MV Mailbag: Managing Risk with Iron Condors
There are alternatives to the all-or-nothing approach.
Dear Professor Wolfinger,
I've been using an approach of "time diversification" with RUT iron condors (ICs).
Roughly every week, I've been buying one lot of a RUT IC with short strikes at a delta of about 10. It's very early, but so far I'm happy with this approach. I closed my 2 June positions with profits of $1.20 and $1.30, which I'm happy with.
So here's my situation with the July RUT ICs:
1. I first bought a one-lot of 360/370/590/600.
2. Next 1 bought a 2-lot of 380/390/590/600.
3. Next I bought one-lot of 400/410/590/600.
4. Finally I bought a one-lot of 370/380/580/590
What this leaves me with is:
- one 360/390 put spread
- one 380/390 put spread
- one 400/410 put spread
- 3 590/600 call spreads
- one 580/600 call spread
My question to you is am I putting myself at significant risk with the 360/390 put spread? It seems 3 put-spread purchases have cascaded to create a 30-point spread. My risk-management game plan was to close the position when the short strike is breached. My concern is that buying a 360/390 could be costly when RUT is at 390.
What are your suggestions? Am I overthinking this?
Dear Minyan TR,
One reason you're happy with this is that the markets have been kind to recently opened iron-condor positions. If you missed buying iron condors before the big rally, as you did here, then you're doing quite well. Nice timing.
You're not overthinking this situation.
I do have a suggestion: You see a potential problem, so look for a different risk-management plan. You have plenty of time to think about alternatives, but I wouldn't do the "all or none" approach of sitting tight until the strike is breached. Not if it makes you nervous.
If you're forced to adjust your 360/390 spread, then you'll have already closed the 400/410 spread and the 380/390 will be in trouble at the same time as the 3-lot spread.
To me, that's no big deal. I'm assuming that 5-lots isn't too many for you, and that had you opened a single potion at one time, you'd have at least as many spreads. Thus, from the perspective of "size," I don't see too much risk.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter