Leaving Money on the Table

Mark,

I generally open my Iron Condor positions about 10 weeks before expiration ad try to close out the “good side” spread when it gets below $0.30. Then I immediately open a new spread at closer strikes for an additional credit. Occasionally, I have an IC that has hovered near the center of my profitable range for several weeks. I haven’t had a significant opportunity to close and replace either side, but the price of the entire position has dropped considerably. Very nice.

I’m thinking about closing both sides. Being a conservative trader, I would prefer to minimize my exposure to the vagaries of the market. I’m willing to forfeit some “opportunity profit” to lock in a gain. However, when I have a very cooperative IC with an underlying price nowhere near either the call or the put options that I sold, I have a bit of inner conflict about leaving high-probability potential gain on the table.

Here’s my question: Based on your experience, are you ever willing to close out the entire IC early? I’m visualizing a little table that says… If there are ___ weeks remaining, I’d be pleased if I can close with a ___% gain.

I suspect you’ll start with a reminder that decisions of this nature must be driven by my own comfort/pain threshold. But, I’m interested in gaining more insight into YOUR perspective on money management in the described situation.

Thanks for the excellent blog and I look forward to your comments.

Robert

Hello Robert,

OK, here’s my perspective.

1) I love the idea of closing the good side at a low price. A couple of years ago, I was willing to pay 35 cents for anything when there was more than one month remaining before expiration day. Today that’s only 20 cents.

But, I no longer sell a more expensive spread that is closer to the money. I used to do that, seeking ‘extra’ profits from my original iron condor position. I may reinstate that strategy again, but for now, the markets are too uncertain. I prefer to hold the ‘bad’ side, without further hedging (unless it meets my criteria for adjusting). I understand that this is no longer a neutral position, but the market has been running up and down – by significant amounts – and I’d rather accept less profit potential and benefit by not increasing risk. Obviously this is a comfort zone decision.

2) When initiating a position with about 10 weeks to go, I have no intention of holding until expiration. I like the idea of closing when there are about three weeks remaining, but don’t always do that because the position is not priced right: too expensive to buy, but far enough OTM that there is no need to adjust.

3) The price of your IC has dropped for two reasons (as you know): time decay, but more importantly, IV has decreased dramatically.

4) Yes, I am willing to close out a very profitable, and very well-positioned iron condor early, and ‘leave money on the table.’

To me the decision is simply this:

a) Do I want to open a new position AND continue to hold the current one? Probably not, but it depends on how much spare margin room I have.

b) How well do I like the new iron condor that I can buy right now – compared with the one I already own? The front-month position can earn money faster, but the next-month (or two) IC consists of options that are further OTM. It’s a trade-off. There is some point at which I would prefer to close and open a new position, but I cannot think of it in terms of a certain number of weeks remaining (three weeks is my arbitrary close-out point). I think of it in terms of how much cash must I pay to exit. Obviously you would always close at 60 cents, per your 30-cent closing mentioned above. I’m typically willing to pay above my minimum price when I can get BOTH sides covered at the same time. How much more I decide to pay depends on how well I like new iron condors that are available.

I really compare the two positions – new vs. current – and decide which I prefer to own today.

Basing the decision on the % gain is a big mistake, IMHO. I know I am in the minority on this, but I very strongly believe that the premium collected for the trade when – is 100% irrelevant (but see #5 below). Whether you collected $400, $300, $200, or any other price for that iron condor, all that matters now is this: Do you want to own the position at today’s price? If ‘yes,’ then it’s ok to hold. If ‘no’, then it’s time to get out. The P/L does not matter. What counts is the current risk/reward profile and how well this position (especially when compared with a new position you are considering) fits into your trading plan and comfort zone.

5) One more point. There are successful IC traders who seek a specific target profit and when that profit is earned, they close the position. (Sure you can go for another dime or two, but the point is they do not hold much longer than necessary.) There is something nice about making your target profit (alas, you cannot earn more) quickly, but you are out of the market for a period of time. That’s a BONUS. It means you met your earnings goal and have zero risk until it becomes time to begin again. Zero risk. I love that part.

923

11 Responses to Leaving Money on the Table

  1. Chris-O 03/09/2011 at 3:25 PM #

    Dear Mark,

    I have been thinking lately, If one always exits an IC early, say one month before expiry on an IC that was opened three months before expiry, is it usefull to do the following:

    As the short legs of the IC ought to be closed one month early and I want to discipline my self to do so, why don’t I select my protection, the long legs of the IC, at one month earlier expiration.

    such wings of the Condor are cheaper to buy. The wings of an IC chosen the normal way, extending to the same expiration, are mostly worthless when I sell them one month before expiration, together with buying back the short legs of the IC.

    So using less duration long legs on the IC take away any hapless free-choice to cover the entire IC and make more money?
    Looks like Free lunch = I must be overlooking something.

    1) one spread, put or call, might be too close to the money and have to be bought back at a loss or a additional wing must be bought for that side to cover a short position during this last month. Does not make sense as an argument, I want to stick to the rule of closing the short legs on month before expiration, so closing at a loss is “biting the bullit”. I definately don’t want to stick around in a high gamma last month environment with a sold option close to the money, even if it has a bought option covering to the final month.
    2) IV might have jumped on the underlying and both sold options in the IC with a month to go, have higher value than I collected. Does not matter. If IV is so high I don’t want to remain in the last month when gamma is also high. Willd swings can happen. So again, why bother buying wings on an IC that carry to the final expiration?
    Are long legs of an IC carrying to to the last expiration date worth anything, one month before expiration at a high IV?
    3) I am trying with a small position, now running until final expiration in may, at Interactive Brokers and see little effect on margin requirements. No argument either.

    Can you shed some light?

    Thanks a lot for your efforts

    Chris-O
    Holland.

