Treating a 20-Point Iron Condor as Two 10-Point Iron Condors


This discussion picks up after a previous exchange in which TR was short a 620/640 call spread (as part of an iron condor).

Mark

I hear what you are saying and I suspect you are right but I think this is
probably one case in which my "science" oriented brain struggles with the "art" side of
options investing.

My thought process in my suggested approach I was bouncing off you is that I
was treating the 620/640 bear call spread as two distinct bear call spreads: 1)
620/630 and 2) 630/640 . This is what I would have if my two IC's bought weeks
apart were actually bought in separate trading accounts.

So my thought process was "just because I have two IC positions and the
proximity of the call side of the two positions created a 20 point call spread,
I should still act as if they were two separate 10 point spreads, not one 20
point spread". Or another way of saying this "just because I have 2 IC's in one
trading account, why should I act differently than if the two IC's were in 2
separate trading accounts?"

I believe the most important part of my suggested adjustment is that I reduce
the spread from 20 points to 10, not that I moved the short strike by 10 points
or 1.5%.

I would appreciate your thoughts on this and let me know what I am missing.

TR


You are not missing anything strategic – but you are ignoring the real-world expenses associated with adjusting these positions and how to make the best trade (most likely to boost the value of your account) possible under the circumstances.
  I'm
encouraging you to think in terms of minimizing losses, cutting
expenses, and having a position that fits within your comfort zone.

It's intelligent to recognize that the 20-point spread is the equivalent of two 10-point spreads. 

If you are going to strictly abide by your rule:  'Don't adjust until the strike is breached,' then your plan is viable. 

But I believe you are missing a subtle point associated with the 'art' side of trading.  I understand how you feel, as I was also educated as a scientist (chemistry), but I'm suggesting you consider the following and then decide:

With an index priced near 600, I believe it's a losing tactic to close only the 620/630 spread – when there's a good chance that you will be closing the 630/640 spread later that same day – or the next.

Every time you trade, you incur slippage (the cost associated with your inability to get the best price when executing an order.  You must pay closer to the ask price when buying, or sell closer to the bid price when selling) due to the bid/ask spreads.  Ignoring the cost of commissions, you are selling the 630 call in adjustment number one and are likely to be buying it soon thereafter in adjustment number two.  That's just throwing away money.  The ONLY time this method provides a better result is when the market turns right then and there, and does not go up another 10 points.  How likely is that?

I believe it's far more reasonable to close both the 620/630 and the 630/640 spreads at the same time.  Slippage is not the only reason.  You also gain when the index does move higher because you cover the 630/640 spread earlier, and thus, at a lower price.  Once again, the ONLY time this decision loses is when the market move stalls and quickly reverses.

I urge you to consider that an option that is one and one half percent out of the money is hardly out of the money at all – at least in today's higher volatility environment.  Yes, far less volatile than last fall, but much more volatile than average. 


TR and his adjustment point

I'm not telling you how to establish your adjustment point, nor am I suggesting that you adjust in stages, but I don't see the harm in closing the very risky 630/640 spread prematurely – especially when you know you are being paid a bonus to close it – and that bonus is avoiding the slippage and reducing current risk.

That's my perspective.  I'm asking you to consider it, and I am NOT telling you that you are wrong.  But I do feel your play is against the odds of saving money.  By that I mean you will end up adjusting a 2nd time far more often than the market will turn – and that in the longer run, you save far more than you would lose (if the 2nd adjustment proved to be unnecessary).

One more note:  The cost of slippage makes the difference here.  I'm not telling you that you should close a 630/640 spread when index hits 620 (although I've already done a stage I adjustment by that time).  It's the fact that you no longer officially have a position in the 630 line that makes the difference in this scenario – because you would be forced to trade that call option twice, when making two adjustments. 

This is a 'think outside the box' situation.

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