Managing/Adjusting Positions

[spindr0]

Quote from Premium:

I'm not saying whether the strategy is right or wrong, but you are increasing your maximum risk every time you adjust that way. If you have an iron condor and the underlying goes up, you become more delta negative and so you sell more vertical put spreads. I would rather use the oppotunity to hedge or remove the put side (at a cheaper price) or do nothing, and possibly manage the call side. But that's just my preference.

OP, rather than add verticals, you can roll the verticals and that will not add add'l risk, so to speak.

For example (made up numbers), suppose your index short strikes are 50 pts OTM and the UL rises 20 pts. Now you're at 70 30. If you roll the put spread up 20 pts, you book a profit and you restore the 50 pt buffer on that side (now 50/30). You still have a problem on the 30 side but you've reduced delta and given yourself a chance to hang in there a bit longer.

A more aggressive approach might be to only roll the short put leg up (more net premium) but since that widens the vertical, not advisable unless you understand the add'l risk and you can manage a reversal.

In general, adjustments tend to reduce the pain not eliminate it. Only a mild reversal cures it.

 

[spindr0]

Quote from dreamliner:

For example, I put on about 6 Iron Condors and Calendars, but as you know the market has plummeted recently (about 6% drop so far), which has put me in large positive delta for my overall portfolio. All my positions would have been a loss had I closed them early. But instead I've just put on some Vertical calls, which have reduced my portfolio delta down a long ways, and it appears that I will now be able to wait until February expiration and close out at a profit.

Will you be able to wait until February expiration and close out at a profit if the market keeps dropping?

 

[dreamliner]

Quote from spindr0:

Will you be able to wait until February expiration and close out at a profit if the market keeps dropping?

I guess it depends on how far. I've used half of my "adjustment funds" in the past week and a half, and we have about 2 weeks to go. I don't really know.

I really appreciate your post above, helping to explain what a roll might look like.

 

[spindr0]

Quote from dreamliner:

I guess it depends on how far. I've used half of my "adjustment funds" in the past week and a half, and we have about 2 weeks to go. I don't really know.

There are many things you can do. There's no right or wrong answer, just what keeps you afloat. And there's no cookie cutter correct answer because we each have different risk tolerances and what adjustments are viable can depend on where and when the drop occurs:

- how much premium decay has been achieved?
- how large is the drop (proximity to short strike)?
- how much time until expiration?
- has IV changed?

If I was in an IC challenged position and I wanted to hang in there, I'd be looking at ways to shift the risk graph. The aforementioned roll would be a starting point. I might sell a few extra put verticals along with the put roll (a blend of both our ideas). I might take off a few short calls with the put roll, ending with more long calls than short (adding a bit more risk on the put side while reducing it on the call side). And maybe as a last resort, instead of closing the entire position, rolling the call spreads up (book put profit, book call loss). A possible but less likely choice for me would be to roll the calls up and out a month.

Short answer: It depends.

 

[dreamliner]

This is very helpful to me, thank you!

Quote from spindr0:

There are many things you can do. There's no right or wrong answer, just what keeps you afloat. And there's no cookie cutter correct answer because we each have different risk tolerances and what adjustments are viable can depend on where and when the drop occurs:

- how much premium decay has been achieved?
- how large is the drop (proximity to short strike)?
- how much time until expiration?
- has IV changed?

If I was in an IC challenged position and I wanted to hang in there, I'd be looking at ways to shift the risk graph. The aforementioned roll would be a starting point. I might sell a few extra put verticals along with the put roll (a blend of both our ideas). I might take off a few short calls with the put roll, ending with more long calls than short (adding a bit more risk on the put side while reducing it on the call side). And maybe as a last resort, instead of closing the entire position, rolling the call spreads up (book put profit, book call loss). A possible but less likely choice for me would be to roll the calls up and out a month.

Short answer: It depends.

 

[RichardRimes]

Here is the big problem...constant "management" or adjusting spreads...delta's will eventually create a very large commission issue. Our brokers get rich we don't. I try to keep it simple and if I can live with the risk of the spread then don't adjust. Spreads by definition are "defined" risk trades so limit the adjustments.

