Managing Risk for More than One Position

This trader is short two put spreads. One in YHOO (Jul 23/24) and the other in RUT (Jul 920/925). These positions began as iron condors and the calls were covered at a cheap price.

I’m not sure of what I should do. When adding these two positions together, the ‘portfolio’ is too delta long for my comfort zone.

=== RUT ===
I could offset the positive delta of the put-spread by shorting another call-spread. But that is somewhat inconsistent with my belief that I should initiate positions with at least two-months expiry. What would be more consistent is if I closed the put-spread and opened another Iron-Condor with a later expiry. The only thing is that in order to exit at break-even… This is somewhat expected as the volatility conditions for this trade were less than favorable.

Another option would be to roll-down the put-spread. This would reduce the amount of positive-delta, but still leave the portfolio with positive delta.

I guess I will be looking to exit the RUT put-spread today. [Note: Position was closed @ 1.20]

Be careful about measuring portfolio delta. One RUT deltas is much more significant than one YHOO.

    a) Delta is the change in value for an option when the underlying moves ONE POINT. One point for YHOO is a big move. One point for RUT is insignificant.

    b) The YHOO spread is only one point wide and the max price for the spread is $100

    c) The RUT spread is 5 points wide and the max loss is $500 (less credit collected)

    d) Delta is a good guide for for current (imminent risk), and the risk graph shows how bad things can get when such and such happens. But as to your comfort zone, the RUT position is far more ‘dangerous’ because more cash is at risk and RUT will move many more points than YHOO on almost every trading day.

    e) Also consider that RUT is 40 points OTM. I am not suggesting that this is ‘safe’ but the question is: how do you feel about it? If this makes you nervous, yes, do exit. Especially today with a small market bump and a small IV decrease (RVX is -.77 as I write this).


Yes, selling another call spread is a viable adjustment. It is one way to maintain delta neutrality. However, when a trader looks at the current market, it is very difficult to sell call spread now that the DJIA has declined by more than 500 points in the past two days. The ‘best’ time to sell that call spread is immediately after covering your previous short spread. But selling another call spread is not for everyone. This is a difficult decision and I cannot offer guidance. For my trading, I do occasionally sell another spread after covering, but most of the time I do as you did: nothing.

There is a world of difference between initiating positions and adjusting positions.

    –When initiating a new trade, you have the ability to wait until conditions suit your needs. There is no urgency. You can easily satisfy that need for a minimum of two months.

    –Adjusting requires a very different mindset. Your objective when adjusting is to reduce risk. NOW. It is not to make more money from the trade. It has nothing to do with future profits. It is only about one thing: recognizing that this trade has gone awry and you want to give yourself the best opportunity to stop the bleeding. Primary goal: make the position less risky, reducing the immediate cash at risk. Secondary goal: Create a position that you want to own (do not blindly adjust and hope for the best) and which gives you a good (this is where your judgement comes into play) chance to make money from THIS POINT. Do not worry about past losses. Do not trade to recover those losses. Trading to get back to even is a losing mindset. Traders make plenty of poor decisions trying to recover losses.

    — Closing the put spread and opening another iron condor is a good idea. But ONLY when

      –You do not allow the idea of ‘break even’ to be part of the decision. Please take my word for this. I know what it is like to roll the old position into a new one, choosing the new position based on its price (in other words, paying zero debit or collecting a cash credit for the roll), giving myself the chance to earn my original profit target – if only the new spread would expire worthless. When the market is trending this style of trading is financial suicide. Be willing to take the loss and independently find a suitable new position.

      — You want to exit the current position because it is not one you want to own

      –The new iron condor is one that fits your trading criteria. Far too often traders make this ‘roll’ just to do something. Do not fall into that trap

      –You understand that doing this is two separate decisions. Close when you believe that is best. Open a new trade when you find a good one. Do not feel you must open that new trade at the same time the old one is closed. Yes – I know the need to get a new position so you can recover losses. Nothing wrong with wanting that new trade. Just make it a good one and do not allow the thought of getting back your money be part of the decision process.

Yes, rolling down the put spread is viable, when two conditions are met.

    –The cash debit required is not more than you are willing to pay

    –The new position is one that you want to own.

The important point of this post is that one YHOO delta is not the same as one RUT delta.


2 Responses to “Managing Risk for More than One Position”

  1. mswiggs June 21, 2013 at 10:26 am #

    Thanks Mark.

    Controlling the ‘must be at least break-even’ thought is something I’m working on. I believe that this thought comes into my mind because I wish to compare the current trading position to some other position. And since I have so few trades in my memory then I will compare the current trade to the entry. Rather I should be comparing the current trade to possible future position. For example, maybe my money is better placed in my account or maybe there exists iron-condors that feel better to own. YES

    I was thinking of how to allocate capital between the two spreads. The simple method I would currently use is to compare their spread widths. For example given 5-point I.C vs a 1-point I.C would mean allocating 5 times as much capital to the 1-point I.C. So when I was thinking about both positions, even though I didn’t mention it before.

    I don’t think I will be selling another I.C today, maybe on Monday after some weekend rest!

    Yes, it is correct to consider a 10-point RUT condor to be twice as risky, with ~twice as much profit potential, as a 5-point RUT iron condor.

    However, let’s assume you sell options will an equal delta. The 5-point YHOO iron condor is much less risky than the 5-point RUT iron condor. The probability that YHOO will decline by 5-points to give the iron condor holder the maximum loss is infinitesimal. The chance that RUT will decline enough to impose the maximum possible loss is far higher.

    If you have The Rookies Guide to Options (1st ed), see page 153.

    Deltas are not created equal. Neither are 5-point iron condors.

  2. Diogenes June 21, 2013 at 11:07 am #

    I’m a big fan of using $ delta, partially because it makes comparing things a lot easier, and partially out of habit. One thing I do like to do is look for new trades in different securities that “fit my portfolio” – for example, if I’m (net) long enough that I’m a little uncomfortable, I try to look for something to sell a call spread or something on it. Sometimes it works great, other times you get slapped (the thing you sell goes up, while the long leg gets worse), but I’ve found over the long run it kind of evens out.

    One other possible alternative is to move in discrete chunks – if you have say 5 lots of RUT, maybe you just sell one Call spread against it or something. Still, in the long run I think mean-reverting, range bound trading is how markets are most of the time, so I like to keep the overall “IC/Strangle” diagram.

    Hello D, It’s great to hear from you again.

    I like that approach. Although you did not mention it, I know you are aware: Sure, we can trade for market reversion, but not bet so much that when the market does the unexpected we are blown out of the water.