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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?


Minyan TR

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.

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