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Real Life Iron Condor Trade

A reader submitted an iron condor trade, along with each of his adjustments – seeking comments.  He gave me permission to anonymously discuss this trade and how he managed risk.  Overall I believe this represents a well-managed position, worthy of discussion.  The trade was still open when I received (Dec 2, 2010) the details.

This trade represents a real-time scenario in which you can evaluate each idea and think about whether you like what was done or would have considered an (unspecified) alternative.  Does the insurance purchase, or each of the adjustments go along with the way you trade?  If not, it's an opportunity to sit over a trader's shoulder and judge his activity.  I offer this as an opportunity to learn how another trader thinks.

Trade data can be seen in the table at the end of this post.


(1) Sep 16: Trade 20 RUT Dec 530/540;730/740 Iron Condor. Premium $2.815

(2) and (3) Same date, he bought a strangle for insurance:

a) Buy 1 RUT Dec 720 C @ $7.80
b) Buy 1 RUT Dec 560 P @ $4.00

The initial trade involves buying a December iron condor with the strike prices of the short options being 190 [corrected] points apart.  I know that feels as if it's a pretty safe trade with each option being quite far out of the money.  Cash collected: $5,630

Our trader, taking a conservative point of view (which I would never discourage) adds one December strangle to provide some protection against loss.  Cost: $1,180.  Remaining cash: $4,450

(4) BUY +20 CONDOR RUT 100 DEC 10 730/740;760/770 CALL @1.5075 (cost: $3,015)

Two weeks later, trader buys condor [not to be confused with an iron condor], thereby rolling the short call spread from 730/740 to 760/770.  This trade uses almost all of the original cash credit.  Remaining cash: $1,435.  Please note that I'm keeping a running total of the cash premium because I understand that the vast majority of traders want to see that number.  My perspective is that we should make necessary and desirable trades, ignoring the profitability of the original trade because it's necessary to manage the current position well – not the original – to make money.

(5) and (6) On same date, trader covers the short put spread and sells a new put spread – but he sells only half as many (10 vs. 20).  This time he sells the RUT Dec 590/600 put spread. Net cash in: $225.  Remaining cash: $1,660

This type of trade is worthy of special discussion. The put spread was moved for two reasons:  To collect additional cash and to move the position a bit closer to delta neutral.  For some traders, this is perfectly normal.  If you began with no preconceived notion of where the market was headed, it's likely you still feel that way, despite the big rally.  With that in mind, moving the put portion of the iron condor makes sense.  Other traders, fearing a retracement, may not be willing to move the puts. 

Of course, he sold only half as many puts, so did not collect much cash.  From my perspective, $225 is just not enough incentive to make the trade.  And don't forget, that small sum comes before commissions.

My objection is that he did not collect enough cash for this trade.  If this idea of rolling the puts has appeal, then I think another strike or two (i.e., moving the short put to the 610 or 620level, instead of 600) would have been a good idea.  And this is extra true when selling only half as many puts. If he had collected more cash, he could have moved his insurance put (Dec 560) to a higher strike price.  Nevertheless, this is a risk management decision and he did nothing wrong.

(7) Approximately one month later (Nov 3) the call spread is rolled higher once again.  This time the condor costs $0.96 and moves the strikes of the short call spread to 780/790.  Cost: $1,920.  Remaining cash: $260 in the hole.

(8) At the same time, the trader sells another 10 call Dec 780/790 call spreads, increasing the call position to a 30-lot.  This presents significant extra risk.  I like the fact that he resisted selling extra call spreads until now, but am concerned that risk may be moving beyond his comfort zone.

[I have no details regarding our trader's account size, or tolerance for risk, but he is an experienced trader.  What I don't know is how much experience he has with options]

Cash collected: $1,150.  Remaining cash: $890

(9) and (10)  He sells his extra long Dec 720 call (bought as insurance) and replaces it with one Dec 750 call and one Dec 760 call. Cash collected $440.  Remaining cash: $1,330.

