Too Many Adjustments

Continuing the discussion:


I don't feel comfortable getting too close
to the money with iron condors. I am happy going just inside one standard deviation.

Yesterday I rolled a 3-point wide SPY IC from Oct to Nov to get more "centered"
and collected between $0.98 and $1.20 on 10 lots.  The new position is just inside one
standard deviation.

Of course it's no longer centered after another
rally today.  By the way, do you think this rally will be over soon?

plan is to collect .3 in 4 weeks and then roll to Dec to get "centered"

I also have a 1-lot of an OCT NDX IC, opened with 50- point spreads (low 1650
high 2000) a little bit outside one standard deviation, and collected $7.50.

Again the plan is hold 4 weeks and roll to get centered.

One more question: when would you suggest adjusting both my open
positions in case of a big movement?



You raise some important points, worthy of discussion.

1) 'Too close to the money' is not a well-defined term because it is 100% relative and strictly a personal comfort zone decision.  It's neither right nor wrong to refuse to trade close-to-the-money iron condors. 

2) I promise that you don't want to know my opinion on where the stock market is headed next.  My prognostication record is dismal.  Yet, because you ask, I don't understand why the DOW is not near 5,000 instead of 10,000.

3) I think you roll far too frequently

This is important.  Why do you 'get centered' every expiration? 

Do you believe that reduces risk?

Do you believe this is an efficient method of trading?

Do you believe it's necessary to get neutral frequently?

Why do you do this.  There must be an answer.  Did someone suggest doing that?

Unless you are at, or approaching, the limit of your comfort zone, why are you exiting your current position? 

4) Here is a good idea that will make your trading far more effective: Cut your trade size in half. Use half your capital for a Nov position and the other half for Dec.

This is my recommendation.  Do not accept it if it violates your comfort zone.  But:

There is no need to 'get centered.'  It may be better to move just the calls or just the puts.   It may be better to reduce size.

The idea is to get centered when YOU are not satisfied with the current position.  That means too much risk or too many delta out of line etc.  It does not mean taking a perfectly good position and rolling it out one month just to get centered.

Your methods include: Too much trading.  Too many commissions.  Too many adjustments. Far yoo much cash going to your broker.

5) Why think of it as rolling?  Here's what I suggest.  Use your Nov position.   Adjust, exit, roll, etc ONLY WHEN IT'S THE RIGHT THING TO DO.  That means when YOU want to take action.  Do not roll just to get centered.  It does cost real commission dollars to get centered.

Open a Dec position when you are ready to do so.  Each of these positions is half your current size.  You own these Nov and Dec positions simultaneously.  Now, trade them separately.  When ready, close Nov.  Then sell January when ready.  Do not roll to Jan.  Just close Nov when ready.  After you do that, open Jan when those options become available for trading.

Manage Dec options the same way.  Trade the spread on its own.  Close when ready and then open a Feb position.  There is no need to roll. 

6) NDX trade

I have no suggestions for when YOU should adjust your current positions.  I don't know your comfort zone.  Nor do I know how far OTM you allow your short options to be before rolling. 

I don't believe in rolling.  I think it's a poor strategy that people adopt because of insufficient information. It should be a two-step process.  If you want to exit the current position, then exit.  If you want to open a new position, then open it.  The problem with rolling is that traders feel obligated to exit AND make a new trade at the same time.  Often, that new trade is ill-advised, too risky, or chosen for the wrong reasons (to collect cash instead of paying a debit).

Rolling should be two separate decisions.  It's okay to roll in a single trade, but ONLY when you want to exit the old and open the specific new trade.  In your situation, I don't understand why you are exiting the current trade.

A 'big move' is another term that is not well-defined.  Thus, I have no idea what it means to you and have nothing to suggest about whether you should make adjustments to your positions if that 'big' move occurs.  The same rules apply.  Make a trade plan to think ahead and consider at what price point you would become uncomfortable.  Then update that plan as time passes. If you don't recognize discomfort when it arrives, then go with the trade plan.

