SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Iron Condor Adjustment: "Rolling" Forever?


Digging through some old forum posts, I came across the following question from one of our members: "My bear call spread is ITM now (RUT 855/865). I adjusted it by rolling it to the next strike (closed 855/865, opened 875/890). But I was wondering if this could be approached differently. This seems too good to be true, so I'm wondering if I'm missing something.

I could have done nothing for now, and if on October 18 (when my spread expires) RUT is still above $865, I could just roll to the SAME strike prices for the NEXT MONTH, for even more credit. And keep doing it forever, until RUT is below my short leg and it can be closed for profit or expires worthless. This seems too good to be true, but here's my logic:

 

Is it too good to be true?

 

It is expected for the price to come down eventually. So I could roll the same strike price (855/865) forever, to a point (worse case scenario) that I would get $1,000+ credit (some more for time value) and pay $1,000 to cover it again (if it becomes well ITM). This RUT spread would eventually come down to less than $855 in this case, and in long term, since we're approaching new highs, eventually expire worthless for full profit. I mean, as long as EMA(50) and EMA(200) are below my short leg, there are good chances that the RUT price will come back to it (to close for profit), or simply expire worthless, to digest the recent climbing.

So in theory, there would be no loss adjusting the legs (use same strike price for following month), and eventually they could always be closed for less than the original credit received. This would apply specifically to indexes like RUT, which is low volatile and can never be assigned before expiration."

Thoughts on what I'm missing here? Seems to be almost no risk of loss provided we keep rolling it this way?

 

Before I even had a chance to reply, another member posted the following reply:

 

"rod, that would be great if we could simply keep rolling a spread that went against us. But I think when you roll a spread that is in the money and has gone against you, it will be a debit, not a credit. For example, the RUT September 850/855 bear call spread is going for a mid price of 3.15 credit. Since RUT closed at 856, the spread is in the money. The same spread for October is going for 2.95, which means that if you rolled it from September to October, you will incur a cost of at least 0.2, probably closer to 0.3. So there will be cost to roll it over to the next month. Now say you roll it, and the RUT comes back down and closes at 848 at October expiration, you should be able to keep that credit.

 

Now if you get into an OTM call credit spread, say September 860/865, the credit is $2.10. The same spread for October is going for $2.50. So it seems that if a spread is OTM, you get bigger credits the farther in time you go out. The reverse is true with spreads that are ITM; the credits are smaller. Someone like Kim could probably explain why this is so. But I don't think you can simply roll an ITM spread that has gone against you and still get a credit. Someone please correct me if I am wrong."

 

out-of-time-clock-display-Copy-672x372.jpg

 

Unfortunately, it is (too good to be true)

 

My response:

 

First of all, I don't accept the concept of "rolling". What you do is closing one position (for a loss) and opening a new one. A loss is a loss, no matter how you call it. The question is: do you want to own the new position or you roll just to salvage the losing trade?

 

Now for your question. As tradervic mentioned, the ITM spread cannot be rolled for a credit. The reason is simple. If RUT is at 855, the 850/855 spread will be worth a full $5 at expiration. As you go further from expiration, if will be worth less and less. If you think about it, it makes sense: further you go out in time, more time value those spreads have. So October spread will be always worth less than September. So you roll for a debit, and what if the index continues higher? You will have to roll again for a debit, this time probably larger debit since you are deep ITM. Sure at some point it will reverse, but meanwhile you might already have a very significant loss.

 

And here is a response from Chris:

 

"And I want to emphasize what Kim has said -- the concept of "rolling" is idiotic. You simply CANNOT think in those terms. You have closed a losing trade and opened a second trade -- likely one you never would have opened on its own. You are almost always better off putting your capital to use on another trade.

 

Simply put, DON'T EVER ROLL UNLESS IT IS A TRADE YOU WOULD DO IF NOT ROLLING. Now this does happen sometimes, I have rolled calendars and spreads before because I liked the trade I was rolling into. But I independently evaluated it."

 

Rolling is just a way to hide losses

 

Rolling from month to month is something many condor services do on a regular basis. Option selling strategies, especially those that roll from month to month to hide losses in their track record, often have hidden risk. This risk became obvious last year when some of them have experienced catastrophic losses of 50-90%.

 

The simple truth is that in most cases, rolling will increase your risk, not reduce it. Is it what you want? If the underlying continues in the same direction, after few rolls the trade will be a complete toast.

 

This is not something we do at Steady Condors. We use different adjustment strategies, which reduce risk instead of increasing it. We just closed another winning month, booking 6.7% return on the whole portfolio (including commissions). Our return in 2015 so far is 23.7%. As a reminder, Steady Condors reports returns on the whole portfolio including commissions, non-compounded. If we reported returns like other services do (ROI/average of all trades, before commissions and compounded), we would be reporting 35.2%.

 

Click here to read how Steady Condors is different from "traditional" Iron Condors.

 

Related Articles:

 

Why Iron Condors are NOT an ATM machine
How to Calculate ROI in Options Trading
Why You Should Not Ignore Negative Gamma
Can you double your account every six months?
Can you really make 10% per month with Iron Condors?

 

Want to join our winning team?

 

Start Your Free Trial

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • 3 Key Pieces Of Advice For New Traders

    These days, everyone claims to be an ‘expert’ on absolutely everything. Apparently, it only takes having a Twitter account to be a seasoned expert on any given subject; all in all, the Internet is full of nonsense. It’s becoming harder and harder to find legitimate answers amongst the quagmire of false information online.

