Tag Archives | adjusting an iron condor

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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Too Many Adjustments

Continuing the discussion:


I don't feel comfortable getting too close
to the money with iron condors. I am happy going just inside one standard deviation.

Yesterday I rolled a 3-point wide SPY IC from Oct to Nov to get more "centered"
and collected between $0.98 and $1.20 on 10 lots.  The new position is just inside one
standard deviation.

Of course it's no longer centered after another
rally today.  By the way, do you think this rally will be over soon?

plan is to collect .3 in 4 weeks and then roll to Dec to get "centered"

I also have a 1-lot of an OCT NDX IC, opened with 50- point spreads (low 1650
high 2000) a little bit outside one standard deviation, and collected $7.50.

Again the plan is hold 4 weeks and roll to get centered.

One more question: when would you suggest adjusting both my open
positions in case of a big movement?



You raise some important points, worthy of discussion.

1) 'Too close to the money' is not a well-defined term because it is 100% relative and strictly a personal comfort zone decision.  It's neither right nor wrong to refuse to trade close-to-the-money iron condors. 

2) I promise that you don't want to know my opinion on where the stock market is headed next.  My prognostication record is dismal.  Yet, because you ask, I don't understand why the DOW is not near 5,000 instead of 10,000.

3) I think you roll far too frequently

This is important.  Why do you 'get centered' every expiration? 

Do you believe that reduces risk?

Do you believe this is an efficient method of trading?

Do you believe it's necessary to get neutral frequently?

Why do you do this.  There must be an answer.  Did someone suggest doing that?

Unless you are at, or approaching, the limit of your comfort zone, why are you exiting your current position? 

4) Here is a good idea that will make your trading far more effective: Cut your trade size in half. Use half your capital for a Nov position and the other half for Dec.

This is my recommendation.  Do not accept it if it violates your comfort zone.  But:

There is no need to 'get centered.'  It may be better to move just the calls or just the puts.   It may be better to reduce size.

The idea is to get centered when YOU are not satisfied with the current position.  That means too much risk or too many delta out of line etc.  It does not mean taking a perfectly good position and rolling it out one month just to get centered.

Your methods include: Too much trading.  Too many commissions.  Too many adjustments. Far yoo much cash going to your broker.

5) Why think of it as rolling?  Here's what I suggest.  Use your Nov position.   Adjust, exit, roll, etc ONLY WHEN IT'S THE RIGHT THING TO DO.  That means when YOU want to take action.  Do not roll just to get centered.  It does cost real commission dollars to get centered.

Open a Dec position when you are ready to do so.  Each of these positions is half your current size.  You own these Nov and Dec positions simultaneously.  Now, trade them separately.  When ready, close Nov.  Then sell January when ready.  Do not roll to Jan.  Just close Nov when ready.  After you do that, open Jan when those options become available for trading.

Manage Dec options the same way.  Trade the spread on its own.  Close when ready and then open a Feb position.  There is no need to roll. 

6) NDX trade

I have no suggestions for when YOU should adjust your current positions.  I don't know your comfort zone.  Nor do I know how far OTM you allow your short options to be before rolling. 

I don't believe in rolling.  I think it's a poor strategy that people adopt because of insufficient information. It should be a two-step process.  If you want to exit the current position, then exit.  If you want to open a new position, then open it.  The problem with rolling is that traders feel obligated to exit AND make a new trade at the same time.  Often, that new trade is ill-advised, too risky, or chosen for the wrong reasons (to collect cash instead of paying a debit).

Rolling should be two separate decisions.  It's okay to roll in a single trade, but ONLY when you want to exit the old and open the specific new trade.  In your situation, I don't understand why you are exiting the current trade.

A 'big move' is another term that is not well-defined.  Thus, I have no idea what it means to you and have nothing to suggest about whether you should make adjustments to your positions if that 'big' move occurs.  The same rules apply.  Make a trade plan to think ahead and consider at what price point you would become uncomfortable.  Then update that plan as time passes. If you don't recognize discomfort when it arrives, then go with the trade plan.

7) My recent record

I made zero adjustments out of necessity in recent times.  I bought in all my RUT Sep 10-point call spreads when they declined 15 and 20 cents.  And over the past few days, did the same with the put spreads.  I have no Sep positions and in fact, have already bought in a good portion of my Oct call spreads at 20 cents – on the recent decline.  I'm hoping to collect a few Oct put spreads on this rally, but nothing yet.

I never felt the need to adjust.  The moves never brought my shorts to a point where I considered the position to be risky.  Obviously you and I have different comfort zones, but if I rolled to get centered as you do, I'd have rolled many times.  I don't believe that's a good reason for making trades.

In my opinion, do not adjust when there is a big move.  Adjust when your position is not what you want it to be.  That's when you feel that your short options are too close to being ATM.  that may come after a big move or a small move.  And it's not an all or none decisions.  As you know, you can adjust in stages.

8) One more item I do not understand.  You collected over $1 for the November spread and your target is to earn 30 cents over the next four weeks?  Then you plan to exit?  Question:  Is the target profit of 30 cents worth the risk?  That's not very much profit. [Yes, it is a 10% gain on margin, but it's less than 1/3 of the premium collected]


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