7) My recent record

I made zero adjustments out of necessity in recent times.  I bought in all my RUT Sep 10-point call spreads when they declined 15 and 20 cents.  And over the past few days, did the same with the put spreads.  I have no Sep positions and in fact, have already bought in a good portion of my Oct call spreads at 20 cents – on the recent decline.  I'm hoping to collect a few Oct put spreads on this rally, but nothing yet.

I never felt the need to adjust.  The moves never brought my shorts to a point where I considered the position to be risky.  Obviously you and I have different comfort zones, but if I rolled to get centered as you do, I'd have rolled many times.  I don't believe that's a good reason for making trades.

In my opinion, do not adjust when there is a big move.  Adjust when your position is not what you want it to be.  That's when you feel that your short options are too close to being ATM.  that may come after a big move or a small move.  And it's not an all or none decisions.  As you know, you can adjust in stages.

8) One more item I do not understand.  You collected over $1 for the November spread and your target is to earn 30 cents over the next four weeks?  Then you plan to exit?  Question:  Is the target profit of 30 cents worth the risk?  That's not very much profit. [Yes, it is a 10% gain on margin, but it's less than 1/3 of the premium collected]


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13 Responses to Too Many Adjustments

  1. Jorge 09/04/2010 at 2:40 PM #

    Thank you very much for your comments.
    I will try to explain the logic behind my trading strategy. I’ve always thought of options as insurance, someone buying stocks, also buys puts to limit losses and someone shorting stocks buys calls also to limit losses. We IC traders, we profit from selling puts and calls, we sell insurance, of course, we also buy puts and calls to limit are losses, just like an insurance company. Under that view, I try to manage risk like an insurance company would do. I have in mind the price of the underlying, and based on history movement and risk, I set the price I would like to collect for insurance, if I find that price, I open the trade. Like insurance companies, we profit from time decay and as long as we don’t have claims (shorts violated), we will keep the entire premium. In case that the initial risk gets higher, an insurance company will ask for additional premium, I will not be able to collect that premium from the same month, so I close the trade and move on. I am certainly not going to make a lot of money that way, but most likely not going broke either, which is probably the first rule of trading.
    I understand that rolling a position is in reality closing the open position and opening a new one, which is what we all do at same point, unless we let the position expire. I think the point then is when to close the position. I cannot deal with a lot of risk, that’s my personality, I don’t have invested savings, just extra money that I would like to put to work. However, that doesn’t mean that I will not manage risk and stay static if I feel that my position may generate a bigger loss than I am willing to take.
    When I say that I want to collect .3 in 3-4 weeks, its means that’s my expectation, but if I get to .3 and the risk of staying in the trade remains the same or it’s lower I will stay in the trade expecting to collect a new .3; however, if the trade gets to .3 and the risk went up I will not stay as I prefer to lower the risk, by closing the trade and opening a new one with better conditions. Of course, if while waiting for the .3, the trade gets too risky I will close it and take my loses and come back with a better trade.
    I think the main point is when to close. When to take profits and when to cut loses. I look for 70% probability trades, that gives me the price I want and a manageable risk, like you said correctly on a previous post, that means that out of the next 10 trades I will profit only in 7 of them. With that being said, if I collect .3 on every of the 7 winning trades and lose a max of .3 on the other 3 losing trades, I will make 1.2 in the next 10 trades, which is 40% of the margin used in the 10 lot – 3 point spread SPY. I am very happy with 40% profit in a 10 trade period. The problem is that the market can move violently for the next 6 months and I can get 6 loosing months in a row, but that’s the risk that I originally understood I was taking when trading options. I trade with options house, which has pretty decent rates, however they will probably eat around 20% of the profits on the SPY IC and 10% of the NDX trade.
    I would love to hear more comments from you.
    Thanks again.

