Q and A. Overlapping Iron Condor Positions

Hi Mark

I have been using an approach of "time diversification" with RUT iron condors (IC). Roughly every week I have been buying 1 lot of a RUT IC with
short strikes at a delta of about 10. It is very early but so far I am
happy with this approach. I closed my 2 June positions with profits of
$1.20 and $1.30 which I am happy with.

I am also fairly happy with my July positions from the perspective
that my risk curve (IB risk analyzer) is very balanced and in line with
my ambivalent view on market direction. I do however have little area
of concern that I want to ask you about, which is related to something
you somewhat predicted before I started this "time diversification"
strategy.

So here's my situation with the July RUT IC's…1) I first bought a
1 lot of 360/370/590/600. 2) Next 1 bought a 2 lot of 380/390/590/600.
3) next I bought 1 lot of 400/410/590/600. 4) Finally I bought a 1 lot
of 370/380/580/590

What this leaves me with is:

1 360/390 PUT SPREAD
1 380/390 PUT SPREAD
1 400/410 PUT spread

3 590/600 call spreads
1 580/600 call spread

My question to you is am I putting myself at significant risk with
the 360/390 PUT spread. It seems 3 PUT spread purchases have cascaded
to create a 30 point spread. My risk management game plan was to close
the position when the short strike is breached. My concern is that
buying a 360/390 could be costly when RUT is at 390.

What are your thoughts? Any suggestions? Am I over thinking this?

Rgds

TR

***

Hello TR,

One reason you are happy with this is that the markets have been kind to
recently opened iron condor positions. If you missed buying iron condors before
the big rally, as you did here, then you are doing quite well. Nice timing.

You are not over thinking this situation.

I do have a suggestion: You see a potential problem, so look for a different
risk management plan. You have plenty of time to think about alternatives, but I
would not do the 'all or none' approach of sitting tight until the strike is
breached. Not if it makes you nervous.

If you are forced to adjust your 360/390 spread, then you will have already
closed the 400/410 spread and the 380/390 will be in trouble at the same time as
the 3-lot spread.

To me that's no big deal. I am assuming that 5-lots is not too many for you
and that had you opened a single position at one time, you would have at least as
many spreads. Thus from the perspective of 'size,' I don't see too much
risk.

But if your adjustment approach is single-minded, that could be a problem.
Sometimes you must be flexible.

a) If you close 'the spread' when breached, ask yourself: What is the
definition of 'the spread.'

Originally it was a 10-point spread, now it's become a 30-point spread. Do
you feel forced to cover the 30-point spread because that's what you have, or do
you still want to close a 10- or 20-point spread? We previously discussed the
advantages of closing the wider spread in a single transaction, rather than
doing it 10-points at a time. Nevertheless, you are not forced to do it that
way.

So, to answer your question, yes, it will be costly to buy in the 30-point
spread. Perhaps the compromise is to buy the 370/390P spread, leaving the
360/370 behind.

b) Another alternative is to tell yourself that you don't like this position,
and look for the opportunity to exit earlier, by paying a bit more to exit than
you ordinarily pay. If you want to pay 20 cents per 10-point spread,
then paying 25 or 30 cents this time would be worth it to you. When you sense
extra risk, that's a time to pay a bit extra to get out of the trade. Especially
when it gets you out sooner and leaves you with a nice profit.

c) There are more alternatives.

Adjust sooner because you are more worried than normal. Consider adjusting in
stages
.

Consider paying a cash debit for a spread that cannot lose money on the
downside, but which may earn a profit. And if it loses money, then that's good
also because it means that your 360/390 spread is ot threatened. This involves
buying a single put and selling 3x as many put spreads in which the put you sell
has a strike that is 20 or 30 points lower [corrected] than the single put you buy.

Example: But one Jul 450 put and sell three Jul 420/430 put spreads. For a
lower cost, buy 1 Jul 420P and sell three Jul 380/390 spreads. Examine risk
graphs and choose the spread that suits.

I can't give you my 'best' suggestion because I don't know what that is. So
much of it depends on your style of trading. And one more point. It's great to
trade small – but trading one-lots makes adjusting difficult.

331


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