Scaling into Iron Condors

Mark,

Someone wants to have a portfolio with more than one IC position.
Once he established his first trade (eg 5 SPY April 118/120 CALL,
112/110 PUT, with SPY @115), he wants to add a second position and then a
third.

What is the thinking process and which data does the trader
consider to decide

a) whether it is wise, at this moment, to add this second position,
and if yes,

b) which strike prices he should consider

Let's assume that he established his first trade 80 days before
expiration and he wants to add another one 60-70 days before expiration
and a last one 40-50 days before expiration. Let's also assume that he
wants to receive a premium of at least $100 for each IC (similar to the
one mentioned above).

I guess that he has to study the Greeks for his first position, the
current volatility and how SPY has moved since the first trade was
established but I am not sure I understand the details.

Many thanks

***

Hello Dimitris,


1) It is wise to add the 2nd and 3rd position if they have been planned in advance.  That requires you to size the first trade appropriately, knowing that more trades will be added prior to expiration.

Clarification:  If you want to trade 15-lots of this iron condor, I'm assuming each trade is for 5 spreads, per your example. 

2) Choose strike prices independently.  Find the iron condor that you believe is best – just as was done with the initial trade.


There are three points worth mentioning:

a) If the first position is already out of balance – according his his comfort zone – make an adjustment before initiating the second trade.  As an alternative, modify the second trade to take the imbalance into consideration.  

One way to do that is to sell 5 put spreads and only 3 or 4 call spreads. Or perhaps take less money and sell the call spreads farther OTM.


b) It is easier to follow your trades when you hold 'whole' iron condors.  The experience trades does not care if the second trade partially closes the first (sell out long options or buy back shorts), but the rookie may care.  If a position is easier to follow, then it's a good idea to make a minor sacrifice to hold that position.  

If your preferred spread turned out to include the 120/122 call spread, I suggest doing the 121/123 instead – just to avoid selling the 120s.  this is not necessary.  It's only when you feel the need to maintain the initial position intact.

c) This is very important.  I don't know how you can plan on how much cash to collect before you see how the spreads are priced.  If you force a $100 cash premium, the options may be too CTM for your comfort zone.

It's true that sometimes iron condors fetch high prices and at other times the premium is low.  Planning on $100 is not not a viable strategy.  When the time comes to make the trade, is the right time to decide if the conditions are good enough to make a new trade, or if it's better to pass.  Forcing trades represents a (financial) death wish. 

647


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