  2. dave 09/04/2010 at 10:26 PM #

    Is this all with a 8k account ? I think thats a lot of risk for an account that size if it is 8k ? Especially the cboe large ndx index option those are very wide strikes. I am just saying this to be helpful not critical . Seems you would need to constantly be adjusting and not really be able to sit in trades to long if the market made a sharp move , and so you wouldnt benefit fro mthe decay

  3. Mark Wolfinger 09/04/2010 at 10:36 PM #

    Thanks for the details, Comments follow and offer suggestions – something to consider. I’m not saying you are making mistakes – only that you re-think and make a decision.
    1)Good overall plan.
    2) People who buy puts to ‘insure’ stocks probably don’t understand what they are doing. It is a very costly strategy. Not bad for everyone, but very expensive.
    3) You have the first rule of trading correct. Do not go broke.
    4) Agree, when to close (or adjust) is a crucial decision. You exit when you perceive extra risk. Good.
    Automatically re-centering seems to be a plan ruled by the calendar and not by risk. If ruled by profits collected, that seems okay – but are you seeking enough profit?
    5)Assume the calls make you nervous & you choose to roll by re-centering the whole IC. This moves the puts to a more risky price level.
    Do you pay attention to collecting a big enough cash premium to justify making this move, or do the puts just ‘go along the the ride’?
    Is this (more risky put position) consistent with your desire to trade with low risk? In this scenario, you get the ‘better conditions’ you seek for the more-risky call position. But is it necessary to make the put position more risky than it was to accomplish that goal (reduce call risk) ?
    I am not referring to a situation in which the put spread is cheap – but to one in which you pay more than you want to pay for the puts and move them just because ‘it’s time to re-center.’
    This is tricky: knowing when to roll the ‘other half’ of the iron condor along with the ‘poorly behaving’ half.
    6) We do NOT all roll. Sometimes we exit and do nothing else. Sometimes we open a new trade and do nothing with the current trade(s).
    7) I do not believe that a 70% probability trade results in earning profits 70% of the time (nor did I ever say that) – UNLESS you ignore risk management and allow positions to expire. That would be absurd.
    Thus, we manage risk, and the chances are high that we will want to ‘do something’ far more than 30% of the time.
    ‘Doing something’ – especially exiting – is likely to be locking in a monetary loss, but it’s done in deference to risk.
    8) Here is the part of your methodology that I cannot understand. You mention a rough assumption of winning 7 x out of 10 and losing $0.30 on the other three times in ten.
    That is impossible. If you exit every time the loss reaches 30 cents, I doubt that you will have more than one winning trade per year. If you do not exit at a 30-cent loss, then you obviously risk a 50-cent, or $1, or $2 loss.
    So how and when do you exit? You cannot trade iron condors when the profit goal is approximately the size of the maximum loss you are willing to accept.
    I don’t see how you you can make any money, so something about your methods is unclear.
    9) You do use a low priced broker, so that helps.
    The ‘impossible’ part: limiting losses to 30 cents – and expecting to win 70% of the time – is not consistent.

  4. Jorge 09/06/2010 at 7:55 PM #

    Yes, my account is now 8k, my currently opened 1 lot october ndx trade has a 500 point spread, 1650 put side, 2000 call side. currently 75% probability, I collected $ 7.5; I would probably have the same trade open only with more lots if my account was bigger, going further out of the money would mean too small of a credit, just personal preference. Problem with the 1 lot – 5K margin is that it doesn’t leave much room for any stage adjusting, but I accept that and if the trade doesn’t go my way I will close it and try again with a new one. When I will close it? 1690 – 1960, probably $ 3-4 loss at that point dependending on time left. Do you stay longer in your trades to let them get closer to the shorts? Do you “adjust” before that point?

  5. Mark Wolfinger 09/06/2010 at 10:28 PM #

    1) I don’t know your definition of a ‘500-point spread’ is but it’s not what you think. That term means
    a)the two calls are 500 points apart from each other
    b)the two puts are 500 points apart from each other
    c)the margin is $50,000
    2) The cash collected is 100% immaterial to any discussion. All that matters is: Do you want to own the position today at its current price? Does the reward potential from today (not from when you opened the trade) justify current risk?
    You look at current probability. I would look at: What does it cost to exit EITHER side? Do I want to pay that price to exit either side? I would enter a bid to exit one or both sides at my price. For an Oct NDX spread (and I assume it’s 50-points wide because of 5k margin), I’d probably bid 50 cents. I’m willing to pay more than $1 to exit the entire iron condor, but when bidding for one side, I like to get it in when it’s available. If I can get either side cheaply, I take it. You may feel that 50 cents is too much.
    3)You trade an 1800 point index and I trade a 600 point index. Thus, your 40 points is my 13 to 14 points.
    I prefer to make a small adjustment when my short options are 30 points (~5%)OTM. However, in these up and down markets, I am very comfortable waiting until 20 point OTM before taking appropriate action. And I begin adjusting small.
    One reason is that I am sized so that no single trade places me in jeopardy, and I have a bunch of small trades going at the same time.