    By Kim,

    • 0 comments
    • 93 views
  • Why New Traders Fail

    Our first advice to new traders is: "Learn First, Trade Later". The markets will always be there, but if you start trading without proper fundamentals, your capital will be gone very fast. The barrier to enter trading is so low today, commissions are near zero, and the whole trading game looks very promising.

    By Kim,

    • 0 comments
    • 308 views
  • Lumpy Dividends and Options

    Dividend payments, like oatmeal, may be smooth or lumpy. Smooth dividends are predictable, usually once per quarter. It is easy for options traders to believe these dividends are guaranteed, because they usually continue uninterrupted quarter after quarter. This also makes it easy to predict total return over a longer time span.

    By Michael C. Thomsett,

    • 0 comments
    • 316 views
  • Coming to Peace With Market Volatility: Part II

    On April 18th I wrote part I of this article, Coming to Peace With Market Volatility. I showed how the US equity market risk premium, defined as the annual average return of the Total Market minus the return of one-month US Treasury Bills, was a large 8.37% per year from 1950-2019. That’s the good news.

    By Jesse,

    • 0 comments
    • 322 views
  • Ratio Calendar Spreads

    The ratio calendar spread is well-known to some, but for others the risk/reward aspects are not well understood. One way to cover a short position is to own 100 shares of the underlying stock. Another, more creative way is to sell a shorter-term expiration position and buy a longer-term position.

    By Michael C. Thomsett,

    • 0 comments
    • 673 views
  • Studies Vs. Real Trading

    "Who you gonna believe, me or your lying eyes?" Our members and readers know that buying pre earnings straddles has been one of our favorite strategies that produced consistent gains in the last 8 years with very low risk. Yet there is a significant number of studies showing that this strategy has a negative expectation. 

    By Kim,

    • 0 comments
    • 691 views
  • Should You Hedge or Diversify?

    Using the most popular S&P 500 ETF (SPY) to represent the US stock market, this article will look at different ways to manage equity market risk using historical ETF and options data from ORATS Wheel since 2007. We will analyze the following unhedged, hedged and allocation choices:

    By Jesse,

    • 11 comments
    • 1,005 views
  • Coming to Peace With Market Volatility

    From 1950-2019, the average annual US equity market premium (return of the total stock market minus the return of one-month US Treasury Bills) was 8.37% per year. This was a large average annual risk premium for owning stocks.  The premium was volatile, with a Standard Deviation of approximately 15% per year.

    By Jesse,

    • 0 comments
    • 488 views
  • 1,300% Gain in One Day? Not so Fast

    Would you like to book a $1,300% gain on a one day low risk trade? I would. That would imply that you turned your $100,000 account into $1,400,000 in just one day. Do it couple times - and you are a billionaire. Sounds too good to be true? It is possible in a Twitterworld. In a real world.. not so much.

    By Kim,

    • 0 comments
    • 532 views
  • A More Diversified Anchor Strategy

    Over the past few months, the performance of the Leveraged Anchor strategy has exceeded our expectations.  There has also been a few things learned regarding adjustments after large market falls, that had never been contemplated (see Anchor Analysis And Options). 

    By cwelsh,

    • 0 comments
    • 510 views

  Report Article

We want to hear from you!


Guest Rolling works, for a while

Posted

I am a fan of Iron Condors, at least in markets where there is historically two way action. Runaway freight trains like MSFT and SPX, it doesn't work very well.

But even two sided markets have their issues. First of all, you must expect your I/C's to test the boundary options. If you do 30/10 delta I/C's, where the short call and put are 30 delta and the long call and put are at 10 delta, breaching the 30 delta option, by definition, is reasonably good. So, what should you do?

If it is early in the trade, do nothing. It is too soon to panic and start moving your strikes. My I/C's start about 45 days out and generally won't do a thing until it gets to the 30 day mark. 

As time marches on and the stock price is outside the 30 delta option strike price, an adjustment can be looked at. Using the 30 day marker mentioned above, I would look at moving the untested spread. That is, if the stock has moved up where the 30 delta call is in the money, I'll look at moving the put spread to a new position, usually where the short put is around 20 delta while maintaining the same spread. The amount collected is small, but really this is being done solely because the odds of a move to the put spread is low. Keep in mind, this strategy is fine IF the original 10 delta strike is not breached. At that point with only 30 days to go, I'd be tempted to close it and play something else. 

For me, the point I'd look at rolling the whole I/C is 21 days out. If the tested side is no further in the money than 75 delta, it should be okay to roll the whole thing to the next month and still get a credit while maintaining the width of the spreads. Any credit, even a small one, allows the opportunity to make this a winning trade. This starts the clock for another 45-50 days of managing the I/C, using the same guidelines with the starting trade. This can keep going to the next month.

One caveat to rolling to future months: watch out for earnings dates on those equities that have public reports every three months. Rolling through to a month where earnings are coming out before the monthly expiration is not recommended without doing another trade taking the earnings date into consideration. Many people do iron condors around earnings dates, but usually, they are wide and far away from the strike price (like 16 delta) where the abrupt move from earnings is likely to reach. 

Iron condors do lose from time to time, but managing the position can reduce the pain. That way, your overall performance with iron condors can be quite positive while making the investment amount attractive for smaller accounts. The key is having many small options rather than a few large options.

Share this comment


Link to comment
Share on other sites


Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs Expertido