Q & A I Bought Those Extra Strangles. Thank You

I recently bought your "Rookies…" book. Considering myself an experienced trader of options, I thought I'd experiment with a couple trades based on the information you provided. In late September, I took positions in November far OTM RUT and NDX iron condors while also buying one October "insurance" contract one strike inside the sold puts. First time ever for buying the insurance puts. (And, based entirely on your recommendation.) [Please call it an 'idea to consider' rather than a recommendation.]

Wow! Am I ever a believer now. I would have been in a deep, deep hole at this point had it not been for the insurance puts. Instead, I closed the put side of the RUT iron condor and sold my insurance put a few days ago for a monster profit. Kudos,
and much thanks.

Here's my question: As the Oct expiration approaches, to stay in my comfort zone, I may want to hang onto my NDX insurance put contract until the very last moment and then close it out while simultaneously closing my now extremely pricey November NDX put spread. Do I need to place an order to close my cash-settled October position or will it automatically be closed for its cash value on Friday if the market is trending down even if I don't enter a sell order?

Bob


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Bob,

Good news.  Thanks for sharing.  I'm also glad you are a believer and have done so well.

But, I want to mention the obvious (for other readers of this blog):  most of the time the insurance expires worthless and reduces profits.  To me, that's just fine.  Insurance is not free.

Every once in awhile, you reap a bonanza.  I'm pleased it worked that way for you.


Regarding your October puts

You CANNOT trade this option on Friday.  Thursday afternoon is the last time you can sell these options.  But you don't have to sell.

If the puts finish ITM, you don't have to do anything.  You automatically receive the cash value.  That value is based on the settlement price (NDS), and the settlement price is based on the opening prices of each stock in the index (NDX in your situation).  Typically NDS is not published until many hours after the market opens and you must wait to learn how much you collect for those puts. [RLS and SET are the settlement symbols for RUT and SPX.]

If you want to close the put spread at approximately the same time that you close your long puts, then the time to exit the Nov put spread is early Friday morning.  Remember, the market often gaps open on settlement Friday, so if you hold those October puts by not selling on Thursday, they could easily move up or down in value by 20 points.  My point is: buy back the put spread when you sell the puts – it's risky to do one on Thursday and one on Friday.


Alternatives

You are paying a high price in time decay right now.  It may be a good idea do any or all of the following: (remember consider YOUR comfort zone) to:

a) Close the Oct puts now, while there is some good time premium remaining.

b) Consider moving your long puts from Oct to Nov, in anticipation of opening new Dec iron condor position. 

c) Buy in your Nov put spread and roll it down to lower strikes – in Nov or Dec.  At the same time, exit the Oct puts, per b) above.  You will not need protection at the same strike when your put spread moves to lower, further OTM strikes.  To complete the iron condor, you may want to cover your cheap call spread and sell a new call spread.  This gives you upside risk – which you don't currently have – so please be careful.

d) Take your profit and close all.  You may decide it costs too much to own insurance at this time.  This is not an easy choice to make – especially when your first attempt was so successful.

Mark

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