Recent Iron Condor Trading Activity

Iron condor traders have faced some interesting decisions as the market continues to rally.  Those who adopted very bullish stances have fared well.  Those who trade market neutral iron condors have faced adjustment decisions.

I understand that my personal trading results differ from yours, however we may have faced similar decisions.  This is how I'm currently situated.

I own RUT iron condor positions with Nov and Dec expirations.  I own a very small January position because I decided to save my free margin for position adjustment, rather than for making new trades.

Each trade was initiated with a minimum premium of $300.

a) I bought all of my Nov put spreads when they became available at $0.15 and $0.20 per spread

b) I've already covered some Dec put spreads at the same prices

c) Not predicting, but fearing a large market selloff, I did not open fresh put spreads when covering those cheapies.  In retrospect, that has cost real cash, but it's not my style to sell new spreads when covering the original trades.

This (idiosyncrasy?) violates the principle of remaining delta neutral.  Thus, I have been trading with short delta as the market has been rising.  To avoid large losses in the rising market, it's necessary to stay ahead of the game and adjust positions.  In some situations, it pays to exit the trade and take the loss as the adjustment.

d) Thus, the bulk of my activity has been concentrated on protecting my call spreads.

Here are two sample (the volume mentioned below represents the lowest common denominator, not the actual trade volume) trades:

i.  Kite spreads. Here is one example

Buy one Nov 710 call; sell three 740/750 call spreads

This provides a much better upside, if the market surges.  It adds current + delta and gamma.  That's all good.  However, if the whole position is held into expiration week, the negative gamma becomes worse near RUT 740. 

This type of kite allows for the sale of four 740/750 spreads, but I'm selling only three to reduce risk

This trade was made when RUT was near 690

ii. Buy one Dec 730/740 call spread;  Sell two Dec 760/770 call spreads.  Traded when RUT was near 710

This type of trade is not appropriate for all.  It works under two conditions.  The first condition is that your account is not already exposed to major risk.  By that I mean that current risk – before and after the above trade is made – is within your comfort zone.

It is a poor risk management technique to convince yourself that although the 730 strike appears to be vulnerable – that 'surely the 760's are safe.'   When the market moves as it has been moving, you never know how far the move may extend.  There is no sense making predictions. 

Because I have extra room (by choosing not to open January positions), I'm using some of that extra margin (and risk) availability to make this trade.

Iron condor traders may choose among many types of trades to reduce risk,  Tomorrow I'll discuss some possibilities.



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14 Responses to Recent Iron Condor Trading Activity

  1. Leo 10/27/2010 at 8:36 AM #

    How do I decide on the distance between my strikes on an Iron Condor? I usually trade SPX so why would 10 point spreads be advantageous over 20 point spreads? How do you arrive at optimum distances?

  2. Mark Wolfinger 10/27/2010 at 9:46 AM #

    Hi Leo,
    This is not a crucial decision. Much depends on comfort zone. Let me explain.
    Let’s begin with a 10-point spread – perhaps the 1190/1200 Call spread.
    Let’s say you want to trade two-lots (or any multiple thereof).
    The alternative is to sell one-lot of the 1190/1210 call spread. If you choose this, the equivalent position is selling one-lot of the 1190/1200 call spread AND selling one lot of the 1200/1210 call spread. [Of course you won’t make both trades because it would be a waste of commissions and slippage].
    Thus, which do you prefer to own? Twice as many of one specific 10-point spread, or diversify a bit by owning half as many of each of two adjacent 10-point call spreads?
    From a risk/reward standpoint, there is not a lot of difference between the two plays. Please remember that if you choose the 20-point spread, you may find it preferable to make adjustments as if you owned two 10-point spreads.
    Leo – I’d suggest choosing the position that you want to own and recognize that a 40-point spread is the same as four consecutive 10-point spreads. Just be careful when choosing position size and you will be fine.

