"In re: 'the one penny per trading day' rule, does that apply for condors sold 30 – 40 days to expiration?
The rule to which he is referring is my advice to close inexpensive call or put vertical spreads when they become so inexpensive that there's too little to gain by continuing to hold them. [That's part of my plan not to carry any positions all the way through expiration.] If that advice sounds reasonable, the difficult part is knowing how much to pay when exiting the winning side of the iron condor.
For my comfort zone, I usually open new IC positions about 13 weeks before the options expire and I collect at least $300 for each. My buy back price is one penny per trading day remaining, before expiration arrives, with a maximum price of 35 cents. Because I don't want to take the risk of holding any spread, no matter how far OTM, I seldom allow a spread to decline to less than ten or fifteen cents before I buy it – even if there are only a few days until the options expire.
However, JCV asks a good question. When selling shorter-term options, the premium collected is less than my usual $3. So what price is reasonable to pay when exiting these trades to lock in a profit? If the original premium is $1 or less, then it doesn't seem right to pay 25 cents per spread to cover. That's giving up half the potential profit.
There is a large benefit when covering: risk is eliminated and the profit has been earned. And you have no residual position – until you decide it's time to play again. That's good risk management!
But, when you open a new trade, you are taking risk – for as long as you hold the position. To justify that risk, there must be a decent potential reward. My recommendation is to find an acceptable price to pay for the OTM spreads based on what's comfortable for you. I would be VERY happy to pay 30 cents for each side of a $3 IC. I don't get to do that very often, but it would allow me to keep 80% of the original premium. If you want to play the 'exit early for safety' game, I suggest trying to keep 70-80% of the original premium (thus, pay 10 – 15% of the total premium for each individual spread). NOTE: This discussion refers to the voluntary closing of a position. If the spread becomes too risky to hold, that's a very different scenario. The risky position is exited based on the boundaries of your comfort zone and your need to protect yourself from large losses.
"so if you had an iron condor with short strikes at 20 deltas, would you perhaps buy an extra 5 delta put?"
No. As I've mentioned previously, I don't believe it's a good idea to purchase options that are further OTM than the options you are already short – unless your objective is to own protection against a catastrophe. The longer you plan to hold your original iron condor, the more important it is not to own those far OTM options – because they are going to decay, and be of no use.
Assuming you decide to buy protection that expires at the same time as your iron condor, my preference is to buy options with a higher delta. If your first adjustment point occurs when the short option reaches a delta of 20 to 25, then my recommendation is to buy a small quantity of the option that's one (or perhaps two, if you are trading an index) strike prices nearer to the price of the underlying. This is what I refer to as a Stage I adjustment.
Example: if short a 600/610 call spread, buy the 580 or 590 call; if short the 450/460 put spread, but the 470 or 480 put.
These options are not cheap, but in return for paying a higher price, you know that you have a long option that works for you – if your position gets into trouble. And that's true no matter how much time remains before the options expire.
If making a one-sided adjustment feels uncomfortable, you can always buy protection for the other side of the iron condor – even if it's not (yet) in trouble.