Q & A. Did I Hold My Position Too Long? What Do I Do Now?

Questions from readers can offer learning opportunities for others.  For the past two days, I answered questions from a rookie who still has much to learn about exercising options, but is asking questions to become better informed.

Today we have a realistic, worrisome situation and the writer is trying to find the best way out of a stressful, extra risky situation.  Take a look at the questions I raise because it gives you an opportunity to learn more about yourself, your trading habits and your comfort zone.


Thanks for your response to my earlier question. I have been monitoring a position (Nov RUT 420/430 put spread – portion of an iron condor) on a day to day basis, and now, with RUT at 456 it is just getting to the point where I am starting to feel a little less comfortable. I have a couple of questions for you as I see this as a great learning opportunity…

You mentioned that you start getting concerned when delta is 20 to 25. Are you talking delta of the short put or delta of the spread? In my case the delta of the short put is 29, and delta of the spread is 6 so I am assuming you are talking about the short put, but I wanted to confirm.

What would you do in this situation and why? I realize the question is about your comfort zone, but it will help me to find mine.




Hello TR,

My reply includes a bunch of questions.  I'm not looking for a response.  Instead these are items for you to consider.

1) As you suspect, I am referring to the delta of the short option.

2) I note that you are 'starting' to feel uncomfortable.  How did you feel when RUT was recently under 440?  Or weren't you aware that happened two short trading days ago?

3) There's less than one week remaining before the options expire. 

Questions for you and your comfort zone:

a) Was there ever a point at which you could have closed this spread for a relatively small premium?  If yes, think about why you chose not to enter an order to close the position.  If 'greed' is the answer, this is not a situation in which Gordon Gekko would say 'greed is good.'

Gordon gekko

Does the remaining profit potential justify the risk of holding?  I note that this spread currently costs about $3 to close and that 'feels' like too much to pay with so little time remaining.  And that's the problem with holding positions into expiration.  It often feels as if closing the spread is so expensive, that it pays to take the risk of waiting.  And that's where extra risk comes into play.  A significant market dip can send this spread to $10 pretty quickly.  And that cannot happen with options that have longer lifetimes (gamma is much less).

I try to avoid being in these situations.  How do you feel about it?  I'm not referring to this specific trade.  How do you feel about holding positions as long as possible?  Or do you make decisions on each position independently, with no specific exit plan in mind?

b) Did you consider closing last Thursday when RUT rallied to almost 500 and RVX (volatility index for RUT options) declined by more than 10%?  Why not?  Did you feel 'safe' and thus, not think about your position?

c) Are you determined to see these options expire worthless, regardless of risk?  This is a question, not a reprimand.

d) Did you ever have an exit plan in place, or are you making decisions on a day to day (or minute to minute) basis?  Was there ever a specific price at which you would definitely buy back the spread?

FYI, I would have closed this trade earlier.  However, if I were in your situation, I would not pay the required price (over $3) right now, but I'd be disappointed with the performance of my risk manager persona if I were still holding this position. 

If RUT drops below the 430 strike, I'd be likely to close by paying about $5.  Thus, my current risk is about $2 more per spread.  What's your risk?  

When we see RUT trading with a daily range of more than 10% and day to day ranges of more than 5%, no position is 'safe' enough to assume it's going to expire worthless.  And that means you will not be able to pay a very low price to cover.  I don't like being in this position, but if I were, I'd be willing to take the risk (another $2 per spread) of holding.  But, as you said, you must make your own decisions.

4) This is a difficult situation.  If I held this position, I'd be thinking along these lines:

a) If the market rallies and if there's a dip in implied volatility, I'd love to use that as a chance to get out.  What am I willing to pay?  Don't know, but 50 cents is certainly cheap – no matter how high RUT may be trading.  I'm willing to pay even more, depending on…

b) How many spreads am I short?  Is the potential loss something I can accept as the cost of doing business as an iron condor owner, or would this loss hurt?  Do I own extra puts as an insurance policy?

c) Am I still within my comfort zone?  If you are 'starting' to be concerned, it's likely you are at the border of yours.  As much as I'd hate paying $3, I must accept some point as my 'drop dead' exit.  For me that's RUT about 429 to 430. 

d ) Psychology counts also.  It's great to trade without emotions, but most people take a long time before being able to do that, and many never get there.

