SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

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

The Art of Trading Decisions


One of my basic tenets in teaching people how to trade options is that rules and guidelines should not be written in stone and that there are valid reasons for accepting or rejecting some of them. When I offer a rationale or explanation or suggest course of action, it is because I have found that this specific suggestion has worked best for me.

I encourage all readers to adopt a different way of thinking when appropriate. The following message from a reader offers sound reasons for taking specif actions regarding the management of an iron condor position. My response explains why this specific reasoning is flawed (in my opinion).

 

The question

 

Hi Mark,

 

I have some questions on Chapter 3 (Rookie’s Guide to Options) Thought #3: “The Iron Condor is one position.”

 

You mentioned that the Iron Condor is one, and only one, position. The problem of thinking it as two credit spreads is that it often results in poor risk-management.

 

Using a similar example I (modified a little bit from the one in the book) traded one Iron Condor at $2.30 with 5 weeks to expiration:
– Sold one call spread at $1.20
– Sold one put spread at $1.10

 

Say, a few days later, the underlying index move higher, the Iron Condor position is at $2.50 (paper loss of $0.20):
– call spread at $2.00 (paper loss of $0.80)
– put spread at $0.50 (paper profit of $0.60)

 

I will lock in (i.e., buy to close) the put spread at $0.60 for the following reasons and conditions:

  1. It is only a few days, the profit is more than 50% of the maximum possible profit
  2. There are still 4 more weeks to expiration to gain the remaining less than 50% maximum possible profit. in fact, the remaining profit is less as I will always exit before expiration, typically at 80% of the maximum possible profit. so, there is only less than 30% of the maximum possible profit that I am risking for another 4 more weeks.
  3. The hedging effect of put spread against the call spread is no longer as effective because the put spread is only at $0.50. as the underlying move higher, the call spread will gain value much faster than the put spread will loss value.

 

Is the above reasoning under those conditions ok? Will appreciate your view and sharing. Thank you.

 

My reply

 

Bottom line: The reasoning is OK. The principles that you follow for this example are sound.

 

However, the problem is that you are not seeing the bigger picture.

 

1. There is no paper loss on the call spread. Nor is there a paper profit on the put spread. There is only a 20-cent paper loss on the whole iron condor.

 

2. When trading any iron condor, the significant number is $2.30 – the entire premium collected. The price of the call and puts spreads are not relevant. In fact, these numbers should be ignored. It is not easy to convince traders of the validity of this statement, so let’s examine an example:

 

Assume that you enter a limit order to trade the iron condor at a cash credit of $2.30 or better. Next suppose that you cannot watch the markets for the next several hours. When you return home you note that your order was filled at $2.35 – five cents better than your limit (yes, this is possible). You also notice the following:

  • The market has declined by 1.5%.
  • Implied volatility has increased.
  • The iron condor is currently priced at $2.80.
  • Your order was filled: Call spread; $0.45; Put spread; $1.90; Total credit is $2.35.

Obviously you are not happy with this situation because your iron condor is far from neutral and probably requires an adjustment. But that is beyond this today’s discussion — so let’s assume that you are not making any adjustments at the present time.

 

That leaves some questions

  • Do you manage this iron condor as one with a net credit of $2.35? [I hope so]
  • Do you prefer use to the trade-execution prices?

If you choose the “$2.35” iron condor, it is easy to understand that this is an out-of-balance position and may require an adjustment.

 

If you choose the “45-cent call spread and $1.90 put spread” then the market has not moved too far from your original trade prices, making it far less likely that any adjustment may be necessary.

 

In other words, it does not matter whether you collected $2.00, $1.50, $1.20, $1.00, or $0.80 for the put spread. All that matters is that you have an iron condor with a net credit of $2.35.

3. You should consider covering either the call spread, or the put spread, when the prices reaches a low level. You are correct in concluding that there is little hedge remaining when the price of one of the spreads is “low.” You are correct is deciding that it is not a good strategy to wait for a “long time” to collect the small remaining premium.

 

If you decide that $0.60 is the proper price at which to cover one of the short positions, then by all means, cover at that point. (I tend to wait for a lower price).

