Rolling a Losing Position: Is it Wise to Avoid Paying a Debit

Hi Mark,

I have a question about iron condor adjustment.

Let say you want to roll one side to a further strike. You can do this by closing the original spread (debit) and opening a new spread (credit). But since the market price is already near the old strike, the adjustment is a net debit.

Using the principle of equivalent positions, the same adjustment (in term of risk profile) can be made with a net credit by changing put to call or vice versa of the debit spread.

Aside from having a higher margin requirement, do you think there is something wrong with this alternative adjustment? Comparing both adjustments, is there a better choice?



 Good question, John

There is one thing you should understand.  There is nothing special about rolling a position and collecting a credit.  I know everyone likes to do that, and it just 'feels' good.  There is a psychological edge to 'feeling' good about your trades, so if that's important, go ahead as planned.

As you indicated with your example, it's often impossible to collect a credit (without increasing risk by far too much).  In my opinion, it's unnecessary to collect that cash credit.

Some losses are inevitable. Paying larger debits than you had hoped, is one of those things that cannot be avoided.  Sure you can pretend you are not paying that debit when you use an equivalent trade, but when expiration arrives, there is no avoiding that debit.

When trading options, postponing the inevitable is not productive.  And in your example, the position you create (box spread) by refusing to exit the losing trade, is going to cost you $1,000 cash when expiration arrives.  What do you gain by delaying that payment?

The original position has lost money.  It costs cash to exit that trade.  When you roll a position, the primary (in my mind, the ONLY) factor that counts is: Do you want to own the new position or are you making the trade in an effort to avoid taking a loss?  My opinion is that you have already taken the loss when rolling and the only decision is: what position do you want to own now?  Forcing a trade that provides a credit, or paying the minimum debit, when you do not like that new position but are opening it only in an attempt to recover losses – is a very foolish thing to do.  I know it's psychologically enticing.  I know most traders believe the loss is not real if the adjusted position is still open.  I know you believe rolling gives you time to 'make back' the loss.  It's all in your mind, but it's a very common mindset.

Here is my recommended thought process and trading philosophy:

  • Rolling is two separate and independent decisions
  • If prudence tells you to exit the losing trade, then exit and take loss
  • Find a new position to open.  Don't force the trade
  • Your goal is to make money from today forward
  • If the new trade is not one you want to own, don't own it
  • If you do close then open, don't think about the cash cost.  Think about future risk and future profit potential


You are suggesting that an iron condor has run into trouble on (for example) the call side and you want to roll that call spread.  Instead of buying the 880/890 call spread (to close), you are asking about selling the 880/890 put spread (to open).

Then you continue with the roll by selling a new call spread at a higher strike price (and probably a more distant expiration).

1) Having a higher margin requirement is a disadvantage.  But if you have lots of margin room, then no – it's not a problem.  But you may not incur a higher margin requirement.

The new position is one box spread (zero, or very small margin requirement) and one (very unbalanced) iron condor.  You would have to ask your broker for the margin requirement on the proposed trades – or check your margin availability both before and after the trades.

That box spread is not going to gain anything in terms of profit and loss.  If the call spread would have cost $520 to close, then you will collect roughly $480 for the put spread.  At expiration, this box spread is worth $1,000, and it will cost that $1,000 to exit.  It is completely independent of stock price. 

But, it can become a problem if you are trading American style options and not European style index options.  There is expiration pin risk (stock finishing at the strike price of an option you sold).  That problem is a bit lengthy to go into here, but the Rookie's Guide to Options has a clear explanation in chapter 15.

Plus, if your broker charges a fee for exercise and assignment, you are going to incur those costs on at least two of the four legs of the box.

Conclusion: There is nothing to gain, but you add pin risk plus expiration fees.  Your also have a more complicated portfolio to manage – unless it's no problem for you to ignore that box spread when looking at your positions. If it makes you feel better to do as you suggest, it's not 'terrible.'  But there is nothing to gain, so why bother? 

Paying debits to take losses – or in an attempt to minimize risk – is part of the game.


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