I've been doing diagonal's and this month found myself with an unacceptable risk when the market started going down so I put on a debit put spread between my Feb short and Mar long. My plan is...if necessary..I can roll the Feb short to a strike below my vertical at BE or hopefully for a small gain then have the vertical reduce most or all of the risk by ending up with a put condor for Mar.

 

[dreamliner]

Quote from RichardRimes:

Here is the big problem...constant "management" or adjusting spreads...delta's will eventually create a very large commission issue. Our brokers get rich we don't. I try to keep it simple and if I can live with the risk of the spread then don't adjust. Spreads by definition are "defined" risk trades so limit the adjustments.

I've been doing diagonal's and this month found myself with an unacceptable risk when the market started going down so I put on a debit put spread between my Feb short and Mar long. My plan is...if necessary..I can roll the Feb short to a strike below my vertical at BE or hopefully for a small gain then have the vertical reduce most or all of the risk by ending up with a put condor for Mar.

Thank you. I initially thought that I would choose high percentile trades (70 or above) and just simply close out the losing trades (since I don't really know how to "roll" them) when they approached the short strikes. This way the risk/reward is always skewed favorably (70% wins, wins bigger than losss, etc.)

I figured if I just keep trading this way eventually it will work out. But then I watched that video, and decided to try a month of "delta portfolio managing".

I'm not really sure which is best, but I will hopefully learn over time.

 

[Premium]

Quote from dreamliner:

Thank you. When you say you would rather "use the opportunity to hedge" can you explain what you would do then?

In other words you are in an iron condor and the underlying goes up and approaches the short call. How would you hedge?

Thank you again for responding.

I agree with what spindr0 had said. There are lots of factors such as time to expiration, how close the underlying is to the short strike, and volatility. Common ways to deal with an underlying threatening the short strike are adding long options (add gamma), adding long vertical spreads, rolling the position, and simply buying back the credit spreads. All these options cost money, but it's part of doing business with credit spreads.

You can roll the other side as well to get some credit, but you might get whiplashed. If the underlying is going up and you move your put spread to a higher strike, a sudden downturn reversal can now threaten the put side, too.

No one answer. If adding more credit spreads was part of the initial plan by scaling into a position, then it might be okay, although with the strategy you described you're selling the spreads at a cheap price since you're selling puts when market goes up and selling calls when it goes down. Just be careful of risk - I think that risk control is the key to longevity, and it takes much more discipline for gamma negative traders.

 

[dreamliner]

Thank you. Very helpful. Yes, I just today noticed that I'm selling the options cheap as I sell puts when market goes up and calls when it goes down. What would be some other ways to increase/decrease delta, by selling premium, that does the same thing?

Quote from Premium:

I agree with what spindr0 had said. There are lots of factors such as time to expiration, how close the underlying is to the short strike, and volatility. Common ways to deal with an underlying threatening the short strike are adding long options (add gamma), adding long vertical spreads, rolling the position, and simply buying back the credit spreads. All these options cost money, but it's part of doing business with credit spreads.

You can roll the other side as well to get some credit, but you might get whiplashed. If the underlying is going up and you move your put spread to a higher strike, a sudden downturn reversal can now threaten the put side, too.

No one answer. If adding more credit spreads was part of the initial plan by scaling into a position, then it might be okay, although with the strategy you described you're selling the spreads at a cheap price since you're selling puts when market goes up and selling calls when it goes down. Just be careful of risk - I think that risk control is the key to longevity, and it takes much more discipline for gamma negative traders.

 

[spindr0]

Quote from RichardRimes:

Here is the big problem...constant "management" or adjusting spreads...delta's will eventually create a very large commission issue. Our brokers get rich we don't. I try to keep it simple and if I can live with the risk of the spread then don't adjust. Spreads by definition are "defined" risk trades so limit the adjustments.

I think that the bigger problem with rolling is the B/A slippage.
I'm not worried about donating 70 cts to my broker