Many options traders buy iron condors as their bread and butter. As part of the risk management, they may close out one of the spreads if the market gets close to, or touches, their closest short strike. If you sell the spreads close in to the market, you have to adjust often. If you go further out of the money, you will have to adjust less often, but your credit will have been lower.
I ran a few Monte Carlos to see if it mattered if you sold the near month versus the far and to get a feel for how often you would have to adjust given where you choose to play. These are for the Russell 2000 index, RUT.
| Strike | Days to Expiry | Delta | Prob to close | Prob to touch | Prob to adjust |
| 620 C | 17 | .33 | .34 | .56 | – |
| 590 P | 17 | -.29 | .27 | .43 | .99 |
| 630 C | 52 | .35 | .34 | .605 | – |
| 580 P | 52 | -.29 | .3 | .51 | .96 |
So here, this close in, it doesn’t matter if we trade the near month, October or November. We’d have to adjust all the time, though it would close past one of the strikes between 60% and 65% of the time.
What happens if we move farther out?
| Strike | Days to Expiry | Delta | Prob to close | Prob to touch | Prob to adjust |
| 650 C | 17 | .09 | .08 | .12 | – |
| 570 P | 17 | -.09 | .09 | .13 | .25 |
| 690 C | 52 | .08 | .06 | .11 | – |
| 550 P | 52 | -.11 | .12 | .19 | .3 |
This is much more manageable. One has to adjust about 25 – 30% of the time, though the market closes past one of the strikes less than 20% of the time.
Next question is, what happens if you don’t adjust? Take your lumps when the market closes past your short strike but sit with it and make the return when the market turns back around. Is that a good strategy or poor one?
Stay tuned.
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