  6. dave 09/07/2010 at 6:35 AM #

    Hi Jorge,
    Is this the 1650-1700 and 2000-2050 condor in the ndx ? I agree with Mark it is a little confusing . As far as adjusting I have been trading close to the money condors with large credits and reducing my size. The credits are generally 1-1.10 in the SPY , mnx,djx with strikes 2 points apart so with reduced size i give the positions a little room before adjusting but i will adjust if my comfort zone is threatened . This has given me ample room for not only adjustments but new positions. You might want to try looking at the mnx mini nasdaq options they have strikes closer the equivalent of 25 nasdaq points . Each point is 10$ instead of 100$ . in the mnx you could trade more lots opening up margin and giving you room for adjustments. You could also do partial adjustments . So that may give you more opportunity. You would of course get smaller credits but make that up with increasing lot size. While comissions would be higher you could structure condors in different months and even buy protection if you wanted. It opens up possibilities more than 1 condor that draws alot of maintence to hold the position. Especially if that position ends up not working out.

  7. Mark Wolfinger 09/07/2010 at 9:17 AM #

    Excellent suggestions. I’ve never looked an mini-options, but it’s far more efficient than trading a one lot.
    But don’t forget Jorge, can adjust your NDX position using the minis, but the margin requirement may may that impossible for you.
    Thanks Dave

  8. Jorge 09/07/2010 at 2:22 PM #

    Yes, I meant 50 point spread 1600-1650 put side 2000-2050 call side. Thank you for the recomendations.
    Mark: How wide are your RUT positions, if you adjust 20-30 points before shorts it must be at least 100 points or more right? What is the probability percentage you are looking for at opening?
    Thank you.

  9. Mark Wolfinger 09/07/2010 at 3:24 PM #

    I always trade 10-point wide RUT iron condors. That just suits my preference.
    NOTE: A 20-point iron condor is the same as trading two adjacent 10-point iron condors.
    The term ‘wide’ does not refer to the distance between the calls and the puts. My iron condors differ, based on implied volatility.
    When IV is high, there is a larger distance between the calls and the puts than when IV is lower. Right now, I am trading Nov and Dec iron condors for which the short options are 80 to 110 points apart.

  10. Jorge 09/07/2010 at 5:47 PM #

    Assuming that you have an IC with 100 points between shorts and you opened it centered. RUT has to move either side only 20-30 points to trigger your first adjustment; I am guessing that happens very often, right? RUT moves more violently than other indexes.

  11. Mark Wolfinger 09/07/2010 at 6:56 PM #

    Over the past 3 1/2 months I have not made any more than a token adjustment. This has been the most profitable iron condor period I have ever seen. NOTE, I’ve only been trading iron condors for about 4 years.
    I truly don’t know how frequently I adjust. I don’t keep count. I carry about 6 to 12 different iron condors (all RUT) simultaneously and adjust a put or call spread when necessary. I NEVER adjust a whole iron condor. I trade all of my calls spreads as one risk unit and all of my put spreads as another risk unit.
    When the market makes a big move in one direction, I make adjustments. Sometimes no adjustment is necessary because I was able to cover the position that would be in trouble now – when it was only 20 cents.
    I don’t think about adjustments. They are a necessary part of trading iron condors.

  12. Jorge 09/07/2010 at 8:32 PM #

    That explains why a rookie like me it’s making money on the first 2 months trading iron condors; let’s hope it stays that way. Thank you for your help, this exchange has been very useful.

  13. Mark Wolfinger 09/07/2010 at 9:08 PM #

    Thanks for sharing.