Tag Archives | kite spread protected by a kite spread iron condor risk management RUT options Time value passage of time

Iron Condor Position, Protected by a Kite Spreads II

Last time, we began the discussion of how to work with a 20-lot iron condor position that was protected by three kite spreads.

We owned 3 RUT Apr 650 calls and were short 29 Apr 670/680 call spreads and the discussion now moves towards the need to make an adjustment.

The risk graph doesn't look bad.  There's not much to lose – as things stand today.  But as the days pass, risk increases when RUT is near, and especially above, 670.  See Part I for a more detailed discussion.

Adjustments

When working with kite spreads, there is the temptation to do nothing because the risk graph looks so reasonable.  The passage of time changes the picture drastically, and the prudent kite user adjusts in advance.

I like to use several different adjustment types, and I've decided to combine three of them for  consideration.  These are not specifically recommended, but may give you an idea that you had not previously considered.

1a) Sell your long options.  They are probably costly options and they served their purpose.

1b) Replace those calls.  My most common play is to roll them by one strike.  That means buy 660s and sell 650s.  My idea of the right time to do this is when I can collect between $6 and $6.50 for the spread.  This play is not as good when you still hold this position very near expiration.

1c) In today's example, I went further.  The first adjustment is to sell 3 RUT Apr 650s and buy 6 Apr 670s.  One reason is that I prefer to own the three extra options.  The second is that it's time to begin to exit the 670/680 call spread.  And this is a start.

2) More kite spreads to provide better upside.  Buy 3 Apr 670 calls and sell 9 Apr 690/700 spreads.  These kites cost roughly $500 apiece. 

If spending that $1,500 makes you uncomfortable, you have an alternative.  Choose 1b above, instead of 1c.  Use that $1,800 to $1,900 to pay for the kites.  You may even decide to splurge and buy a fourth kite instead of only three.

3) I avoid increasing position size as a general rule.  But when I now own 6 extra long calls (instead of 3), I believe the risk/reward allows for owning a larger position.

Buy back 10 Apr 670/680 call spreads and sell 20 Apr 690/700 call spreads.  At current prices, this should cost about $80 per spread.

If you choose all three trades, the risk plot looks like this:

6_x_3;_10_x_20;_3_x_9
Dark blue = today

Light blue = 1 day before expiration

It's important to do your own graphs and consider any adjustments you want to make.

To me, I can live with the position more easily than the unadjusted position.   Please remember, these three trade ideas are not all-or-none.  But they should provide food for thought.   Draw those graphs and analyze alternatives.

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