Quote from newguy05:
mark,
when do you close out the iron condor as stop loss? Based on your method, you write otm iron condors that are few months out and take the profit ~1month before expiration and gamma risk become too high.
Hi NG,
Yes, that's the plan, but I don't always get out as quickly as I'd like.
Lets say you wrote an IC 3months out, then 2 weeks later the underlying hit your strike so one of your leg is now atm and of course the position has an unrealized loss. What do you do at this point, do you close it out or do you adjust, and how do you adjust? by rolling or buying additional insurance.
I was planning on writing a very detailed reply and then decided I don't want to give away all the details. On rereading this, it's already plenty detailed!
Here's a general outline, assuming I have enough insurance.
Lacking that insurance. I would close the losing spread and also enter a bid to close the winning spread at a low price. For me that's usually 20 to 35 cents, depending on how much time remains etc. But I always try to bring that cheap spread home. I never go for those last few nickels.
Then I open a new, suitable iron condor. I might decide to only open puts (if I just closed the put spread at a loss and did not yet buy in my call spread), or I might sell a smaller number of calls until I covered those outstanding calls.
To most people this is 'roiling the position.' But I don't roll as a single decision. To me it's two decisions. First I cover to mitigate risk. Once that's done, I open a new position if it's attractive to me. If not, I take the loss and wait until I'm ready to trade again.
One other reason for not rolling is that I find it very difficult to get a good fill by entering a 4-legged spread. I do much better trading a two-legged spread and then trading the other two legged spread. Especially now with those horribly wide markets.
I want to make this point. Not everyone can do this, but trading without emotions is fantastic if you can do it. When I'm forced to close for a loss, I just do it. I do not FORCE a roll just trying to make back that loss. My thinking is that I can make plenty of money by buying iron condors, but that losses are inevitable. To succeed, I must not allow those losses to overwhelm profits. Thus, I'm very willing to take losses. In fact, I don't bother to calculate the size of the loss, because I try to forget the price at which I initiated the position. That is 100% irrelevant when my risk manager persona determines that it's too risky to hold the trade any longer.
I also hold too many overlapping positions to keep track of each. Record keeping, and a trade diary, is a good idea for most traders - when it's possible.
Regarding <b>insurance</b>, as described in Chapter 20 of The<i> Rookie's Guide to Options</i>. If I have adequate insurance, then the IC loss is manageable because I have offsetting gains in the extra options I own. Sometimes I am ahead, sometimes I am behind. No matter. I trade to keep risk and profit potential in line, not to try to force a profit on every trade.
What I <i>prefer</i> to do (it's not always feasible) is buy in my losing spread and sell a larger quantity of spreads in the same calendar month for something near even money. I don't care if it's a small credit or small debit. NOTE: this isonly feasible when IV is as elevated as it is today. With much lower IV, you would not be able to move very much further OTM - and that makes increasing size a poor decision.
As market conditions change, so does my strategy. No single method works all the time.
NOTE: Without the insurance, doubling up is <i>verboten</i>. It's simply not a good idea to keep building larger and larger size. That's too much risk.
In RUT for example, I recently closed some March put positions (I traded so many months out because I liked the idea of selling additional vega as IV increased. That was obviously premature). For example, I could have done something similar to this: Buy 40 RUT Mar 520/530 put spreads (to close) and sell 60 to 80 spreads at the 440/430 level or perhaps the 400/390 level. The decision would be based on just how much protection I had.
Then I would look at my long protection, and would collect cash by selling out my long puts and buying an equal number (or perhaps one or two more) of a much lower strike put.
I would consider buying extra insurance, but NOT at the current IV. It may be right to buy those extras, but I cannot make myself do it. Thus I trade my current extras with care, trying not to lose them - even though there is a lot of decaying time premium tied up in those longs.
In summation, I adjust most often by closing and that end's the trouble. I could buy in only a portion of the losing spread, depending on the price I must pay to get out. But I'm not stubborn. I don't wait too much longer to close all.
I usually do what you call rolling, but, as I said, it's an independent decision.
I've made decent money in the past and am not losing anything on this decline, so I feel it's okay to take losses on specific trades, as necessary. And if I own insurance to mitigate those losses, even better.
I want to be in the game when the golden opportunity arrives. That means when IV eventually declines, I want to be there. I also know that this is not a strategy that generates a profit every month. It's a long-term proposition.
And sitting on the sidelines because the market is too volatile, it not a bad idea for undisciplined traders.
Mark
