BACKGROUND: If you follow me on twitter or stocktwits you know that I like to sell iron condors on about a dozen stocks ETF's and indices. I try to keep my strikes far enough from price at the sell-to-open time. I have a few rules that I have developed to help minimize failure (but that's another post).
TRADE: Assume that I am bullish AAPL mid to long-term. So, I sold-to-open an iron condor in $AAPL and it looked like this:
Credit put spread 555/550
Credit call spread 600/605
Say I put this on when AAPL was 575ish
SITUATION: Then AAPL sold off down close to 555. Lower leg of the iron condor is now under fire and has exploded in price. Conversely, the upper leg has shrunk in price (helping minimize the loss).
1) I can panic and close the trade out for a loss.
or 2) IF IF IF IF my conviction in AAPL is still intact (no fundamental changes in aapl) and I believe that the trade is still a good one then I will do this:
a- Close the upper leg for pennies. This way when AAPL rallies back I will no longer have the upper risk.
b- & I may add to my lower leg. From here (like my 'crazy' trade) the risk is minimal since the leg is already in trouble. This will also help speed up the breakeven point on the way back up when aapl rallies.
LESSON: Notice that I didn't put exact numbers because as this is not an exact science. The bottom line is that I don't necessarily panic and raise the white flag when one leg of my iron condor gets tested. I revisit the thesis and decide if I am being STUBBORN or am exercising true CONVICTION.
THIS IS NOT A RECOMMENDATION. I ONLY TRADE WITH MONEY I CAN AFFORD TO LOSE. OPTIONS ARE DANGEROUS AND CAN LOSE MONEY FAST.