closing at twenty cents makes good sense to me. But, that would not be true if you collected only 40 or 50 cents originally. Thus, such advice must be considered in the context of your own trading.
    I’m also willing to pay more than $0.20, depending on how much time remains. I’d certainly pay at least $0.25 for any March positions (it’s now 9 weeks before expiration).
    So yes, paying $0.40 for a 20-point spread is the same as paying 20 cents for each of two consecutive 10-point spreads.
    But – do pay attention to your original selling price.
    Yes, Jared. It’s a risk-reducing rule that I use, but ‘$0.20’ is a flexible number for me.

  3. Jared 01/18/2010 at 12:12 PM #

    Thanks Mark. It is a great help.
    Jared

  4. Tyler 01/18/2010 at 2:02 PM #

    Hey Mark,
    You’ve talked previously about how collars and put spreads are equivalent. Since selling a put spread and buying a call spread (same strikes & expiration) are also equivalent, any reason why you seem to mostly use put spreads as an alternative to collars as opposed to call spreads. I’m assuming it’s just personal preference, but wondering if I’m missing anything.

  5. Mark Wolfinger 01/18/2010 at 2:17 PM #

    Tyler,
    You are not missing anything.
    I prefer to sell the put spread simply because I prefer to have the cash in my account. That’s a left over habit from the old days – when interest rates were high.
    Buying the equivalent call spread (same strikes and expiration date) affords the same profit/loss profile.
    If you want to be efficient, check both spreads prior to making the trade. If you can collect $1.60 for a 5-point put spread, it’s better to buy the call spread at a price that’s lower than $3.40.

  6. Tyler 01/18/2010 at 2:24 PM #

    Great, Thanks-

  7. Mike I 01/18/2010 at 6:45 PM #

    Hi Mark,
    do you have a preference for which strategy to put on (e.g. Iron Condors or Double Diagonals) depending on volatility levels or do you stick to Iron Condors regardless of the volatility knowing that it may take longer to reach a specific profit target if volatility rises? I’m trying to decide if I should be using more than just Iron Condors in my toolbox of strategies.

  8. Mark Wolfinger 01/18/2010 at 6:56 PM #

    I’ve discussed this previously.
    Yes, current IV influences me. I am not in the ‘predicting IV game’ – but there is no need to ignore IV.
    1) When I believe IV is high enough so that I’m not too concerned about its moving higher, I trade only iron condors. For me, that’s RVX >30.
    2) If I believe IV is low, AND AM WILLING TO BET THAT IT’S GOING HIGHER then I trade only double diagonals. This does not happen often because I am seldom willing to bet on it.
    3) At all other times – such as now, when IV is sort of low by recent standards, but not that low by historical standards, I would not own 100% iron condors.
    I hedge by owning a portfolio that is near vega neutral. DD adds + vega; IC adds – vega. That makes it fairly easy to adjust vega any time you choose to do so.
    4) If you truly prefer iron condors, then 20% of your portfolio in double diagonals is a reasonable hedge.
    IV risk is easy to eliminate – if you decide that’s what you want to do.
    Thanks for posting