Tag Archives | roll down

Front Month Iron Condors Bite Again

Question from Mark:

Assuming you did open some RUT spreads. Let's say you have
some on the books around the 580 level. Market gets crushed today.
Shorts double. 12 days to expiration. Still some breathing room but been
stung before.

Adjust now and quick big loss. Wait for market to bounce and
adjust/close down the road. Wait and market falls, suffer more.

When do you mostly make your adjustments?



I have many comments explaining how I feel about your situation and my way of dealing with it.  Obviously my method may not be suitable for you.  I cannot tell you how to trade, but hope to offer some thoughts that you find useful and logical.

1) Two of your phrases are: 'shorts double' and 'quick big loss'

  • That tells me that you sold these spreads recently and at a relatively small premium
  • You are paying careful attention to the price at which the original trade was made

I strongly believe that it is bad policy to pay any attention to the original trade price.  Your primary concern right now – is the risk and reward potential for this position – as it stands right this minute.   Are you comfortable holding, or it feel too risky.  If too risky, would you hold anyway just because closing locks in a loss?  I hope not.  My point is that you are either comfortable holding this trade or you are not.  Original cost is immaterial.

If not comfortable, one decent option is to reduce position size.  It is not necessary to cover the entire position. 

Alternative suggestion:  Roll down:

  • Perhaps you can roll down by covering
    the 570/580P spread and selling the 550/560P spread.  It appears that
    you can make this trade for about $0.50
  • If size is not the issue (but how far OTM is), and if your position is less than your maximum size, you may want to roll down on a ratio:
    buy 2 570/580P spreads and sell 3 550/560P spreads.  Cost is approximately zero cash – but do not ignore the real risk associated with this trade, and that's being short additional spreads

Although it is the method of choice for most traders, using front-month iron condors is much more risky (yes, it's also more rewarding) than trading positions with a longer lifetime.  I believe that the high negative gamma is too difficult for the majority of traders to handle.  As you say, hold and you may be saved by a market reversal.  Holding may also result in additional losses that quickly mount on a further decline.

This risk is much less when options have a longer lifetime (gamma is less).  For my comfort zone, that makes them easier to trade and more comfortable to hold.  In addition, I collect a larger premium for spreads that expire later, so if I am concerned with P/L at a later date, I may still be able to exit profitably. [Honest, I pay no attention to original entry price.]

I recommend avoiding front-month options despite the rapid time decay.  But that is a decision for you and your comfort zone.

I also recommend against selling spreads
and collecting a small premium.  We each have our own comfort zones,
but front-month options have far too much negative gamma to suit my taste.  Sure, the rapid time decay is nice, but I prefer to trade the
less risky 2nd and 3rd month options. 

I'm not telling you what to do, but I do suggest that you consider your choices and decide whether front-month is the way you want to go.  You probably will not change styles, but at least when you consider alternatives, you should be more confident that your eventual choice is appropriate for your needs.

Having 'been stung before' I know you understand the problems of trading with increased negative gamma

2) I don't have set rules for making adjustments because I find that market conditions can be so different from one time to the next that I only have basic guidelines.

I tend to adjust early, but not always.  I may make a stage I adjustment when my short RUT options are 4 to 5% OTM.  At other times, I may wait for 3%.  Much depends on which adjustments are available at favorable prices.  When IV is high, I am more willing to roll down on a ratio because the roll can be made at a low cost and I can roll on a small ratio (when I am not 'all in' and have room to expand my position size).  It's amazing how high IV allows a good-looking roll down opportunity.  I recently rolled my short RUT options down by 3 strike prices on a 2 x 3 ratio for essentially zero cash cost. 

This opportunity is available when options are vega rich – and that means they are not front-month options.  

I do not enjoy moving the position by selling more spreads than I buy (to close), but will do that when IV is high and the prices are attractive.  But watch out for position size. This is not risk free – the black swan is in hiding – he has not disappeared.

3) Being a poor market prognosticator, I do not hope for a bounce in this situation.  It's strictly risk of holding vs. likelihood of earning a reward, and the size of that reward.  That's a discipline that does not come easily.  Trading without emotion (fear and greed) is also essential for the successful trader, but not so easy to achieve.


4) To avoid being in his situation, my trade plan calls for exiting when expiration is three weeks away.  I don't always meet that objective.  But, if my risk management persona is okay with the trade, then I hold a bit longer. 

I covered some Jul call and put spreads when they became inexpensive (25 to 30 cents in this volatile market is cheap in my book) but  I never was able to buy the Jul 570/580P spread.

5) Like you, I am short a some of these RUT Jul 570/580 put spreads, and if I felt compelled to cover, paying near $1.50 would be a relatively inexpensive exit for me.  Yet, I feel no urgency to exit. 

The Jul 580P has a 21 delta, and at that
level I'm willing to hold longer.  However, this is a small part of my
portfolio, and if this specific spread gets into trouble, the loss is
well within acceptable limits.  If this is your only position (and I
understand that is likely) then you must think about your ability to
withstand the potential loss.

NOTE:  I don't know whether holding is within your zone.  This is a personal trade decision each trader must make.  I hope you can base the decision on something other than fear.

Good trading.


Open and fund an account at Trade King and get a free one year subscription to Expiring Monthly: The Option Traders Journal. You must use the link below.

Switch to TradeKing and get up to $150 in transfer fees reimbursed.

Read full story ยท Comments are closed