How badly would you feel if you paid the price to cover and then watched the market rally?  

How badly would you feel if you allowed yourself to watch this position slowly move towards its maximum value?

Are you 'monitoring' this position, or do you really own it?  For many investors, trading a position that does not have real money on the line is totally unrealistic.  For others, it's good practice.  In which group are you?  Be honest with yourself.

Once I make my adjust/no adjust decision, I don't have the time to be concerned with whether it was a winning or losing decision.  I have an entire portfolio to manage.

I believe that a decision is 'good' if I act in a way that is most likely to produce profits and reduce risk over the longer-term.  I don't try to keep score on how those decisions worked.  Keeping score is a good idea, but you want to have lots of data points before deciding that you are 'good' or 'bad' at making those decisions.  I don't care about what would have happened had I acted differently.  In other words, to me, the real world results don't make my decision correct or incorrect.  This is my job and I'll face these decisions again and again.  I want to be right most of the time, not every time.  I want to protect my assets and must take occasional losses.  I own extra options as insurance, but sometimes that's not good enough.  That's the life of a premium seller. 

Do you agree with that philosophy?  It's a rhetorical question – but something for you to decide for yourself.  If making the 'wrong' (based on results) decision will bother you so much that it hinders your trading ability by destroying your confidence, then it's even more important to stay away from higher-risk situations.

If you would be emotionally devastated by buying and then seeing the options expire worthless, then don't cover.  Spare yourself from that feeling of devastation.  OTOH, if this spread were to result in your taking the maximum loss, how would that make you feel?  The answers to these psychological questions should be considered.

e) Thursday afternoon is the end of the line.  If this spread is still out of the money, I would NOT risk holding through Friday morning's settlement, and will be bidding to get out.  If I cannot pay my price, I'll raise my bid in the afternoon and will not allow a few extra nickels or dimes force me to hold overnight.

But, bottom line, this is not a situation in which I want to find myself.  That's my comfort zone.  I've listed some questions that will help you find your own.


2 Responses to Q & A. Did I Hold My Position Too Long? What Do I Do Now?

  1. TR 11/16/2008 at 3:57 PM #

    Hi Mark
    Thanks for an EXCELLENT response. You have given me a lot to reflect on.
    I have been watching this position every evening and had a GTC cancelled order offering 0.15. Unfortunately even when RUT was up near 550 a week and a half ago, the price was not low enough for my order to fill. I guess I should have been offering a higher price (I think at one point the mark on the spread was about 0.5 or 0.60). And yet when my short spread is more that 20% OTM with less than 3 weeks to expiry it felt like 0.50 or 0.60 was too much to pay. And I am still not convinced that I should have paid that much money to buy it back (from a long term strategy perspective, obviously in this particular case I would have been better off paying 0.50 or 0.60). But then again these are very turbulent times and maybe I should be willing to pay a lot more to cover a spread than what would be reasonable in a “normal” market. Please let me know if my thinking is off base.
    Thanks for your comments regarding closing on Thursday. One of my personal challenges is that I have a day job and I usually put in orders at night. For the time being I have decided to increase my offer on my GTC order to 0.60. Assuming that it does not fill by Wednesday (and my short put is not breached), would you recommend that I put in a market order on Wednesday night so that I get a guaranteed fill on Thursday morning?
    Thanks again for your excellent responses to my questions so far. I really appreciate it

  2. Mark 11/16/2008 at 8:05 PM #

    You are very welcome.
    You are not off base. I agree that 60 cents feels as if it’s too much to pay. And I agree that these are extraordinary times. Thus, it’s difficult to decide how much to pay now.
    This is a new experience for almost everyone, with the possible exception of those who traded in 1987 – and all you can do is make your best judgment as what to do.
    I loathe market orders. Especially at the opening of the market in the morning. It’s an open invitation to get an extremely poor fill.
    Instead, call your broker. Ask if you can enter a limit order for Thursday morning and automatically change it throughout the day by increasing the bid by (for example) 10 cents every (for example) 1/2 hour or hour. There’s no guarantee of a fill, so you can change the price or time increments to give you a better chance to fill. If you do this, be certain to ask what they charge to do this for you. It may be prohibitive.
    My idea of closing Thursday does not apply if the spread is $9 (or even $6). At that level you have more to gain than to lose by holding overnight. But paying a buck, or even two, is an insurance policy worth owning.