    P.S. On options for Rookies premium, is the planned content difficult to organise for people in a very different time-zone than yours?

    • Mark D Wolfinger 03/09/2011 at 7:10 PM #

      Chris,
      Look for a full blog post in reply.
      Very thought provoking questions

      Thanks

  2. sandeep 03/09/2011 at 5:54 PM #

    Hello Mark,
    A couple of questions regarding IC’s. You guys talk about buying back the individual spreads for 20-30 cents. In my case I am currently holding my March RUT condor 760/770 puts, 860/870 calls. It’s in a nice position but the put spread currently is 75 cents, and the call spread is 40 cents. This is with only about a week to go, so in my case I’m not sure how realistic it is to wait for 30 cents or less. To be able to buy back the spreads so cheaply I’m assuming your strike prices must be much further out than mine, is that correct? At the current price I have made about 75% of my max profit so I’m leaning towards closing this thing out this week rather than waiting for the spreads to get cheaper.

    Also, to buy back my put spread is a lot more expensive than the call spread, even though the the short call is closer to the current price than the short put. Is that just because of volatility skew?

    Thanks,
    S

    • Mark D Wolfinger 03/09/2011 at 7:18 PM #

      Sandeep,

      The random choice of Thirty cents or twenty cents refers ONLY to an early buy-back when there is lot of time remaining and the options are so far out of the money that the spread can be closed by paying a relatively low price.

      Nowhere in the discussion was there anything remotely resembling the suggestion that the same rule applies to exiting front month options. Those are high-risk positions and are handled differently. Your job as risk manager is to be certain to exit in time (before it blows up). Your job as trader is to be certain that the price paid is reasonable. However, the risk manager is the boss – or should be.

      So let me be clear: exit those spreads when it is not comfortable for you, sandeep, to own them. I have no idea what the price will be, but in my opinion – the price is not important. This is risk management, not profit management.

      The fact that you have 75% of your profit is meaningless (at least to me). All that matter is: Do you want to hold or close at today’s price? That’s the whole story. How can it possibly make any difference at which price you made the original trade?

      Yes, that is volatility skew.

      Regards

      Exit whe

  3. sandeep 03/09/2011 at 6:14 PM #

    Also, when you talk about buying the spreads back for 20-30 cents, are you guys generally referring to an index option like SPX or RUT? That is what I am assuming, as obviously some spreads like SPY or IWM will be much cheaper to buy back in nominal terms. People often talk about about closing SPY spreads for 10 cents or less, which would translate to $1 or less when talking about SPX or RUT spreads. Would you consider that a pretty reasonable guideline to follow?

    S

    • Mark D Wolfinger 03/09/2011 at 7:21 PM #

      s,

      Yes, I am referring to a 10-point spread in a high priced underlying.
      Naturally you would not be paying 30 cents to bring home SPY spreads. The strikes are only one point apart.

      Guideline? I don’t understand what you are asking. I do not consider closing a ONE-POINT SPY spread @ $0.10 to be reasonable. I believe that is far too much to pay – unless exiting because risk demands that you do so.

  4. sandeep 03/09/2011 at 7:58 PM #

    Thanks Mark.

    “”Guideline? I don’t understand what you are asking. I do not consider closing a ONE-POINT SPY spread @ $0.10 to be reasonable. I believe that is far too much to pay – unless exiting because risk demands that you do so.”

    Yes, Mark that is exactly what I am referring to – in this example buying back that spread under 10 cents to close the position. So as I said, the equivalent thing in RUT or SPX would be buying the position back when it is under a dollar. I understand that these are just arbitrary numbers and that risk management triumphs all regardless of price originally paid for the position.

    My original question came about because for my style of trading, this March RUT IC that I mentioned above is in just about an ideal position – price is about halfway between the strikes, I’ve been holding it for 6 weeks, and expiration is a week away. So it is pretty hard to get any more ideal than this, and to try to milk the spreads down to 30 cents would probably require luck and perfect timing on expiration day (and not something I ever had any intention of doing). As we said in the SPY example, to close this position out now would be like buying back a 1 point SPY spread for 4 cents and 7 cents, which for me is something I would do even if I felt safe with my position, just to remove the risk.

    Regards,
    S

    • Mark D Wolfinger 03/09/2011 at 8:10 PM #

      s,

      Under ten cents – perhaps at two or three cents makes a lot of sense to me. But, as front-month options, I’d pay a couple pennies more – just as you would: For the purpose or removing the risk. True, closing also locks in the profit, but that is very secondary.

      Yes, risk management triumphs all.

      Agree, the current RUT position looks wonderful, time decay is rapid and those options are soooooo far OTM. Today.
      I am not saying it is right to buy them and wrong to hold them.

      I am saying that you must make the final decision based on risk, reward, and probability. Not always an easy thing to do.

      Regards

  5. sandeep 03/09/2011 at 8:15 PM #

    Mark,
    I read your response about closing the one-point SPY spread for 10 cents again being unreasonable, now I’m not sure if I understand exactly what you mean. So I’ll use a real example of a theoretical trade I might make. Right now one could sell the SPY April 137/138 call spread for 20 cents, and the short 137 call has a 0.20 delta. So if I made that trade, and at some point in the next couple of weeks SPY tanked and I could close the position out for say 10 cents I would strongly consider doing it, just to bank the gains and remove the risk, even if I though it highly likely that SPY would continue going down and I didn’t feel threatened by holding my position. So that is kind of a guideline I use and what I was referring to.

    s

    • Mark D Wolfinger 03/09/2011 at 9:34 PM #

      s,

      ‘Unreasonable’ to me may be ‘very reasonable to you.
      We each much choose out exit points.

  6. sandeep 03/09/2011 at 8:16 PM #

    Just saw your response, thanks.