Q & A. Closing an Iron Condor Early

Mark,

I generally open my Iron Condor positions about 10 weeks before
expiration. I generally try to close out the "good side" spread when it
gets below $0.30, and immediately open a new one at closer strikes for
an additional credit. Occasionally, like right now, 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 spread, 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.  In fact, I covered some Jan put spreads this  morning, paying 22 cents.  It was very far OTM.

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 volatile and too uncertain.  I prefer to just 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 fully invested I am.

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 (I don't like to hold any positions into expiration, and three weeks is my arbitrary close-out point).  I think of it in terms of how much cash must I pay to close.  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 would rather 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 you collected for the trade when opened – is 100% irrelevant (but see #5 below).  Whether you collected $400, $300, $200, or any other price for that iron condor, all that matters 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 consider closing.  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.

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