I received an interesting question from TR and believe it's worth sharing.
I am trying to think through the approach to closing the winning
side of the condor when it gets to less than 5 cents per week remaining.
Let's assume it is still 5+ weeks to expiration and I want to
continue to own the condor (or at least an adjusted version of it). In
this situation I am thinking that instead of first buying the winning
spread and subsequently selling a closer to the money spread, it would
be better for me to roll the winning spread closer to the money (as a
single transaction) for a credit. I am thinking this because this
approach will avoid the short term situation where I only own "one
side" of the position (I acknowledge that when the winning side is that
cheap, my original IC is somewhat "one sided" to begin with, but why
make it more so).
What are your thoughts on the pro's and cons of the above approach? Am I missing something?
That five cents per week is my comfort zone. Please be sure it works for you before adopting that idea. It's apparent to me that you already have doubts. It's important that you make trading decisions that suit you.
My thought are that you are not missing anything, but that you are worrying too much about a tiny difference. There is no real difference between:
a) Covering the cheap side when you can (I covered more than 200 call spreads over the past 2 days – mostly in December, which is more than 10+ weeks away, @ 30 cents or less) and then deciding to 'immediately' sell a new spread to replace the one you covered.
b) Entering the order as a spread.
The real question is: Which trade can be executed more quickly, or more importantly, which can be filled more efficiently (better prices). When the bid/ask spreads are as wide as they are now, it's tough to say. It depends on which underlying is being traded.
I prefer to pay that low 25 cents per call spread when the market is heading lower – that's the time when someone is likely to sell it. That's also the time when it's more difficult to sell a bullish call spread. If the market does not give me an opportunity to sell new spreads at favorable price (and favorable strike prices), then I 'wasted' those few nickels.
You obviously noticed how wide the bid/ask spreads were in this volatile market. That makes it very difficult to get a fair price when you want to enter a four-way spread. It's much simpler to leave a sitting bid or offer on a two way spread.
If it's urgent that you sell a new call spread at a lower strike to collect cash, then by all means pay up for the cheapie to get the job done. But, I must warn you that selling those new calls spreads will earn decent money when nothing terrible happens. But all you need is one sudden, sizable market reversal to wipe out years worth of profits earned by selling options that are closer to the money.
I prefer (my comfort zone) to sell the new spread where I can collect a good amount of cash and don't have to worry about going too near the current index price – and that means a more distant expiration.
As to 'why make it more so': First, the delta of the options you cover are very close to zero and the price is only a few nickels. If you are selling iron condors for $2 to $4, those few nickels don't matter. Second, when an iron condor runs into trouble, I find it's more efficient to temporarily manage the position as two separate spreads. I 'fix' the bad side, if necessary. And I bid for the winning side.
If I EXIT the bad side (i.e., buy it in without rolling, then I also want to bring home the good side and I'll pay a bit more to get it. If I ROLL the bad side, then I want to complete the new iron condor and may decide to pay up for the cheapie – allowing me to comfortably sell the new iron condor-completing spread.
There are no rules cast in stone here. If it makes you comfortable to enter the order as a spread, then by all means, do so. No single approach is guaranteed to be best.