Iron Condor adjustment: Can I "roll" it forever?

[rodbarc 9]

Hi folks,

This is somewhat related to my previous post. 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:

Since today's price (or any price higher) is way above EMA(20), EMA(50) and EMA(200), it is expected for the price to come down eventually, as it always touch these 3 points from time to time. Of course these indicators would move up, but a lot slower than the price itself. 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). But since the market never goes up straight forever, and it must touch EMA(50) and EMA(200) eventually, then 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?

Thanks!

Rod

[Tradervic 0]

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.

[Kim 7,475]

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.

[rodbarc 9]

Got it. I think my mistake was not considering time value properly. I also could had lowered my loss if I had opened the full Iron Condor at once, instead of waiting the market for separate legs.

Thanks!

Rod

[cwelsh 1,497]

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.

Take my horrific AAPL RIC -- it never should have moved like it did given the probabilities, but it did move way more than expected, and the 690-695 call side got reached.

My options were:

a. Close for $3.50 (a massive loss);

b. Roll to the next week strikes for a cost of $3.50 (but if AAPL stays the same or goes up, this just compounds the loss); or

c. Roll to the next week at a higher strike (such as the 710/715) for a cost of $1.50.

Under Option A, I take my loss, because I had I was position sized accordingly, my portfolio only took a 4.5% hit. I move on and make money on other trades.

Option B, I am now out of pocket $2.95. If AAPL finishes at 695 or higher, I can lose up to $7.95 -- in other words more than double my loss. I have to ask myself, would I ever sell an ITM vertical call on AAPL's weekly. Hell no, thats suicidal.

Option C, I am now out of pocket $0.95. If AAPL stays below 710, then I have REDUCED my loss from $3.50 to $0.95. That's pretty good, But, would I ever sell the vertical call, on its own, only $15 OTM? No, the chances of that hitting are well above 50%. If that happens, I again compound losses.

Simply put, DONT 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.

[rodbarc 9]

Thanks, Chris. You said it well, that's literally what it means "chasing a losing trade".

I'm happy with my new trade, but I didn't look at it that way. Analysing if I would ever open that on my own makes more sense.

Thanks!

Rod