The Difficult Trade Decision: Take the Loss or Hope for the Best

I appreciate the excellent question that have been arriving as comments to individual blog posts.  Many are worth their own separate posts.  Here's a timely example.

Hi Mark,

I've been having some trouble in deciding how I should be exiting and/or adjusting my Iron Condor trades.

(1) I like your idea of exiting once x% of the potential profit
from the trade has been achieved. How should this be executed? Should I
just leave a limit sell order with my broker the moment I put on the trade?

(2) I bought a RUT Iron Condor 650/640 C and 540/530 P about 1 month
from expiry (Jan). I've received $200 credit a piece. When I entered
this trade, RUT was trading around 609. Seeing as how RUT is trading
around 640 (it breached my sold strike for a few days), have I left it
too late to adjust?

It will be a loss if I exit it at market (roughly $80-90 each
spread) now but I also don't really want to face settlement risk with
RUT that near to my sold strike.

I would like to find out what more I could have done to save
my position. The "when to adjust" question seems to be difficult to
answer, but leaving it until the underlying breaches the sold strike
doesn't appear to be viable.

It might be too late to salvage this position, unless the market
heads south. I did actually open 3 more Iron Condor FEB positions on
RUT, in effect "rolling" it to another month, without closing the
initial. My plan was to close these at the same time as my Jan
positions – in the hopes that the credit I receive can offset any loss
from the Jan options

What is your opinion?



When to exit is the true dilemma.  And it has no simple answer.

Psychology plays a huge role.  Look at it this way:  Assume you pick a spot where you recognize the risk, don't like that risk, and exit the trade.  You know it's the right decision for you. 

Once the exit trade has been made, would you

a) forget about it?
b) watch closely to see what would have happened?

If you chose b) that is not to your advantage.  If you learn to make a good decision and move on, you will be less emotionally tied to your trades.  That's a good thing.  You can never make the winning decision every time.  Your job is to keep your positions out of trouble.

In my opinion, the simplest method for doing that is to avoid holding into expiration.  Yes, pulling the trigger is difficult, but over the longer term, you will be a happier, less stressed trader if you can do that.

If you cannot make up your mind to pull the trigger, then consider this question: Which would make you feel worse

a) not exiting when you know you should, and losing more money?
b) exiting and seeing the market reverse?

If you know which would make you feel worse, even when the amount of cash at stake is identical, then for peace of mind, you should minimize the chances of 'feeling worse.' 

This is where the psychology of trading comes into play.  The worse your decisions (that turn out to lose money) make you feel, the more you must do these things: 

  • Avoid placing yourself into situations in which the decision that makes you feel worse may be your best choice
  • Avoid the choice which makes you more upset.  If this is going to cost you money, then obey the suggestion in the above bullet point
  • This is a decision-making process.  Do the best you can (sure, try to develop skills that allow you to make even better decisions), but learn to live with those decisions

Now, your specific questions/comments

1) I do not recommend exiting at a specific percentage gain.  I was merely commenting that such a method was appropriate for some traders, including the person to whose comment I was replying.  I believe it's better to make the decision to hold or exit on an ongoing basis

2) Placing the order with the broker is a good 'set it and forget it' routine, but I don't like it.  You truly may forget that the order has been entered and that can be a problem. If you work full time and cannot watch the position closely, that's a different story and a GTC order may work.  Just don't forget you entered it.

3) If you watched RUT trade about 4 points above your short strike price, in my opinion you waited too long to adjust.  But this time it worked for you.  Don't assume it will always work well.

You got a reprieve and could have exited yesterday at $2.  Did you do that?  If not, how greedy do you want to be, after getting a reprieve?  Note:  This is a question; it is not a reprimand.  You should be asking yourself:  What are you waiting for?  The position to expire worthless?  

4) I agree that you do not want to take settlement risk.  That's important

5) Do not exit at 'market.'  Use limit orders

6) You have a loss?  So what difference does that make?  Here is something I believe very strongly that is difficult to convince others:  It makes no difference what premium you collected when you opened the trade.  The only things that need concern you now are:

  • You own the position right now at the current price
  • Do you want to continue to own this position at this price
  • Do you accept the risk/reward of the position as it stands NOW
  • If you want it, hold.  If you don't want it exit.  Whether it is a profit or loss is 100% immaterial

7) You did not 'roll' the position.  You ignored the Jan position and opened a new one in Feb

8) I have discussed many times – ideas for adjusting an iron condor position.  It's not the strategy that is the most important part of the decision.  It's your need to recognize that iron condor trading involves losses.  You cannot win every month.  You must also recognize that an adjustment reduces risk and often results in even higher profits than when not making the adjustment.

Your problem is an apparent unwillingness to pull the trigger because it may cost you money.  You already have a trade that may cost you money.  Your job is to manage the risk, not worry about profits.  If you ignore risk, I can almost guarantee that you will fail as an iron condor trader.  You cannot simply hold each position until expiration arrives and anticipate that this is a winning strategy.  It is great over certain periods of time, but at other times, it will bankrupt you quickly.

I suggest you have a serious talk with the portion of your persona that represents your risk manager.  The trader persona has taken over and the risk manager must be given more authority.


10 Responses to The Difficult Trade Decision: Take the Loss or Hope for the Best

  1. Bill 01/13/2010 at 12:13 PM #

    You have emphasized that risk management is the key to long term success, not attempting to squeeze every last penny out of a position at the risk of one’s comfort level. Since traders cannot be profitable in every trade or every month, can you suggest a win/loss ratio that an IC trader should aspire to; a percentage that suggests the trader is mastering the job of risk management? Possibly one shared by successful career traders.

