My Iron Condor Dilemma

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.

Addendum 

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)?

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8 Responses to My Iron Condor Dilemma

  1. PeteD 01/21/2009 at 6:12 PM #

    Hi Mark,
    I feel the same – I also have covered all my call spreads in Feb, and I will leave the put spreads open and manage them as per my rules…
    Cheers,
    Peter
    (options.freeblogit.com)

  2. Mark Wolfinger 01/21/2009 at 6:29 PM #

    We got a break today, but I only bought more calls (the last of them) at lower prices on today’s rally and volatility crunch.
    But, need more of the same to get those puts back cheaply.

  3. Russ Abbott 01/21/2009 at 11:06 PM #

    Hi Mark,
    Hi have a question about the VIX. Why is it that VIX increases and decreases more or less with the market rather than with the market’s volatility?
    For example, yesterday the market was significantly down, and VIX shot up. Today, the market was significantly up. Not quite as much as it went down yesterday, but VIX almost returned to where it started? Why are option sellers less concerned about upwards volatility than downwards volatility?
    Thanks.
    — Russ

  4. duane slyder 01/22/2009 at 5:27 AM #

    Mark,
    I closed scv positions for a profit as well. I then reduced my spv positions by half, on the 7% down day to my detriment, because of the bearish trend and to preserve what profit I make this month. I would rather be cautious with the major index supports being broken. Finally, I recreated my Feb ICs by opening more scv positions at a lower strike. We have time so I’m sitting on 350/360/520/530.
    Creating Mar ICs as well but skewing them to the downside in anticipation of the next test of Nov lows.
    Duane

  5. Mark Wolfinger 01/22/2009 at 8:35 AM #

    Russ,
    The reply appears as a post.
    Mark

  6. Mark Wolfinger 01/22/2009 at 8:39 AM #

    Duane,
    Preserving your profit is always a good idea when risk appears to be increasing.
    I agree that establishing new positions with a skew is appropriate when you have an opinion regarding market direction.
    But, I’m not adding any more Feb positions. I don’t like to be in the higher risk/higher reward near-term iron condors. I know that places me in the minority, but my comfort zone just doesn’t like it.
    Thanks for sharing.

  7. Rik Rasmussen 02/12/2009 at 4:28 PM #

    So, here I am sitting on a SPY Feb iron condor with the high side at max profit, up in the corner. I came here, selected Iron Condors and found this post (which I remembered reading a while back) which helped me as I consider what to do with this. I could hold for expiration, but as you say, “closing a winning trade – especially when there is so little profit potential remaining – suits my risk profile and comfort zone”. So, tomorrow I plan to buy back the call spread for $0.00. Then, I’ll let the put spread ride, probably to expiration.
    So, that leads to my question, will an order to buy the spread at $0.00 get filled?
    Am I thinking about all this correctly?
    Enjoying the book!

  8. Mark Wolfinger 02/12/2009 at 5:06 PM #

    Hello Rik,
    You are thinking correctly – to a point. No one will sell you the spread for zero. What would that person have to gain? Nothing.
    But, if you bid zero, sometimes a spread such as this can be filled when person A offers the call you want to buy @ 0.05 and investor B bids $0.05 for the options you own. Thus, it’s worth a try.
    Here’s where I disagree with your thinking. You have been carrying the risk of this position for awhile now. To me, that’s a problem. Closing a week or two ago for a nickel or dime would have eliminated the risk for very little cost, and might have been a good decision for you and your comfort zone. You can think about it and decide for next time.
    But – I sell call spreads and put spreads for more than $1.50 each (on average) and paying a few nickels is a no-brainer. But, if you sell them for 25 to 50 cents, then I understand why you would not want to pay anything to buy them back.
    I note that you plan to ‘let the put spread ride.’ Does that mean you are going to ignore risk and let the chips fall where they may? Isn’t there some price you are willing to pay to close the position?
    Today, to guarantee I could not get clobbered next week, I paid 45 cents to close the RUT Feb 390/400 put spread. Bad trade? Depends on how you look at it. I surely expect it to be a money-losing trade from the point of view that it will probably expire worthless. But, I no longer care. I locked in a very good month, elinimated all risk – however unlikely – that bad news appears next Tuesday and am prepared to add May iron condors when they begin trading a week from Monday. Thst suits my comfort zone. If riding those puts suits yours, then go for it.