When trading iron condors, one of my tactics is to cover (buy back) any short call or put spread when it becomes available at a sufficiently low price. To me, that price is approximately one penny per trading day before the options expire. Thus, today I bid 25 cents. Proviso: I don't I pay more than 35 cents and seldom allow a spread to dip below 15 cents.
Many traders consider this to be wasted money. In fact, there are iron condor traders who like establishing new trades at the prices I use to close trades. I suspect I'm leaving money on the table, but closing a winning trade – especially when there is so little profit potential remaining - suits my risk profile and comfort zone. Covering today, sacrifices the possibility of earning another 25 cents, but prevents the loss of up to $9.75 per spread. It's just right (for me) to close. Thus, I always enter bids to close these spreads at my price, and ignore the theoretical value of the spread.
So why the dilemma?
During the past week, I've been able to cover substantially all my February RUT call spreads by paying 25 cents, or less. I could make the position delta neutral again by selling new February call spreads – at lower strike prices. Or I could ignore delta and sell only enough spreads to replenish the cash used to buy the inexpensive spreads. The problem with these approaches is that a market reversal could be costly – as those newly sold calls move into the money.
I prefer not to balance the position by selling more spreads in the front month. In fact, I'd prefer to close all my February positions three or four weeks before expiation. That's not likely to occur after today's 32-point (that's 7%) drop in RUT.
The dilemma is: Do I cover my Feb put spreads, or do I hold these positions? None is threatening to move into the money immediately, but a further decline will move me out of my comfort zone.
If I do cover, I can initiate new iron condor trades. These would expire in Apr (I already own enough Mar RUT iron condors) and can be established to provide a portfolio that is much closer to neutral.
Conclusion: Covering those spreads at low prices makes good sense from a risk/reward point of view (so I'll continue). But it does leave me with a portfolio that's almost exclusively short put spreads, with few short call spreads. I'll live with that for now and look for opportunities to snare those short put spreads at reasonable prices.
Readers: Do you like the idea of maintaining unbalanced positions? If not, do you sell more spreads to replace the ones covered (most traders prefer that choice)?