The Thrill of Victory…The Agony of Defeat


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.

I first blogged about the idea of owning 'extras' last September (at length), but the idea of owning insurance when trading iron condors has been repeated several times.


2 Responses to The Thrill of Victory…The Agony of Defeat

  1. TR 07/24/2009 at 6:28 PM #

    I am in the same boat as you. I am SO GLAD that i picked up an August RUT 560 call option to protect my Sept RUT IC’s (closest short call being 580). I am down a bit as a result in the steady increase of RUT but down FAR LESS than I would be if I did not have the extra call option. If RUT stays moving up I know that I will have to renew my insurance at a high rate – if I want to hold onto my Sept RUT IC’s – but I also have the option of closing my positions for a small loss a week or two before the August expiry.
    I did make one move today that somewhat violated my generally ambilvalent view on market direction. I picked up a sept 430 put (inside my closest sept short strike of 420) because it was so cheap I couldn’t resist. I am now hoping that RUT will fall a little bit and make this purchase a winner, while giving me the chance to pick up a sept 560 or 570 call on the cheap.
    Once again, THANK YOU for repeatedly talking about risk management. Your book “The Rookies guide to options” has paid for itself multiple times over in helping me in my trading. Just the risk management chapter by itself would have been well worth the cost of the book. It makes dealing with these kind of moves much less stressfull and much more fun.

  2. Mark Wolfinger 07/24/2009 at 9:43 PM #

    You must soon make a decision that is probably going to make or cost you some decent bucks. I know it’s just a one-lot, but you are going to have to keep that Aug not-so-far-ot-of-the-money call option (with all that positive gamma and negative theta), or you are going to have to sell it while it still has significant value.
    If you sell you will probably replace it with one or two Sep calls, in effect doing a one-lot diagonal spread or a 2 x 1 diagonal back spread.
    Don’t ask for guidelines. It’s just this decision: which position do you want to own today? When the answer is no longer ‘Aug’ then it’s time to move to Sep. If you wait too long and the Aug call expires worthless, your current position is likely to be a good-sized loser. Timing is everything. You want that gamma, but the clock is ticking. Good luck.
    I don’t like the put you picked – it’s just so far OTM. But if you bought it for protection, then it will do its job well.
    Glad the book did so well by you. Of course you bought one copy for each of your 200 closest friends. Right? (grin)