When I first discovered the iron condor and began trading it - I never thought about whether or not I should ever take them off early. I just left them on all the way until the very end.
After I placed the trade, I would just leave it be until expiration day where the options would expire worthless and disappear into option heaven.
I figured this was the smartest way to go, since I would bank the ENTIRE credit received - and I wouldn't have to pay any broker commissions to close out the trade.
But I don't think this way anymore.
After spending far too many nights worrying and not being able to fall asleep - along with a lot of expiration day close calls - painful ulcers - and a near hernia or two - I've altered the way I manage my iron condor trades.
Here's what I do now: Right after I put on my iron condor, I tell my options broker (through the use of automatic contingent orders) to buy back both the put credit spread and the call credit as soon as I make the bulk of available profit in each spread.
As an example - if I received a credit of a dollar (let's say about fifty cents each side) when I put an iron condor trade on - I would immediately ask my broker to set up an order to buy the vertical spreads on each side back when the price on them has been reduced to about ten cents or so.
Then I would set up a contingent order to buy back the put spread of my iron condor for.05 or.10 (or at the very most.20).
Crazy?
Personally I don't think so.
Yes of course it is true that by buying the trade back I am leaving money on the table. At least it seems that way.
But then again, not necessarily.
Let's take a second look at the amount of money we are talking about here. Ten cents per side - or twenty cents total. Okay - sure - it's nothing to sneeze at - but when you step back, get a broader look, and start to take a few other things into consideration - it can actually start to look quite miniscule.
What's more important to me, is that by buying back those credit spreads, I've LOCKED IN the BULK of the profit.
AND - I've reduced my risk.
AND - I've created the potential to make even MORE money on the trade than was originally possible when I first initiated the trade - WITHOUT increasing my original risk.
Let me show you what I am talking about here:
A lot of times, the value in options will evaporate really quickly during a trade. I've actually seen options lose most of their value in just a few days.
Going back to our example - let's pretend that I put an iron condor on about 40 days until expiration. For the trade I receive around a 1.00 credit. Fifty cents for each credit spread on either end of the position.
Immediately after placing the trade, XYZ heads downward over a number of days.
4 days after I put the trade on, I see that I can buy back my CALL side of the Iron Condor for.10.
If I do nothing, I am choosing to risk that CALL spread margin for the next 36 DAYS for a measly $10.00 of remaining profit (per spread).
But - if I instead just spend the ten measly bucks to pull off that upper credit spread - I will LOCK IN the majority of the profit that was available in that spread - and earn a great return on investment in just four days.
And then, if our underlying suddenly turns around and shoots back up (which actually happens quite often) - I have no worries whatsoever since I no longer have any upside risk in the trade.
And - for the icing on the cake - if it DOES head back up we have the opportunity to 'resell' those identical credit spreads - the same ones we just bought back for ten cents - for potentially the same amount of credit we originally sold them for - or perhaps even more. Doing this it's possible to wind up with an even greater ROI then we were hoping for when we first initialized the iron condor trade.
And even if I don't resell any spreads - but just buy them back at.10 to close out the entire trade - it reduces my risk, frees up my capital sooner, increases my ROI over number of days, and gets me out of the trade MUCH more quickly than if I were to try and hold on all the way until expiration.
This allows me to totally get away from trading for a few days - or weeks (or however long until the next expiration cycle starts) - and enjoy the other things in my life without having to always be wondering what's happening to my trade - or the market - or worrying about the next big crash.
And for me, being able to have that monthly 'window of time' away from the markets and the iron condor - that 'break' where I can completely clear my head and forget all about 'options', and 'strike prices' and 'standard deviations' and 'deltas' - being able to just get away from the computer and go out and do other things without having that little constant nagging 'I have a current live trade on' stress and worry - being able to go to bed at night without an 'option trading care in the world' and quickly fall into a thick, deep, snoring sleep - sound as a baby...
These things are priceless.
For me it's ABSOLUTELY worth the measly twenty cents or so I'll be leaving on the table to get out of the trade early - and STILL make a ridiculous monthly profit.
