Adjusting Iron Condors: General Concepts

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When it comes to trading, beginners are especially overconfident.  I have no clue as to why that is, but they often trade before becoming educated, trade too much size, seldom manage risk, and far too often – blow up their accounts, and quickly become ex-traders.

At some point – early in your career as a trader – the importance of managing and controlling risk must be recognized or there is a significant chance you will not survive as a trader.  Today's post is not to argue that point.  Assuming you are convinced (or very soon will be) that it's true, let's discuss how to manage risk when trading one specific option strategy:

If you are unfamiliar with iron condors, here is a very basic description.


  • You own an iron condor on a broad based index (INDX)
  • INDX has rallied (fallen) since the position was opened
  • INDX is trading at the edge of your discomfort level

    • You believe this position can be salvaged and there is no reason to exit
    • You believe now is a good time to adjust the position


Making adjustments

There is no single 'best' strategy to use when adjusting positions.  The primary goal is to reduce risk. You are adjusting because risk has reached an unacceptable level.  At this point there are basically two choices:

  • Reduce size by closing some or all of the position
  • Reduce risk by making a new trade – bur ONLY when the adjusted position is worth owning

The secondary goal is to own a position that has a better chance to earn a profit – from this day forward.  I am not talking about recovering any losses.  Losses are in the past and should play no role in choosing your current trade (or investment).

Earning money in the future is all that counts.  Whether it turns out to be enough to offset earlier losses is not important.  Your goal as a trader should (obviously this is my opinion) be to make money today, tomorrow and for as long as possible.  You have no control over what has already happened.

My goal when choosing an adjustment is to make the position something with a good probability of earning a profit.  A satisfactory reward potential, along with an appropriate level of risk are necessary considerations.  If I cannot meet those, I'll exit instead of adjusting. 

From my perspective, I suggest not owning a position that is already outside your comfort zone when it is opened.  It's common for traders to do just that when making an adjustment.  Why?  Because the adjustment is made with the objective of getting back to even on the trade, rather than focusing on making money today and tomorrow.  Both ideas are similar in that the goal is to earn money, but the 'getting back to even' mindset focuses on earning a specific amount – and that may easily result in your owning a position with too much risk.

Below are some of the adjustment possibilities for an iron condor gone awry.  Each is appropriate under the riight conditions.  I suggest that you consider the list and find one or two that suit your needs.  There is no space to provide detailed descriptions of each strategy, nor is this an attempt to provide a complete list.  It's a group of ideas worth considering.

Basic Adjustment types

  • Exit or reduce size
  • Buy extra options for protection.  These options must be less far out of the money than the options being protected.  If your condor is short calls with a strike price of 900, the adjustment is to buy calls with an 890 (or lower) strike price. 

    • Maintain those options unhedged for potentially unlimited gains.  This is often too costly for most traders to consider
    • Hedge the option purchase to reduce cost

      • Convert it into a call (or put) debit spread

        • Sell lower priced option with same expiration date.  For example, buy the 880/890 or 890/900 call spread to adjust a position that is short the 900 calls.  This trade offers good ban for the buck.  Protection is limited, but the cost should be acceptable (unless you waited far too long to adjust)

      • Convert it into a kite spread

        • Sell a few farther OTM call (or put) spreads
        • Example: Buy one 890 call and sell three or four 920/930 call spreads (same expiration date)

      • Convert it into a long strangle by buying puts (or calls).  This is expensive

      • Sell more premium.  This adds to risk and is ONLY appropriate when the current risk level of your account is well below your maximum level

        • Sell OTM put spreads when delta short (INDX rallied)
        • Sell OTM call spreads when delta long (INDX has declined)

        • AVOID selling spreads for small premium.  This is not a risk free trade, and if you are going to take this specific risk, be certain the reward is worthwhile.  It's easy to believe (incorrecty) that a low delta spread is 'safe' to sell.

    • Cover troubled spread, roll farther OTM, sell extra spreads.  Example buy to exit your short 900/910 call spreads and sell a larger quantity of 920/930 spreads (expiration month may be the same or different)

        This trade often usually made for a cash credit

        Warning: The position looks better right now, but those extra short spreads translate into extar risk.  Be certain your portfolio does not become too risky to hold

    • Buy OTM calendar spreads.  These offer limited protection and may lose money when the underlying moves too far.  Choose a strike price that offers profits when you need them the most – and that is near the strike of your current short options


The iron condor strategy is often used by traders who think of it as an income source.  It is not free money, nor it is guaranteed to produce income every month.   Risk must be managed well.  If you take good care of your option positions and limit risk at all times, the chances are good that they will take care of you.


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8 Responses to Adjusting Iron Condors: General Concepts

  1. Dimitris 10/28/2010 at 3:17 PM #

    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 find it also 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

  2. Mark Wolfinger 10/28/2010 at 9:51 PM #

    Reply tomorrow in a full post

  3. Joe 10/29/2010 at 12:20 AM #

    If the RUT is at 700 and I was to go long by buying the index whilst at the same time shorting it at 700, would my position be cancelled out or would I be able to hold both positions. Also how would the margin work in such a position?

  4. Mark Wolfinger 10/29/2010 at 7:33 AM #

    You cannot ‘buy the index.’
    You can buy futures and you can buy very deep ITM calls.
    Thus, when ‘shorting’ the index, if you sell the same position you bought when going long, it all cancels and there is no position and no margin requirement.
    If you sell different options – say a different strike price, then you would ‘hold both positions’ and have a spread. The margin requirement would be that of holding the spread.
    Thus, if you buy the 550 call and sell the 560 call, there would no no margin (you already paid to own the spread). If you buy the 540 and sell the 530 calls, the margin requirement is the typical 10 points, or $1,000

  5. Brian 10/29/2010 at 9:05 AM #

    Hi Mark,
    What about this as another option: delta hedging on a periodic basis (like once per week)? If the IC is using an ETF such as IWM or SPY you could either buy or sell the underlying, or could do it synthetically with puts/calls. With the index you’d have to do synthetic long/short.
    Problem with this approach might be the margin required. I just tried a simulated trade with RUT and selling 1 700P and buying 1 700C (100 delta) and it required ~16k margin with ToS.

  6. Joe 10/29/2010 at 12:35 PM #

    I must have been given the wrong information by my broker, as I was told you can go long and short on the index at the same price, just the same way as if it were a stock.
    Thanks for the reply

  7. Mark Wolfinger 10/31/2010 at 11:43 AM #

    Hi Brian,
    One can adjust back to delta neutral based on the calendar.
    I never adopted that approach, and I have been adjusting delta since 1977 (when I began trading as a market maker).
    Although this appears to be satisfactory, consider what happens when a big move begins on Monday and continues all week. You may be out of business by the time Friday arrives.
    I believe it’s preferable to adjust as needed.
    Margin: To the broker, you sold one naked put option – and that carries a large margin requirement (when using Reg T margin).
    Thanks for sharing

  8. Mark Wolfinger 10/31/2010 at 11:45 AM #

    Ask the broker exactly how he suggests that you do that.
    Here is a great opportunity for all of us to learn something, or for your broker to get embarrassed. Note: If he suggests using futures, that is not similar to ‘buying the index.’