Let's set the scene. It's Monday, July 7, and it's almost time for me to open my August trade. I typically open my preferred monthly butterfly trade 35-38 days before expiration. The trouble is, I still have a live trade open.

Live Trade Monday Morning, July 7, at about 8:40 AM CT, OptionNet Explorer Chart:

Remember when you view that snapped image that prices and the Greeks, too, can be wonky in the first few minutes of trading. That's especially true on days such as that Monday, when the RUT had opened down hard. Profit-and-loss figures (PnL) were jumping around quite a bit. The chances that I could exit a complex trade and trust that I would capture that $1,763 profit were just about nil. Nevertheless, I did have a profit, albeit less than the profit target of $3,000-$3,600. However, by that morning I had been in this trade 21 days. I typically enter my trades for each month at 35-38 days until expiration. That week, it would be time for me to be considering my AUG trade.

Should I have overlapped trades, keeping my JUL trade open long enough to hopefully meet my profit target and opening my AUG trade at the typical time? That's a decision each trader should decide depending on that trader's personality and trading account size.

Up until about four years ago, I used to regularly overlap trades. I allocated monies for each month's trade so that I would have enough money to pay for adjustments as well as to open new positions in the next month's trades. I had done that for years. However, I didn't like having overlapping trades, and the practice came back to bite me twice, once in the spring of 2010 and once a few years earlier than that. Both times, the underlyings soared higher as implied volatilities dropped. Adjustments were rendered more expensive and less effective.

In addition, as I grew older and became a more seasoned trader, I recognized that I trade best when I focus on a single trade. I feel scattered when I have several trades. Other traders trade best when they have several trades and are not obsessively focused on one. We each must discover what works best for us. That's part of the decision-making process traders must go through when deciding whether they'll overlap trades.

If I didn't want to have overlapping trades, I had a decision to make. Was it better to close the trade that had already been open 21 days and hadn't yet met its profit target so that I could open a new trade that might perform better? Or, with time decay accelerating, was it better to keep the current trade open and pass up the opportunity to open the next month's trade on time? Usually, in that case, it's my choice to close the trade that's been open, taking the profit or loss that I have, and open the new trade. Why, if theta or time decay is accelerating?

While time decay is accelerating, the trade is also getting more difficult to handle in other ways. As expiration approaches, it's harder to recover from a big move. For traders who trade by the Greeks, that difficulty shows up in a more and more negative gamma in trades such as the butterflies I currently trade. That negative gamma means that trade is going to be adversely impacted more and more by any big move as time goes on.

These decisions, then, must take into account a trader's personality and preferences. There are no absolutes here. If, unlike me, a trader enjoys having several trades open, then the next question is whether there's enough money in the account to pay for two months' worth of trades and their adjustments and still have money left.

Why does there need to be money left? Traders certainly want money left in the account in the case of an absolute rout that hits both sets of trades at once. Traders want to be able to trade even if the worst has happened. Moreover, even in the absence of an Armageddon event, the extra money may be temporarily needed. Let's take the case of a hypothetical iron condor trader who entered a five-contract iron condor trade on June 18. After commissions are added and credit or premium received is deducted, the trade has a margin of $4,387.50. On Wednesday, July 2, that trade would have been in trouble by the rules under which I used to trade iron condors.

Hypothetical Iron Condor Trade on Wednesday, July 2:

Adjusting this trade would have cost money, increasing the margin. The delta on the sold call was 18.65, above the 16 level that usually triggered an adjustment for me when I was regularly trading iron condors. Because the implied volatilities had dropped so low, the call credit spreads could be raised only a few points if any reasonable credit was to be received. Moreover, it would be necessary to sell double the original number of contracts to preserve any profit at all. The chart below shows the current expiration chart and, in green, the chart after the proposed changes. The sidebar shows the current positions and, in green, the proposed changes to buy back the current credit spreads and sell the new ones.

Adjusting the Iron Condor, Chart by OptionNet Explorer:

This choice has raised the margin to $9,725, more than doubling the amount that would have to be set aside for the trade. This points to the reason that monies must be set aside for adjustments. Otherwise, the only choice is to close the trade for a loss.

Traders who don't set aside enough money in their accounts can have trouble closing trades such as this if they have to close the two sides separately. Imagine a fast market in which it's not possible to close a four-legged trade all at once, removing all margin requirements at once. If the trade must be broken up, with the two sets of credit spreads bought to close separately, the trader must have enough money to pay for closing one side of the trade as well as for meeting the margin requirement. Closing one side of an iron condor does not halve the margin requirement, since the iron condor is margined on only one side on most brokerages. Traders have gotten into trouble trying to close in-trouble iron condors when they didn't leave enough money in their accounts to pay the debit for closing one side and still maintain the margin due.

Let's backtrack a bit because some of you would argue that doubling the number of sold call credit spreads wasn't the only adjustment choice. When making the decision about how much cash must be left available when overlapping trades, those traders might argue that other adjustments would have been less expensive. I'm not suggesting that all adjustments are this costly. The price of the put credit spreads had narrowed, for example. Those spreads could have been bought relatively cheaply and new put spreads could have been sold at higher strikes to bring in some credit. The original 5-contract iron condor could have been rolled up into a new 7-contract iron condor with strikes at 1260/1250/1140/1130 for a margin of $6,557.50. That's far less than the $9,725 requirement if the number of call credit spreads had been doubled.

Still, the margin requirement would have increased, and there must be enough money in the account to meet those requirements. In addition, those newly sold 1140/1130 credit spreads would have been in trouble as soon as July 8, when the RUT had begun to roll down again. Some traders are leery about rolling sold put credit spreads higher in a low-vol environment. Limiting the amount of extra funds left available for adjustments, whether or not you're overlapping trades, could mean limiting your adjustment choices to those that require less margin.

So, what's the summary? Depending on the timing of your entries as well as the performances of the market, traders may find themselves regularly faced with the decision about whether to overlap trades. Their own personalities as well as the size of their trading accounts and the existing trade must be taken into account when making the decision. A trader might be cool and calm with the usual amount at risk but fall apart with double the amount at risk due to overlapping trades. Having too much at risk can lead to panicked decisions. Some other traders react differently and prefer to have many trades working at once, spreading out their risk across two or more months of trades. The point is to include the overlap-or-not decision into your trading plan before a trade is ever entered and then to size the about-to-be-entered trade accordingly.

I exited my JUL trade, shown in the first chart, on Monday, July 7. It did not appear to be in trouble, but it was getting harder to corral, if you will, and I wanted to enter my AUG trade that week when conditions were right. As it turned out, a situation not related to trading precluded me from entering an AUG trade. It was, however, a very good week to have exited on Monday with the profit I had and not be wrestling any trade at all during the tough market conditions that presented. I hope our subscribers made it through those conditions as unscathed as possible, too.

Linda Piazza