Perpetual Dilemma: Rebalancing an Iron Condor Position

Hey Mark,

Thanks for starting and maintaining this blog. The blog and your
books are valuable resources.

I have a question about the position described in this post. I had a
similar situation with 10 April SPX 1150/1160 call spreads; the put spread
portion of the IC already having been closed.

My question is: if I'm going to continue holding the call spread
(adjusted by buying back 3 short calls) should I start a new put spread?
This probably wouldn't be called a roll, but would this be a good idea?

It seems that
adjusting when a position goes well would be a good idea and considering
the fact that I will hold the call spread a bit longer (hopefully close
early April), adding another put spread position would allow me to
collect a bit more premium.

I know this specific situation leaves very little time to open a new
position and I'm unlikely to open a new put spread but please consider
this question in a more general sense. Adjusting a good position vs
moving on to a new position in a later month.



Thanks.  This is a perpetual problem with no answer that applies to everyone.  But I do have an idea of how to treat this situation.

Once you cover the put spread, your choices are:

a) Sell a new put spread.  It's closer to the money than the original and provides additional premium.  It also adds downside risk when you had none.

b) Do nothing.  Consider this situation to be a 'normal' a legging out of the initial iron condor position.

c) If you believe in market neutral trading, and if you don't have a market bias (on which you are willing to wager) that the market is about to decline, then selling another put spread to get to closer to market neutral is a sound policy. 

Selling those puts allows you to be somewhat less aggressive when adjusting the call spread, but is that a good idea?  It's the call spread that threatens.  Buying three calls is an expensive proposition.  Are you thinking about potential losses on a decline, or are you counting on the market to rise?


Having no predictive powers for the market, it makes sense to be invested in positions that are not far removed from neutrality. 

At least, that's the common mindset.  This is a topic
for another time.  Tomorrow.

Your market outlook, your comfort zone, your desire/need to keep delta somewhere near neutral at all times, all play a significant role in the decision under discussion.

Then there's the psychological consideration, which I consider to be so important, that for me, this is the deciding factor when I am faced with your problem:

Consider two scenarios:

a) You don't sell the new put spread.  It turns out that the market never retreats and not selling results in  a missed opportunity.  You did not earn that extra premium when you 'knew' you should have sold the spread.  That bothers you.

b) You do sell a new put spread, the market declines and you exit that put spread at a loss.  The fact that the call spread became profitable and you were able to exit at a good price is no consolation.  You lost money on that put spread, and find it bothersome.

Which of those outcomes, if either, results in a more unhappy feeling for you?  Does either of these outcomes anger you?  Does one 'poor' result feel worse than the other?  Or are you truly emotionless and shrug your shoulders, knowing you made a good decision at the time the decision was needed?

Do not minimize this factor.  Psychology plays a big role in trading.  Some traders find a loss resulting from a specific trade type to be far more emotionally upsetting than other losses.  The reason for feeling this way is not the issue, but generally results from a condition knows as 'I should have known better syndrome.'  If you know that you may get so upset that your ability to trade efficiently is hindered, then you must take that possibility into consideration when making the trade.  Is the reward worth seeking when there is a possible 'worse than normal' outcome?

I've learned to sacrifice that potential profit (and avoid the risk) when a poor result is too upsetting.  I believe I keep my emotions in check very well, but getting whipsawed, is the situation that I avoid. Thus, I seldom sell new put spreads in the scenario described.  I'd rather pay more attention to the riskier call position and pay cash to protect it (assuming that the adjustment is a better idea than closing), rather than collecting a 'bit of premium' by selling put spreads. That's me.  I am not suggesting that you trade that way.


Comments not addressed in the reply above:

a) I'd call it rolling the trade.  A delayed roll.  Terminology is not important here.

b) Opening a new iron condor trade in a
new month is a separate decision.  If you usually carry only one
iron condor then don't do it.  Wait until this position is
closed.  If you often own more than one position, then open the new
trade when you deem it appropriate.

c) Your current position will be well
protected, if you make the specified adjustment.  It is going to be very costly.  You would own three 1160 calls and remain short seven 1150/1160 call
spreads.  This is a true 10 x 7 back spread.  Time decay is now the
enemy.  You have good protection that disappears as time passes. Consider more than the risk graph as it appears today.  Be aware of how time affects that graph.

Your risk management skills, are going to be tested in a new way.

d) One big negative is represented by the idea that you are adding a 'bit' more premium.  Is that sufficient for the risk?  This is a question, not a condemnation.

Do you consider that the trade is going well because you closed the put spread?  Do you consider that the trade is going well because you are able to adjust the call spread and still hold it?  It seems to me that this trade is  not going well.

Keep in mind that if you choose this adjustment method (buy three Apr 1150 calls), the downside is going to be an unhappy occurrence or you.

If you usually sell spreads with (for example) at a $2 – $4 premium, don't sell a put spread to collect an extra $0.50.  Sell a 'cheap' spread only if that's your normal course of action.

Do not make the mistake of believing that this put premium is 'in the bag.'  Markets do move up and down, sometimes violently (yes, not recently).  It's okay to sell a new put spread.  It's not mandatory, and if you follow the main advice, you will avoid the situation that may cause heartache.


, , , , , ,

2 Responses to Perpetual Dilemma: Rebalancing an Iron Condor Position

  1. Dimitris 03/22/2010 at 3:03 PM #

    I am not aware if you have covered the following subject (if yes, please let me know where to find it):
    Someone wants to have a portfolio with more than one IC position. Once he established his first trade (eg 5 SPY April 118/120 CALL, 112/110 PUT, with SPY @115), he wants to add a second position and then a third one.
    What is the thinking process and which data the trader has to consider, so that he can decide
    a) whether it is wise, at this moment, to add this second position, and if yes,
    b) which strike prices he should consider
    Let’s assume that he established his first trade 80 days before expiration and he wants to add another one 60-70 days before expiration and a last one 40-50 days before expiration. Let’s also assume that he wants to receive a premium of at least $100 for each IC (similar to the one mentioned above).
    I guess that he has to study the greeks for his first position, the current volatility and how SPY has moved since the first trade was established but I am not sure I understand the details.
    Many thanks

  2. Mark Wolfinger 03/22/2010 at 7:48 PM #

    I’ll elaborate on this point in a separate blog post. Please give me a couple of days