  2. Mark Wolfinger 01/13/2010 at 12:48 PM #

    A reasonable request, but I have no data.
    I have never considered this issue. You must find guidelines that suit you, but let me offer an example of how I think.
    1) I trade iron condors, collecting $300+ per spread.
    2) I close the losing side when the price is approximately $5 on a 10-point spread). At this price, the position is essentially ATM
    3) I close – or at least place a decent bid – to exit the (now very cheap) winning side of the iron condor.
    4) If I do that, the maximum loss is less than $250 per trade.
    Obviously if I adopt risk-reducing prior adjustments, the numbers are all different and the losses are smaller. But this is only an example.
    5) If I exit my trades profitably, and if I win 50% of the time, I must average a $250 profit to break-even.
    I expect to win more than I lose, so there is no need to earn as much as $250.
    I leg out when one side gets to ~$0.20, so there is a chance to exit at ~$0.40 – at least a portion of the time.
    If I set my exit point (for both sides at the same time) at $1, then I earn ~$200 per.
    6) If I win 2 times out of 3, and if I use the above numbers, I make $200 twice and lose $250 once. That’s net gain of $150, or $50 per iron condor.
    7) That doesn’t feel very good. But it is a $50 profit on a $700 margin requirement ($1,000 less $300), or 7% in roughly 2 months. For most iron condor traders, the time period is less.
    Not outstanding. Perhaps not even ‘good’
    But that is a decent return by most people’s standards.
    8) What can go wrong? Losing more than $250. That’s the big problem. I don’t mean losing an additional $20. I mean holding on and losing $500 to $700.
    If you make less than $200 part of the time, that’s okay. You will occasionally earn a bit more by opening the trade at a price above $300.
    All of this is just a way of saying that if you keep losses in line, you should come out ok. I just do not have a ‘feel’ for how often one should win. 2 of 3 seems achievable.
    When I first traded iron condors (about three years ago), I started with 14 consecutive profitable months. I will never do that again. It was just the perfect time for iron condor trading, and it’s not the result of something special that I did.
    There are going to be losing periods. but if those losses are reasonable, you will succeed.
    I’m sorry, I cannot give a better reply to your question.

  3. NK 01/13/2010 at 2:29 PM #

    Insightful response. Thanks Mark.

  4. Antonio 01/13/2010 at 2:50 PM #

    Sorry Mark,
    I donĀ“t understand what you mean when you said:(point 2)
    “2) I close the losing side when the price is approximately $5 on a 10-point spread). At this price, the position is essentially ATM”
    Could you explain, please?

  5. Mark Wolfinger 01/13/2010 at 2:57 PM #

    If I trade an iron condor and the the call spread is the XYZ 700/710 call spread, and if XYZ rallies to approximately $700, then the spread will be priced near $500 – or half of the maximum value of $10.
    It’s not always $500, it depends on how much time remains before the options expire. It depends on the implied volatility of the options, but it’s a reasonable approximation.
    The position is ATM (at the money). That means the option I sold is very nearly the same as the price of the underlying stock or index.

  6. Peter 01/14/2010 at 5:12 PM #

    Mark, you mentioned you trade only Iron Condors now, and I think that you mentioned your preference was near 3 month time frames. How do you allocate your capital? Do you trade 4 times/year with 100% of your trading capital, or stagger it monthly, maybe trading 3 condors at a time and using 33% of the capital on each. I’m just wondering about this, related to return on total trading capital. Thanks. Peter

  7. Mark Wolfinger 01/14/2010 at 5:26 PM #

    I’m not rigid.
    Right now, one day before Jan options expire, I have positions that expire in Feb and Mar.
    On the first or second trading day after expiration, I will trade some April ICs. The quantity depends on how attractive the price is and whether I’d prefer to go all in for Apr now, or scale in when possible. Some months I never get to do much (Mar 2010 for example)
    If I have a big Feb position remaining – i.e., because I was unable to close much of the Feb position yet, then I have less margin to use and new positions are smaller.
    If Feb is small, I’ll have more cash for Apr – and I will also add to March – if I don’t already have a full load. This time I am small in March because the prices were unattractive.
    In other words, no rules. I’m very flexible. I invest lots when I like what I see and I invest less when I don’t like it. And by ‘it’ – I mean market conditions and my overall portfolio risk. I keep some powder dry for adjustments. If I have lots of insurance, I can afford to open more positions because there is less portfolio risk.
    If I don’t like the IV level for April – and I will not like it – I may keep my April position small and add a bit to March as not trade much for awhile.
    I don’t force the trades.

  8. Peter 01/15/2010 at 12:06 AM #

    Thanks Mark. The reason I asked was because I too trade mainly condors, but with 2 month time frames. I stagger them so I have 2 condors on at any time, and based on regular margins, I’d say I use about 65% of capital for each position (adjustment capital included). I have portfolio margin so I have enough (and actually much more leverage available) for these positions. I’m just thinking that in order to compare results to those who trade condors strictly on a one month basis and assuming using 100% capital every time, I would have to multiply my result by 65% for comparison, or something like that. Thanks.

  9. Mark Wolfinger 01/15/2010 at 7:40 AM #

    This is an intriguing question and presents an opportunity for me to share more of my investment philosophy.
    Because this reply is not time critical, I am saving it for a separate post.
    Thank you

  10. Peter 01/15/2010 at 11:33 AM #

    Thanks Mark. Look forward to your comments.