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Exiting An Iron Condor Trade


One of the more difficult aspects of options trading is knowing when to take a profit. No one likes to ‘leave money on the table.’ However, I also hope that no one likes to lose thousand of dollars trying to earn another $50 to $100. There is a compromise somewhere.

Question:

"I currently have a RUT Sept IC [iron condor] paper trade that I opened on Aug 27 for a credit of $1.90. This morning the position had a profit of $1.20 and would cost $0.70 to close."

 

If you can watch a position during the day would you advise locking in a profit at a certain point in a situation like this?

 

I cover early. That’s my comfort zone, and you must find your own. However, even that is insufficient. How early to cover and how much to pay remain the unanswered questions. The best place to discover the answers is in the original trade plan. When you have such a plan, it is easy to follow. Sure you can modify it as needed, but the plan gives you a general guideline for making decisions.

 

For example, if your plan was to earn $1.50, then I would say that earning $1.20 is acceptable ONLY when the current position makes you uncomfortable. If you have doubts, then quitting earlier than anticipated makes sense.

 

Lacking a trade plan, I believe:

  • How much you collected originally is immaterial.
  • How much profit you have is immaterial

 

All that matters is this:

 

You can cover this position by paying $0.70. Do you want to take the risk of holding this position when your potential is all, or part, of $0.70? Are the options far enough OTM that you are comfortable when holding? Or would you be holding just because you cannot bear the thought of paying ‘so much’ to close?

 

Would open this iron condor as a new position for $0.70. If ‘yes’ then do not close. If ‘no’ then you have a decision to make.

 

 

ironcondor_alt727x285.jpg

 

Is it too risky to hold? I cannot possibly know the answer. It’s a personal decision.

 

If you do hold, what is the target? If it is another 5 cents, get than $0.65 cent bid in now. There is no reason to risk losing the whole profit to earn another $0.05.

 

I offer this advice: Don’t allow the actual result to sway you. If you decide to hold, and this time that turns out to be a losing decision, don’t conclude that you should close early next time.

 

If you close early and the position goes out worthless, that does not mean you should hold next time.

 

Trading is about RISK and REWARD. Not how much you coulda, woulda, shoulda earned.

Also, your decision on holding/closing should influence your decision. But that becomes part of the trade plan.

 

You are in the learning phase of your options trading career. You are gaining experience. Education is an ongoing process, and requires time. Before you risk real money, you must (IMHO) understand the strategy you are using and have some basis for believing you are capable of managing the risk of your investment, should the market move against you.

 

You are still paper trading. So trade. Manage risk. Keep a daily diary of how you ‘feel’ about your positions: Are you comfortable? Are you concerned about volatile markets or pending losses? Are you confident (overconfidence is a killer)? Are you anxious to lock in profits or do you prefer to try to collect the last penny from a trade? Put your thoughts into writing.

 

Keep a trade plan for every trade. Be conscious of position size and have a good reason for increasing or decreasing size. As time passes, keep a record of how well you like the plan or whether you feel the plan did not serve its intended purpose.

 

Answering these questions – in your diary – is important. Your own commentary will lead you down a path that is good for you. And you can modify your comfort zone as the years go by.

 

It takes time to find a strategy that you can handle effectively. But, no strategy is always ‘right.’ Times change and markets change. Be prepared to change your trading habits.

 

Take your time. If you develop good habits now, those habits will last a lifetime. If you go broke now, you may give up trading options. I cannot tell you what will work for you – but you will figure it out as you go along.

 

  • The primary goal is to survive. That means protecting your assets.
  • The secondary goal is to make money.
  • The tertiary goal is to build wealth.
  • The fourth rule is to never forget your primary goal.

Concentrate on getting experience with iron condors, finding your comfort zone, and protecting your assets. That is what is important.

 

Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Since leaving the Exchange, Mark has been giving trading seminars as well as providing individual mentoring via telephone, email and his premium Options For Rookies blog. Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.

 

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