When you own iron condor positions and the market moves in a unidirectional manner, it spells trouble, or defeat.
However, one method for protecting yourself from suffering under those conditions is to own extra call and put options. The current surging market (NDX up 12 consecutive days) had made owning iron condor positions treacherous. However, traders who had the foresight (or dumb luck) to be prepared for such an unlikely event have come out unscathed.
Owning extra call options provided so much relief during this surge, that I wonder how I ever survived without owning insurance. I'm not suggesting that I've earned big profits during this rising market. Far from it. But instead of being forced to scramble to exit one losing trade after another, my portfolio value is holding reasonably steady – because the gains from owning extra calls is approximately equal to the losses I'm taking from the iron condor trades. And the good news is that I'm not forced to exit those iron condor trades at terrible prices [but if I chose to do so, I could sell some of my extra calls to offset the losses].
I'm poised to profit nicely if this market continues for another few days. But tonight's slew of bad earnings reports (it's Thursday evening 7/23/2009) from MSFT, AMZN, AXP suggests a weaker opening tomorrow – and perhaps an end to this very strong market.
I must confess, I'd prefer to see a decline because I know many of you are iron condor traders and the decline would be welcome.
But it's not about the results. It's about being prepared. If you trade positions with negative gamma, it's a good idea to manage potential risk by owning an appropriate number of extra calls and puts, and the offsetting positive gamma that comes with them.