One approach of moving credit spread strike prices down as we move away from a trending underlying index

Question:  I have a one comment in regards to “clicking down a strike” as we move away from a trending underlying index. This assumes commission per spread is not an issue. Let’s say we have the 90/93 Put spread open. If we were to click down a strike, instead of opening an 89/92 spread and then an 88/91, why not click down to a 90/92 spread and then a 90/91 spread. This still allows you to open the same number of spreads to collect the premium (in fact you may be able to get more premium this way). But now, 90 is the only strike price that you cannot hit, so you have the option of opening something like an 87/89 spread if the need arises, instead of being forced to drop to something like an 84/87 spread.

Answer:   Sure, this can work, and you can bring in a little more premium by moving to a 2 point spread. (but moving to a 1 point spread is probably not recommended since commissions get pricey when opening so many spreads) However, the problem that we run into is that we are also opening the top bear call spreads with the goal of completing the iron condor where we only have to hold maintenance for the one side; and in order for the broker’s computers to recognize that you have an iron condor the point spread has to be the same for both the bottom spread and the top spread. Therefore, when we start opening 3 point, 2 point, and maybe even 1 point bull put spreads, we need to keep track of these to make sure we open the same mix of 3, 2 and 1 point bear call spreads to complete the iron condors, and if not, we then will be forced to hold maintenance for both the top and bottom spreads which will dramatically reduces our returns. In summary, the approach that you proposed will work, it just takes more work to track the different point spreads that are opened on both the top and bottom to ensure that we can complete as many iron condors as possible, which ultimately reduces the amount of required maintenance and increases our returns.

Technical analysis of the S&P 500 and Russell 2000 (RUT) indexes, along with how to trade trading tips for index iron condor options and credit spreads provided by Brad Reinard, Editor-in-Chief, www.monthlycashthruoptions.com