After I placed the trade, I would just leave it be until expiration day where the options would expire worthless and disappear into option heaven.
I figured this was the smartest way to go, since I would bank the ENTIRE credit received - and I wouldn't have to pay any broker commissions to close out the trade.
But I don't think this way anymore.
After spending far too many nights worrying and not being able to fall asleep - along with a lot of expiration day close calls - painful ulcers - and a near hernia or two - I've altered the way I manage my iron condor trades.
Here's what I do now: Right after I put on my iron condor, I tell my options broker (through the use of automatic contingent orders) to buy back both the put credit spread and the call credit as soon as I make the bulk of available profit in each spread.
As an example - if I received a credit of a dollar (let's say about fifty cents each side) when I put an iron condor trade on - I would immediately ask my broker to set up an order to buy the vertical spreads on each side back when the price on them has been reduced to about ten cents or so.
Then I would set up a contingent order to buy back the put spread of my iron condor for.05 or.10 (or at the very most.20).
Crazy?
Personally I don't think so.
Yes of course it is true that by buying the trade back I am leaving money on the table. At least it seems that way.
But then again, not necessarily.
Let's take a second look at the amount of money we are talking about here. Ten cents per side - or twenty cents total. Okay - sure - it's nothing to sneeze at - but when you step back, get a broader look, and start to take a few other things into consideration - it can actually start to look quite miniscule.
What's more important to me, is that by buying back those credit spreads, I've LOCKED IN the BULK of the profit.
AND - I've reduced my risk.
AND - I've created the potential to make even MORE money on the trade than was originally possible when I first initiated the trade - WITHOUT increasing my original risk.
Let me show you what I am talking about here:
A lot of times, the value in options will evaporate really quickly during a trade. I've actually seen options lose most of their value in just a few days.
Going back to our example - let's pretend that I put an iron condor on about 40 days until expiration. For the trade I receive around a 1.00 credit. Fifty cents for each credit spread on either end of the position.
Immediately after placing the trade, XYZ heads downward over a number of days.
4 days after I put the trade on, I see that I can buy back my CALL side of the Iron Condor for.10.
If I do nothing, I am choosing to risk that CALL spread margin for the next 36 DAYS for a measly $10.00 of remaining profit (per spread).
But - if I instead just spend the ten measly bucks to pull off that upper credit spread - I will LOCK IN the majority of the profit that was available in that spread - and earn a great return on investment in just four days.
And then, if our underlying suddenly turns around and shoots back up (which actually happens quite often) - I have no worries whatsoever since I no longer have any upside risk in the trade.
And - for the icing on the cake - if it DOES head back up we have the opportunity to 'resell' those identical credit spreads - the same ones we just bought back for ten cents - for potentially the same amount of credit we originally sold them for - or perhaps even more. Doing this it's possible to wind up with an even greater ROI then we were hoping for when we first initialized the iron condor trade.
And even if I don't resell any spreads - but just buy them back at.10 to close out the entire trade - it reduces my risk, frees up my capital sooner, increases my ROI over number of days, and gets me out of the trade MUCH more quickly than if I were to try and hold on all the way until expiration.
This allows me to totally get away from trading for a few days - or weeks (or however long until the next expiration cycle starts) - and enjoy the other things in my life without having to always be wondering what's happening to my trade - or the market - or worrying about the next big crash.
And for me, being able to have that monthly 'window of time' away from the markets and the iron condor - that 'break' where I can completely clear my head and forget all about 'options', and 'strike prices' and 'standard deviations' and 'deltas' - being able to just get away from the computer and go out and do other things without having that little constant nagging 'I have a current live trade on' stress and worry - being able to go to bed at night without an 'option trading care in the world' and quickly fall into a thick, deep, snoring sleep - sound as a baby...
These things are priceless.
For me it's ABSOLUTELY worth the measly twenty cents or so I'll be leaving on the table to get out of the trade early - and STILL make a ridiculous monthly profit.
About the Author:
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