I like this trade. This is a good risk management decision and makes me feel better about the fact that he sold those extra 10 call spreads.  Apparently the plan was to buy extra protection, and this does the trick. 

Those who look at this trade in isolation may feel that it's a bad trade because the trade has negative time decay (theta), and the whole purpose behind trading iron condors is to collect that time premium.  However,  this specific trade is not designed 'to make money' as a standalone trade  It is to own an improved insurance policy.  He now has two calls protecting 30-lots of calls instead of one call protecting 20-lots.  How to manage risk and how much insurance to own (if any) are personal decisions.  All we can do is examine his trades and offer comments.  And hopefully learn something.

(11) (12) (13) This series of trades can be broken into two parts.  First, he bought back his 590/600 put spread and once again moved to higher strikes, selling half as many.  Thus, he is now short only 5 put spreads. Cash collected $115.  He then sold 10 Dec 640/650 spreads, collecting $0.90 for each.  That's another $900 and the remaining cash is: $2,345.

(14) The next day he brought in some cash  by rolling his insurance option to a higher strike (750 to 770).  Cash collected: $665 for a 20-point spread.  I like the idea of taking cash out of insurance by rolling higher.  My experience says that the minimum sale price should be 50% of the maximum value of the spread, and I prefer to collect 60%.  However, the trader may have made this play as a way to get a bit bearish over the short term.  Cash remaining: $3,010

(15) One day later, he sold some of his long insurance and collected $265 for his Dec 770 call.  This is a trade I just don't like.  I understand that we all want to earn good money from our trades, and holding this option to expiration is likely going to cost some cash.  However, once again the cash collected is just too small to justify the risk. He is short a 30-lot call spread, which may be ITM in a day or two. That $265 is too small for the upside risk. Cash remaining: $3,275

To me, this trade is micro management – attempting to achieve the best possible result by taking extra risk. Not a good long-term strategy.

(16) Twelve days later, the market has rallied and the Dec 770 C was repurchased at a price of $730.  I'm pleased he was not stubborn, and did not refuse to bite this bullet.  Good discipline.  Please note that it cost $465 to cover this error in jusgment.  The risk/reward for making that call sale was way out of line.

This was not an expensive lesson, but one worth learning:  Cash remaining: $2,545.

(17) Covered the 5-lot short put spread at $0.25.  I agree with playing it safe for a few dollars. Cash remaining: $2,420.

(18) It's now Dec 1, and theta and gamma are increasing.  He bought a one-lot to reduce his short position.  Don't be afraid to trade a one-lot, if that seems appropriate at the time.   Cost $103. Cash remaining: $2,317

(19) Covered the last of the put spreads at $0.20.  Cost $200.  Cash remaining: $2,117

(20) Sold five dec 690/700 put spreads @ $0.80.  Cash +$400. Remaining cash: $2,517. 

This is the killer trade.  This is the play that can destroy your career.  First, it only adds $400 of profit potential.  Next, it sets up a potential dilemma for the trader.  If the market takes a quick tumble (good for the whole position), it's likely to be too soon (and too expensive) for him to be eager to cover the call spread.  But that little put spread, and the measly $400 it generated threatens to lose a few thousand dollars.  And if he does pay up to cover those puts, then the real dilemma appears: Can he afford to sit by and NOT cover the calls?

Sure, the most likely result is earning part (knowing he will cover prior to expiration) of that $400.  And he will remember how well this worked and may make a similar trade next time.  This is strictly a gambling move.  With so little time prior to expiration, and with a position that already has  negative gamma, it's tempting to collect more and more premium and to move nearer to delta neutral.  However the risk is just too large for the small reward. 