  3. Dimitris 10/27/2010 at 10:57 AM #

    What are the original IC positions that you try to adjust with the two examples?
    Thank You

  4. Scott 10/27/2010 at 4:51 PM #

    I had same question as Dimitris above? Also Mark what software do you use to model the effect of a potential adjustment to your Greeks? Are you using something special or think or swim. An article on modeling an adjustment would be great.

  5. Mark Wolfinger 10/27/2010 at 8:04 PM #

    I don’t know.
    Once I open an iron condor position, I forget that I have the position.
    I manage the position by risk. That means that I manage call risk separately from put risk. I already bought back the puts at $0.15 or $0.20 and don’t know what the strike prices were.
    I adjusted the call spreads because I believed I was short too many delta and faced upside risk.
    a) The first adjustment was made to a position that was short the Nov720/730 call spread
    b) The second was a trade where I was short the Dec 730/740 call spread – which I covered to sell twice as many Dec 760/770 call spreads.
    Dimitris – why do you care which specific strike prices comprised the put portion of the iron condor when it is very far OTM and the call portion is too risky to hold? I’m curious as to why you and Scott are interested. Perhaps I’m overlooking something important to share.

  6. Mark Wolfinger 10/27/2010 at 8:06 PM #

    I hope the answer above is sufficient.
    I don’t have good software for modeling, but I use the tools supplied by Interactive Brokers. They allow me to change the date, and that’s all I need. I can change the price of the underlying if I believe it’s necessary.
    Thanks for the suggestion

  7. Scoot 10/28/2010 at 12:02 AM #

    Mark thanks that answers my questions. I was just curious where your original call position was in relation to the kite. Not very important and as usual you missed nothing. Just trying to gauge the differential you used. Once again thanks for the response.

  8. Mark Wolfinger 10/28/2010 at 6:55 AM #

    Mea culpa. The strikes of the call spread in relationship to those of the kite – is an important consideration.
    When adding kites, I prefer to pay as little as possible and almost always choose to buy the call that is closest to the short strike. True for both puts and calls. I don’t have enough experience with these to be certain that works out best, but it does cost the least.

  9. Dimitris 10/28/2010 at 7:18 AM #

    Same as Scott said. I was interested in the call options to see the distance between the original short call strike and the strikes you chose for the adjustments.
    Your answer is clear.
    Thank You

  10. Mark Wolfinger 10/28/2010 at 7:20 AM #

    Thanks for the clarification.

  11. 10/28/2010 at 5:12 PM #

    I was curious about your put price I wanted know how much profit ie how much price has dropped, before you buy your put spread back. Do you use a % or just a set price ie .15 or .20.

  12. Mark Wolfinger 10/28/2010 at 7:51 PM #

    I’ll answer, but this is one of those things that should not matter to you. When the profit potential becomes so small that it’s not worth any risk to earn it, exit the trade. For me that used to be 35 cents. Today it’s 20 cents. Sometimes I hold out for 15 cents.
    Total profit is 100% immaterial. I would never hold a 10-point spread when I can buy it for 15 cents and there are at least 3 weeks remaining. That’s me. It’s not you.
    I mentioned that the original IC was at least $3.00. That means I probably collected $1.60 or so for the put spreads.

  13. 10/30/2010 at 6:30 PM #

    I’m interested in trading the RUT but the spread seems prohibitive, are you usually able transact at a reasonable mid price? How long do you have to wait for a fill?
    Thanks Mark

  14. Mark Wolfinger 10/31/2010 at 12:16 PM #

    Yes, the prices are reasonable to me. That is obviously an opinion and the prices may not be reasonable to you.
    My fills tend to come instantaneously or within 30 seconds). When it’s instantaneous, I always feel I bid too much.
    When I see an iron condor quote that is far more than $1 wide, I just ignore the quote. I place my order to collect the cash credit I want to collect. I am either filled or not.
    I place my order 10 cents worse than midpoint. I often have room to give another nickel and occasionally a dime. But, If unfilled at my price (I leave the order in all day), I may try a different spread with slightly different strikes.
    This is truly trial and error – so you can decide if you are satisfied with the fills. The fills are ok for me.