Q & A. Closing the Winning Side of an Iron Condor

Hello Mark,

 After buying
iron condors, I understand that people try to buy back the call spreads or put
spreads when their remaining value goes down to a certain value (let's say 35
cents). And, I understand that the logic behind this is to eliminate the
potential loss should the market swing the other way.

 However, what
if we were to leave those call spreads and put spreads open until we decide to
close the entire iron condor?

 For example,
let's say that when XYZ is at 700, we buy an iron condor with strikes at 600,
610, 790, and 800, for a credit of $2.50. Then, as time goes on, XYZ move up to
750 and now the put spread is only worth 35 cents.

 Instead of
buying back the put spread for 35 cents, how about if we kept the put spread
open just in case XYZ continues up. That way, when XYZ goes high enough and we
finally decide to close the entire iron condor, the put spread might only be
worth 15 cents and we've saved ourselves an extra 20 cents. My reasoning for
leaving the put spread open is that with XYZ at 750, it seems much more
probable that XYZ will go the 40 points up to 790 than it is for XYZ to go down
the 140 points to 610. And should XYZ trend downwards, hopefully the time-decay
will reduce the value of the entire iron condor down to a point where you could
close the entire iron condor for a profit.

 What do you



Hello Hud,

First, I like
your reasoning and agree that your idea is sound. If you decide to manage your iron condors
that way, you would get no argument from me. However, my comfort zone tells me to look at it differently. And neither of us is ‘wrong.’

 If the
underlying asset moves higher (in your example), and if you decide to close the
entire position to manage risk:

  •  Because you are probably closing the iron condor for a loss
    in this scenario, saving a few extra nickels on the put spread definitely
    lessens the pain.
  •  And if the market does reverse, you earn much more from the
    call side than you lose on the put side (at least at the beginning of the
    reversal) – and that makes the decision not to buy in the puts acceptable.

  •  Sounds like a win/win when you don’t buy in those cheap

However, there
should be some price that’s low enough
to encourage buying in those cheap OTM spreads. For me, that price is 5 cents per week, for each week remaining before
the options expire. For you it may be
only 3 cents. But at some price, there’s
so little to gain that it’s just not worthwhile to wait for the options to
expire worthless. The market does
produce surprises and cheap insurance is worth owning.

 There’s more to
consider. Let’s say XYZ does move to
750. This position is short delta. You are probably still comfortable with the
position and feel no adjustment is needed.  But if you decide to adjust the position, one
possibility is to generate additional cash by selling more credit spreads (puts
in this example).  That makes the
position closer to neutral, and the idea of buying iron condors is to adopt a
market-neutral strategy. If you choose
that option, it’s important to buy in the inexpensive spread.  Leaving extra short positions outstanding (especially
when the price is low) does not represent good risk management, IMHO. 

I take this
into consideration also: It’s good to
earn the extra 15 to 20 cents that you mentioned when XYZ moves higher, but if
I buy the cheap puts now, I’m not sacrificing much profit potential, and there
may be an opportunity to sell other puts later (rather than now) – if and when
the market reverses. The markets have experienced
much volatility lately, and I’m willing to sacrifice a small amount of extra
profit as insurance against a big surprise.

 To my way of
thinking, buying in those puts is not a crucial decision. It’s what I refer to as a ‘comfort zone’
decision. I have many iron condors open
at one time and it’s impossible to manage each one separately. Thus, I look at the risk of my entire
portfolio when I make decisions. For me,
and my complicated portfolio, it pays to cover a spread at 30 cents when there
are 6 weeks remaining (I pay less with less time). It not only allows me to survive a black swan
(unexpected) event, but it allows for the possibility of earning a profit if
something unexpected happens. In fact, a
single such occurrence may pay for a lifetime of buying in cheap short
positions. But the reason I buy those
spreads is so that I am able to sell more puts (a smaller quantity for more
dollars) and re-balance my portfolio – if it’s unbalanced. I just bought a bunch of Sep RUT puts this past
week, paying 27 to 30 cents each. In
their place I sold fewer Oct puts with higher strike prices– but which are far
enough out of the money to suit my style.  Plus I took in a good amount of cash to
provide a small cushion if the market rallies further.

 This adjustment
trade is not without risk, and is not the type of adjustment every trader
should consider. If RUT tumbles, I could
lose money on the Oct puts when doing nothing would have proven to be very
profitable. But I am not a predictor of
market direction, and I’d rather buy in cheap puts and sell fewer, more
expensive, puts. You can easily get into
trouble doing this – as
I did
with my September RUT calls.

 Covering the
cheapies suits my risk tolerance. It may
not suit yours. Plus, if you are trading
only one or two different iron condors simultaneously, it is much easier to
manage each individually.  Again, this is
not a difference of opinion as to what is ‘correct.’ It’s really a matter of making decisions that
allow you to constantly remain within your comfort zone.

Thanks for the



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