Important note:  He made this trade earlier – and more than once: Selling some OTM puts to collect cash.  The big difference is that this time we are approaching expiration and, as explained above, if this specific trade turns out to be a loser – that would be okay becasue the call portion of the portfolio would earn some decent cash.  But it's much more involved than that.  An increase in imped volatility (due to the market decline) would make it even more difficult for the trader to be willing tp pau u[p to get out of his call position.  And that's the risk.  Taking a loss on the puts and possible still gettting hurt on the calls – that's the worst case scenario.

This is one of those 'let's take the extra cash right now' trades that just feels right.  The market shows no immediate signs of crashing and the trader can make another $300 by covering in a few days – so why not?  Because there is ust too little to gain.  In my opinion, it's already time to exit the December position and making it bigger and more risky is not the long-term winning action.

It's okay to continue to trade December options, but the point is that is too late to increase size and/or risk.

The true risk is not making this specific trade.  Instead it's the fact that winning this bet this time only encourages making a similar, but larger bet next time.  And the next time.  This is one trade that is guaranteed to blow up.  The obvious problem of a potental loss in the trade is not THE problem.  It's the overconfidence that gets a trader to the point where selling extra premium become the #1 choice for adjusting positions.  Although that is an acceptable method when the trader can afford to take more risk, the play is not to be made for insignificant sums – especially when time is short.  If the reward is too small, it's just not worth any risk (in my opinion).

He has been very conservative with the put selling.  Covering early, reducing size, covering again.  But this small trade is just to CTM (close to the money) for comfort.   Obviously it's our trader's comfort zone that matters here, however, some trades have a bad risk/reward ratio – and this is one of them.

If I get a further update, I'll let you know.  This is where the position stands as of December 2


1 9/16/2010 SELL -20 IRON CONDOR RUT 100 DEC 10 730/740/540/530 CALL/PUT @2.815 LMT
2 9/16/2010 BUY +1 RUT 100 DEC 10 720 CALL @7.80 LMT
3 9/16/2010 BUY +1 RUT 100 DEC 10 460 PUT @4.00 LMT
4 9/30/2010 BUY +20 CONDOR RUT 100 DEC 10 730/740/760/770 CALL @1.5075 LMT
5 9/30/2010 BUY +20 VERTICAL RUT 100 DEC 10 540/530 PUT @.45 LMT
6 9/30/2010 SELL -10 VERTICAL RUT 100 DEC 10 600/590 PUT @1.125 LMT
7 11/3/2010 BUY +20 CONDOR RUT 100 DEC 10 760/770/780/790 CALL @.96 LMT
8 11/3/2010 SELL -10 VERTICAL RUT 100 DEC 10 780/790 CALL @1.15 LMT
9 11/3/2010 SELL -1 VERTICAL RUT 100 DEC 10 720/750 CALL @12.00 LMT
10 11/3/2010 BUY +1 RUT 100 DEC 10 760 CALL @7.60 LMT
11 11/3/2010 SELL -5 VERTICAL RUT 100 DEC 10 620/610 PUT @.89 LMT
12 11/3/2010 BUY +10 VERTICAL RUT 100 DEC 10 600/590 PUT @.33 LMT
13 11/3/2010 SELL -10 VERTICAL RUT 100 DEC 10 650/640 PUT @.90 LMT
14 11/3/2010 SELL -1 VERTICAL RUT 100 DEC 10 750/770 CALL @6.65 LMT
15 11/4/2010 SELL -1 RUT 100 DEC 10 770 CALL @2.65 LMT
16 11/16/2010 BUY +1 RUT 100 DEC 10 770 CALL @7.30 LMT
17 11/22/2010 BUY +5 VERTICAL RUT 100 DEC 10 620/610 PUT @.25 LMT
18 12/1/2010 BUY +1 VERTICAL RUT 100 DEC 10 780/790 CALL @1.03 LMT
19 12/2/2010 BUY +10 VERTICAL RUT 100 DEC 10 650/640 PUT @.20 LMT
20 12/2/2010 SELL -5 VERTICAL RUT 100 DEC 10 700/690 PUT @.80 LM

 Table. List of trades


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