Adjusting iron condors: Choosing among the alternatives

Mark,

Making the "right" adjustment, at the "right" time is, by far, the most difficult part of trading iron condors, as far as I am concerned. In my real trading, the only type of adjustment I dare try is to close part of (or all) the position or roll over. All other types of adjustments seem too difficult to manage for me.

Most probably I am asking too much but , if not, and if other visitors of your blog also find it helpful, may I suggest that for a period of one or two weeks, you set up a simulation game where every day you give us a specific position (IC) and the necessary data (price of underlying, volatility, the Greeks etc) and we are asked to make a decision whether we need to adjust or not and if yes what strategy we choose, and then, the next day you give us your own proposal. I fully understand that everybody has his own comfort zone but it would be a great opportunity to see in practice how all the different adjustment strategies are used and why.

If this is not realistic, is it possible to publish in "Expiring Monthly" a new "Follow that trade" like you did last March?

Thank You

Dimitris

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It's not realistic because of the huge amount of time required.

However, what you ask is not nearly as beneficial as you may believe it is.  Asking for the greeks?  Isn't that easy enough to do yourself?  However, that's not the point.

As a rookie, you cannot always expect to read about something and immediately put it to use.  Sure, that happens part of the time, and one example is becoming aware of the risk associated with trading too much position size.

However, not everything is so easy.   Adjusting iron condors is complex.  There is much to understand.  You cannot expect to examine a few example and then know what to do.

 

Your job

You have two main tasks: understand the adjustment method and then practice.

Understand:  Think about the reason for making an adjustment of the type under consideration.  Decide if it makes sense to you.  Try to guage the amount of risk reduction to be gained vs. the cost.  Compare with alternatives.  Decide if the whole deal fits within your comfort zone.  When you find something suitable, it's time to go to work.

Practice:  Use a paper trading account.  There's more detail on this idea below.

When

You know that I have no idea whether you should adjust when the underlying is 5% OTM, 3%, 1% or any other number.  How can I know your tolerance for risk or your investment objectives?  Or just how much you understand and how much of a beginner you are.  Each of these items, and much more must be considered when adjusting an iron condor,  Remember that there is no right answer.  There is merely something that is good for you, and hopefully you choose something very good, or even 'best' for you.

Then if you decide to adjust, I don't know if you should exit, reduce by 10 to 30%, buy a debit spread, buy a kite spread, roll, etc.  I'll go further:  If I were to tell you what to do, and not teach you how do make that decision for yourself, then I would not be fulfilling my goals. No one knows what you should do. 

I have no idea what is right for anyone but myself.  Even then I may have a difficult time making a decision.

 

My job.

I cannot show you what to do.  What I can do is offer a list of suggested strategies and try to explain why each may be a good idea, depending on conditions.  I can be certain you recognize the risk involved.  That's all I can do.

If you cannot make a good choice from the information – and I understand that as a rookie it's far from easy – then you must practice.  You suggested that I undertake a specific task.  Instead, you do it.

Each day for a week, open a new iron condor in a paper-trading account.  Each new IC should be require an immediate adjustment. Because you don't know 'when' to adjust, try this.  Open the trade based on this assumption:  It was a good, netutral trade at one time,  but now the calls (or puts) are 2% OTM. It does  not matter how much premium you collected.  It does not matter how long ago you made the trade.  Today the position is uncomfortable for you to hold.  Thus, an adjustment is in order.

Pick one adjustment method.  If you don't know which to choose, buy some credit spreads.  Guess how many.  Guess which stirkes – based on what I have previously suggested.  Try to be comfortable with the cost.

Make an adjustment.  Follow the trade.  Determine how well you like the adjustment method being tested.  They try again with another straegy.
 

Follow the trades.  Record your thoughts and collect data.  Gain experience.  That will be far more useful to you than reading my opinion on specific trades.  My objective is to teach you to think for yourself.  I know that as a beginner, you want to learn everything NOW,  That is not going to happen.  You must have some patience and learn at your own speed.  Here, practice trades offers the best learning experience.

Over several months you will collect much data and have many entries in your trade journal.  Some trades will be comfortable for you, some will not.  Be certain to record which adjustment types fall into which category. 

Among the comfortable trades, try to decide which seems to work best for you.  This is not to be determined by which makes (or save) the most money, but that is one consideration. 

Use that startegy as your primary adjustment method, but at the same time, continue the paper trading to gain more experience with other iron condor adjustment methods.  It's an ongoing proposition.

You may want to view my Oct 12, 2010 one hour webinar at TradeKing on this iron condor adjustments.

A lengthy example may be educational, but it's not a substitute for doing the work yourself.  I'm here to help or offer guidance.  But this request is more than I can handle

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