Q&A. Closing a Near-Term Iron Condor in a Volatile Market

Hi Mark

I've been dabbling in iron condors for the past few months, and
paper traded for few months before starting to trade some one-lots.

I closed out my first two positions for a loss of about $1
each. In a strange and sadistic way, I'm glad about this because I
think it is teaching me that making money with iron condors is not a
"gimme", and that risk management is critical.

That being said I have a chance to make some money on a a November
RUT IC 420/430/630/640 which I opened a few weeks ago for a credit
$2.85. I closed the call spread portion today for a debit 0.20. The
current mark on the put spread is $1.40, so if I close now (assuming I
get a fill at the mark price) I will end up with a profit of $1.25,
minus commissions.

The help I need from you concerns finding my comfort zone when
trading IC's – and expiration is approaching. For my first two real money
IC trades I promptly sold when one of my short strikes was breached,
and this approach makes sense to me and seems to fit my comfort zone
(besides, it's a reasonable and easy rule to follow).

At the same time, I am well aware of your warnings on gamma getting
too large as expiration approaches (in the case that either short
strike is not breached). At this moment (RUT at 490) it seems (if I
believe IB Risk Navigator) that the delta on my RUT spread is 3 and
gamma is 0. This tells me that I am not yet facing the huge gamma risk
with 23 days to expiration.

What are your thoughts? With delta = 3 and gamma =0 should I remain
comfortable to hold the position? FYI theta is at 5 right now. At what
gamma or delta level would you start to get concerned? I realize that
this question may have to do with your comfort zone, but what I am
really trying to do is to identify my own comfort zone in terms of
delta and gamma.



As mentioned in an earlier post not getting off to a hugely successful start can be a blessing because iron condor trading is not a 'gimmie.'  In fact, it's a difficult proposition when the markets are so volatile.

Buying in that call spread may be a 'waste' of $20, but not to me.  Good job!

Regarding your CZ.  I don't have an easy answer.  You will find the boundaries of your zone as you make many more trades and decide which risks you are willing to take, and which leave you queasy.  And once you find it, it probably will change over your lifetime.

Regarding your remaining put spread, you appear to be 'safe enough' for right now – one day at a time.  RUT was less than 549 a day or two ago, and if you felt no pressure to cover your short at that time, I assume you feel ok to hold it now.  But these days, RUT can move 20 points in a couple of hours.  Be vigilant.  If you hold down a full time job, meticulous risk management is essentially impossible.

Near-term gamma

Regarding near-term gamma risk: I don't have a specific gamma that I use to make decisions, (I use gamma to manage risk for my entire portfolio), but when delta gets to 20 or 25, I'm concerned.  Especially now when that delta can move to 50 in a few minutes.  Did you notice that today's market (10/29/2008) included a 400 point DJIA drop in 10 minutes?  As another blogger pointed out, at that rate the DJIA would move to zero in less than four hours!

When to close

The two major factors (for me) in deciding whether to close at any specific time are:

a) Is this spread trading at a low enough price that I don't feel comfortable trying to earn 'just a bit more' because the risk of holding is too big?  In today's market, those relatively safe-looking options can run ITM quickly. 

OTOH, holding and collecting theta, is rewarding and it's not so easy to pay what appears to be 'a high price' to get out.  But when the spread reaches a reasonable level, I exit.  And that 'reasonable level' is higher than it used to be.

b) Is this position threatening to move ITM?  If 'yes,' then I don't continue to hold.

NOTE:  Like you, I tend to close when the strike price is breached, but that's too dangerous when dealing with front-month options.  Your spread has three weeks remaining.  It looks to me as if you have at least another day to carry the position.  After that, it's a day to day decision.

As you may recall, your original credit is immaterial to me, although I know that's not true for most traders.  I close based on risk, not on profitability. 

However, profitability is yet another factor that goes into your comfort zone discovery process.  If you plan to close based on the size of your profits, then you can decide how much you want to earn, and that can be your exit target.


2 Responses to Q&A. Closing a Near-Term Iron Condor in a Volatile Market

  1. Brad 10/30/2008 at 7:13 PM #

    I have been reading for a few weeks and want to say thank you. I hope you continue to share your wealth knowledge of options with us. I am beginning to learn IC and other spread trades. This site is very enriching. Thank you.

  2. TR 11/15/2008 at 4:57 AM #

    Thanks for your response to my question. I have been monitoring this 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.