Adjusting in Stages. The Reality.

Question (black font) and answer (blue font):

Dear Mark, Hello Antonio

Firstly hope everything is OK as you don’t write too frequently in the blog. I am writing much less these days, and most of that appears in my column.

Maybe you remember me Sure I remember you because throughout the years I have done some questions and also was in the premium forum a few months. I got out because it coincided with a strong work time and also left trading because of the poor results.

I came back to the idea of ​​the Iron Condor and re-reading some post I would like you to validate this system and give me your opinion about it.

The idea is to adjust risk by closing in stages as you suggest and I explore the numbers.

In these low volatility times, it seems to make an IC by generating a 3$ credit is very difficult. 2.5$ could be easier with delta 15 ~ It’s a different world today, and we must adapt to current market conditions. Just be certain that you truly like (i.e., you are comfortable owning) the positions you are trading — and not merely following a formula for deciding which iron condors to trade. For example, when IV is low, 15-delta iron condors would be less far out of the money than they used to be. Perhaps you would be more comfortable with a lower delta…maybe 12. That is a personal decision, but I want you to think about it. Do you want a smaller premium coupled with a higher chance of success? It is very difficult to answer that question.

Scenario: I trade 3-month iron condors.

Closing the not-adjusted (i.e., profitable) spread 3 weeks before exp at an estimated cost of 0.50$

I trade 6-lots of the iron condor, collecting 2.50$ in premium for each. Total cash collected is 1,500$.

First adjustment: Close ~20% position (1-lot). losing 100$. I would close only the threatened half of the IC. I encourage exiting the whole iron condor.

Second adj: close ~30% position. losing $ 150 per iron condor (2 contracts) = 300 loss.

Third adj. close remaining 50% position. losing $ 250 (3 contracts) = 750 loss.

Let’s examine the worst (or at least a very bad) scenario: we would have to adjust every month of the year: This is very harsh. This scenario should seldom — if ever — come to pass.

  • Six times: 3 adjustments, exiting entire position.
  • Six times we make only 2 adjustments.
  • Assume that we NEVER get to earn the maximum possible profit (zero adjustments)


3 adjustments:
1500-100-300-750-300 (spread value not threatened $50×6) – 60 (commission) = $ -10 [i.e., we lose $10 for the trade]

2 adjustments:
1500-100-300-300 (spread value not threatened 0.5×6) – 60 (commission) = + $ 740

a) Lose $10 six times per year: = -60

b) Gain 740 six times = 4,560 ….. ….. 4500$ year ….
Total Annual Performance = 4500/18000 = 25%
This would be a very satisfactory result.
Unfortunately the math is very flawed.

***You are assuming that it costs $100 to exit at the first adjustment, but that is the LOSS, not the cash required. To exit one iron condor at a loss of $100 costs $350 to exit.

Similarly, when you exit after two adjustments (at a $150 loss per IC, it actually costs $800 cash – i.e., your original $500 plus $300 in losses).

Exiting after three adjustments costs the $750 loss plus the original $750 premium. Total cost is $1,500.

Thus your numbers should be:
a) The 6 times when three adjustments are required: collect $1,500, pay $350 for adj #1, pay $800 for adj #2, pay $1,500 for adj #3, pay $60 in commissions: Loss = $1,210.

b) The 6 times that two adjustments are required: collect 1500, pay $350; pay $800, and pay $150 later to exit the three winning spreads; pay $60 commissions. Net profit is $140.

The Discussion

As I say I’d appreciate an opinion as deep as possible, because regardless of other possible adjustments we can make, I think the way you handle the IC goes here.

One practical difficulty is this: How aggressively do you try to exit when adjustment time arrives? If you do not bid aggressively to exit the position, the loss may get much higher than $100 before your trade is executed. If you bid very aggressively, then you may be paying too much to exit positions that have not yet reached the adjustment stage. You must think about this.

Honestly I pulled away from trading because i was not getting good results, but I continue thinking that IC are great and that your way is one of the best to do it. Please remember that no method is ever good enough – unless you feel comfortable when trading. Why? Because discomfort leads to poor decisions. Also: When you examine the correct numbers (above), you will see that you cannot make any money when you anticipate making three adjustments approximately 6 times per year. Adjustments are expensive and we make them to be certain that we keep our losses small. However, you must expect to make one or fewer adjustments — most of the time — for the iron condor strategy to be viable.

Please tell me if there is some way to communicate privately. Thank you. Send email and we can discuss. rookies (at) mdwoptions (dot) com



One Response to Adjusting in Stages. The Reality.

  1. Jeff Holson 05/26/2015 at 1:20 AM #

    Great review. Thanks for sharing.