 

If you want to pay more to cover the “low-priced” portion of the iron condor when you get a chance to do so quickly, there is nothing wrong with that. However, do not assume that covering quickly is necessarily a good strategy because that leaves you with (in your example) a short call spread — and you no longer own an iron condor. If YOU are willing to do that by paying 60 cents, then so be it. It is always a sound decision to exit one part of the iron condor when you deem it to be a good risk-management decision. But, do not make this trade simply because it happened so quickly or that you expect the market to reverse direction. If you are suddenly bearish, there are much better plays for you to consider other than buying back the specific put spread that you sold earlier.

4. The differences in your alternatives are subtle and neither is “right’ nor ‘wrong.”

 

The main lesson here is developing the correct mindset because your way of thinking about each specific problem should be based on your collective experience as a trader.

 

Your actions above are reasonable. However, it is more effective for the market-neutral trader to own an iron condor than to be short a call or put spread.

 

You are doing the right thing by exiting one portion of the condor at some “low” price, and that price may differ from trade to trade. But deciding to cover when it reaches a specific percentage of the premium collected is not appropriate for managing iron condors.

 

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

Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Option Settlement: The Basics

    At their core, options involve buying and selling the rights to transact in a specific asset. When you buy a call option on AAPL, you're paying for the right to buy AAPL at a special price before a particular date. But all options expire, and at expiration, the two parties of the contract need to settle up with each other. This process is called settlement.

    By Pat Crawley,

    • 0 comments
    • 76 views
  • Pros and Cons of Weekly Options

    Weekly options used to be a niche product only reserved for gamblers and last-minute hedgers. However, weekly options are now listed on most major stocks and account for a significant portion of overall options trading.

    By Pat Crawley,

    • 0 comments
    • 136 views
  • Iron Condor Vs. Short Strangle

    The journey of an options trader's development typically has several stops along the way. The first is generally related to using options to leverage their directional bets using outright calls, puts, or vertical spreads. Somewhere along the way, a novice options trader begins to understand volatility's importance to the options market.

    By Pat Crawley,

    • 0 comments
    • 210 views
  • Short Gamma vs. Long Gamma

    Gamma is one of the primary Options Greeks, which measure an option's sensitivity to specific factors that could affect an option price. Despite traders hyping up several different Greeks and second-order Greeks like "Vanna" and "charm," there are only four primary Greeks that you need to be familiar with to understand options trading.

     

    By Pat Crawley,

    • 0 comments
    • 239 views
  • 7 Steps To Take Your Investments To The Next Level

    Investing is one of the most important activities you can do for yourself. In today's world, it's becoming increasingly important for individuals to take control of their financial future and ensure that their investments are working in their favor. So if you're looking to take your investment strategy up a notch, there are seven essential steps you should take.

    By Kim,

    • 0 comments
    • 1,090 views
  • SteadyOptions 2022 - Year In Review

    2022 marks our 11th year as a public trading service. We closed 147winners out of 215 trades (68.4% winning ratio). Our model portfolio produced 90.5% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month in 2022. 

    By Kim,

    • 2 comments
    • 1,175 views
  • Steady PutWrite 2022 Year In Review

    The Steady PutWrite service consists of two separate strategies available to subscribers known as Steady PutWrite and ETF BuyWrite. Steady PutWrite sells monthly at the money puts on equity indices targeting total notional exposure of 125% and then invests collateral in bond ETF’s.

    By Jesse,

    • 1 comment
    • 633 views
  • How Much Do You Need to Start Trading Options?

    Theoretically, anyone can trade options. After all, there are listed options that you can buy for as cheap as $1.00. So what is the right amount of money you need before you can officially dip your toe in the water and give yourself a fair shot at becoming a profitable options trader

    By Pat Crawley,

    • 0 comments
    • 1,020 views
  • Options Strategies for Small Accounts

    Ask a handful of traders what they deem a “small account” to be and you’ll get probably get a few different answers. For the sake of this article, we classify a small account as having less than $5,000. There’s a number of obstacles you run into trading a small account, like the options in certain underlyings being too expensive for you to trade, as one example.

     

    By Pat Crawley,

    • 0 comments
    • 1,008 views
  • 7 Things I Wish I Knew When I Started Trading

    Options Trading can be very exciting and rewarding. But you should not be trading options before learning at least some basic facts about options. Options are very different from stocks.  This article presents 7 basic options trading facts that every options trader should know. Don't start trading of you don't understand them.

    By Pat Crawley,

    • 0 comments
    • 997 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido