Tag Archives | options trading position risk iron condors adjusting iron condors position size

Q & A. Adjustment Discussion

Continuing an earlier discussion:

"When I put on the adjustment I am not really thinking of it as a stand
alone position that I want to own.

I think the question is do I want to lock in a loss
(when probabilities are still on my side) on the initial spreads and then put on
another position? Or do I want to own the new combined position, that is the one
where I sell an equal amount of iron condors for equal money, where the delta of
the original position is now offset by half or so.

I think in a way the loss and
new position is not that different in terms of aggregate risk from what I am
proposing. But, I admit I might be wrong here."

***

1) Most adjustments are made with the primary purpose of reducing the risk of holding an existing position.  However, that is insufficient.  It makes no sense to reduce risk and then have a position that you hate.  Thus, when adjusting a position think of it it terms of:

Can this position be salvaged?

What are the chances of doing some good, instead of just spinning wheels?  In other words, do you anticipate the adjusted position will make money going forward?

Is there a better position to own?  Should you exit this trade and open a new position?  The problem with the new position is that it may require a longer time period to earn the profit.  I don't let that bother me, but I know some people want to make a profit every month, despite the fact that this is an unrealistic expectation.

2) If you ever open a separate position, i.e,, not as an adjustment but as general portfolio protection (for an example, click here), that profits from a market move in one direction or the other – then that is a standalone position that may offset losses from a current position.  In other words, it's just semantics.  I buy pre-insurance as a standalone trade – and occasionally close that trade, earning a profit.   At other times that standalone trade is needed to offset a loss from a previously existing iron condor.

3) Just a comment: There is more to a trade than just the probabilities.  When you own an iron condor that is not behaving well, the probability of success may still be more than 50% (and thus, the 'probabilities are still on your side') , but that does not always translate into a position in which the risk/reward ratio is satisfactory.  

4) There are different mindsets that a trader can use, and we each have an opinion as to which best represents reality and a reasonable method. 

I ignore whether a trade has made or lost money.  I look at the position as it is TODAY and decide whether I want to continue to own it at the current price (the original trade price is meaningless) with its current risk/reward potential.  Then I decide whether I prefer to exit this trade and own another.  I also have the choice of modifying (adjusting) the position.  It does not make any difference whether the current trade has lost money. 'Locking in a loss' is a blind spot for many investors who cannot see that money has already been lost.   Because I prefer to own a less risky portfolio that has an increased chance to be profitable, I'll give up an a bad trade and move on.  This thinking may be inconsistent with the boundaries of your comfort zone.

My goal as a trader is to own a portfolio with the best chance of making money from today forward.  I am less concerned with recovering assets that are no longer mine.

My goal as a risk manager is to be certain that the decisions of my trading persona are acceptable and within both of our comfort zones.

The point: Do you want to adjust the position or would you prefer find something better?

5) The adjustment you suggest – opening a new iron condor that is not neutral – in an attempt to partially neutralize the Greeks for the entire position, is reasonable, but it does violate one of my priorities: When adjusting a position, do not increase position size or risk.

If the new position, with twice as many iron condors as you originally owned, is acceptable to you, then there is no problem.  There is no reason why this adjustment is better or worse than any other: if used in moderation.  But it does increase size and thus, risk.  Keep in mind that the Greeks are improved, but if you were short a call or put spread that is threatening to move ITM, nothing has changed.  That threat has not been eliminated. 

The new and improved position may require another adjustment.  You must be careful not to repeatedly increase position size.  That's just looking for trouble.

6) Are you wrong?  You are neither right nor wrong.  It depends on what you believe.  I feel that your suggested adjustment results in increased risk.  Adding iron condors to a portfolio, increases both profit potential profit and risk.  Of course with Greeks that are closer to neutral it appears that immediate risk has been reduced. 

It depends on how your comfort zone feels about  immediate delta risk vs. risk of a major market move.  I'm more worried about the latter.

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