Options Trading: Insuring the Iron Condor

Here's one way to look at my recent trading activity.

I admit it.  I've had a difficult time with iron condor positions during the recent unidirectional moves of the stock market.  Yet, I also understand how owning enough insurance would have solved those problems.  I've taken care of that situation going forward (more on this below).

To make matters even worse, during the decline to the March lows, I covered almost every one of my short call spreads at very low prices (nothing more than 35 cents), leaving me with a portfolio that consisted of only short put spreads – right at the bottom.  Imagine the profit potential if the market headed higher!  Well, I imagined it, but did not believe it was possible.  Because I had covered all my call spreads, I sold new call spreads to convert my portfolio back into an iron condor portfolio.  At least I sold fewer spreads, but still, it was too many. The proverbial riches to rags story.

My current portfolio is so safe from market movement that it hardly resembles an iron condor portfolio.  It's also essentially vega, gamma, and delta (ok, I'm short a couple hundred RUT delta) neutral.  That's not much fun.

The reason I'm mentioning this is that so many investors buy at market tops and sell at market bottoms that I'm wondering whether I've fallen into a similar trap.  I now own enough extra options to eliminate market risk (for now) at today's relatively low implied volatility – ok, ok – it's low compared with recent history, but still very high on a historical basis – that I'm concerned that I may have 'bought the top.'  By that I mean: I bought strangles just when the future may show that no protection was necessary and that this is going to be one of those periods in which unhedged iron condors were extremely profitable.

But, I'm still going to stay with my safer portfolio.  I want very limited losses – and that's what I have.  My weak spot is RUT between 530 and 540 as expiration approaches because I'm long extra Jun 540s.  But for the moment, I'm going to enjoy the peace of mind that I bought.


4 Responses to Options Trading: Insuring the Iron Condor

  1. lynx 05/13/2009 at 2:22 PM #

    The last month’s “unidirectional” move was painful for me as well. By the way I like that word. I violated one of my own trading rules and paid for it. Hopefully, I will learn from my mistake and do better next time. I was testing something I learned from your site and was selling more premium than normal to aid in adjusting if need be. So the extra premium helped, I just should have never stayed in the trade for two months. If you like, you can read about it here at http://www.manandhismoney.com

  2. Mark Wolfinger 05/13/2009 at 2:57 PM #

    When we think we know what’s coming next, it’s easy to violate our rules.
    Now that I’m very well protected, I don’t expect the markets will move quite as far as they have over the past couple of months. That’s the way it goes.

  3. Dave 05/13/2009 at 9:52 PM #

    Mid-week every week I sell an iron condor no matter how wrong it feels. I try to keep it very “neutral” no matter how wrong that feels, and I tend to bring them back home w-a-y early (learned from you) which sometimes feels totally wrong too– but results have been quite nice.
    I’ve come to view any other type of market trading (except scalping) as a wild and reckless gamble… Is that typical of option traders?

  4. Mark Wolfinger 05/13/2009 at 10:11 PM #

    No. That is not typical.
    I like your disciplined approach. I like that you cover early to lock in profits and especially to reduce risk. I admire your ability to trade without a market bias – even when it feels wrong.
    I’m pleased to hear that youa re doing well. that’s always good news.
    What I don’t like is the fact that you seem to believe that iron condors have some special power. It’s my strategy of choice also, but I’m flexible, knowing that there are times to consider alternatives.
    My belief in a nutshell: It’s not the straegy that makes money. It’s your ability to successfully manage the risk of a positon.