Adjustment Headaches

Hi Mark,

Recently I have some mixed feelings about iron condors (IC), and hope to
benefit by sharing my thoughts here (and hopefully you have some input that
may enlighten me and others who trade IC).

While veterans like you have
mentioned that IC is not a free lunch, I think I have a way to put this
in context. Although IC adjustments are a must for long term success, I
believe these adjustments only make deferred losses (aka preventing an
immediate loss).

If all the positions are closed immediately after
adjustments, then it results in an immediate loss. The
deferred losses pile up as more adjustments are made.

adjustments are made, then the IC trader hopes that the market will
treat him kindly so that theta decay is accumulated by enough to cover the
deferred loss, and hopefully have some left as profit.

But hope is
not a strategy, as you have said.
So my conclusions are:

  • IC does not have a clear advantage compared to other strategies
  • The only feature that makes IC look promising in hindsight is
    the upfront collection of premium

Mark, I wonder you agree with my point of view.



1) I do agree with your point that IC do not have a clear advantage 

But there is zero advantage to collecting cash upfront, unless that gives you a psychological boost.  An equivalent strategy requires the payment of cash upfront, but the result is the same.  If that cash is the main reason that you trade IC, I strongly suggest that you reconsider, and perhaps find a strategy that is better suited to your trading talents.

2) I don't believe any strategy has a 'clear advantage' over most other strategies.  Some methods work better than others for a given trader because the trader is better equipped to manage the position

a) I believe the 'strategy' tells you which options to buy and sell as your ticket onto the playing field.  You can play the 'options trading/investing' game with a variety of strategies

b) Once you open a position, you are on that playing field. At that time, risk management takes over as the vital factor that determines your eventual success (or not)

5) I don't know how you choose to adjust your IC positions, and that information is not important.  But it's clear that whatever method you are using, it is not working for you

Here is what is important:  AFTER you make the adjustment, do you believe you have a good position?  (If the answer is not 'YES'! then you do not want to make this adjustment) Good being defined as:

a) You expect (not hope) to make money with the position as it is RIGHT NOW.  Not compared with the original price you received when opening the trade.

b) If you have a market bias, then you anticipate a profit when that bias becomes reality.  Neutrality is a market bias

c) If you don't believe the position will be profitable going forward, don't own it.  That means don't adjust the original trade.  Close the position

Adjusting a position is truly the same as opening a new trade.  The major requirement is that the trade is suitable for you.  The one advantage to adjustment is that you save a bit of money on commissions, but that should never be a factor.  If commissions are too high, find another broker.

d) If you look at adjusting as deferring losses, then I don't believe you are making good trades.  Adjustments can be profit centers – they are not only used to 'defer losses.'

Here's an excerpt from an earlier post:

'The bottom
line is that when you make a trade to adjust the position, it's going to
improve what you currently own.  That's why it tends to be a money
maker going forward.  No guarantee.  But you had no guarantee when you
initiated the iron condor in the first place.'

e) My view on adjustments is this

i) The new position is good, meets your criteria for profit and loss potential and fits snugly (with room to spare) within your comfort zone

ii) If EACH of those characteristics is not present, then DO NOT ADJUST.  DO not own this position.  EXIT

iii) Sit on the sidelines or re-invest your money in a fresh position

iv) Adjustments are not made to defer losses.  They are made to give you a good position.  Not a reasonable position, not a position you 'don't mind' holding.  NOPE.  A good position.

v) You have a choice:  Exit and open a new, good position.  Or adjust.  Why adjust if it's not something you WANT to be part of your portfolio?  Why defer a loss and keep a bad trade?  Don't do it.

6) Bottom Line:  Don't think of it as an adjustment.  Mentally think of it as a two-step process.

a) Exit

b) Re-open the adjusted trade

If you would not do b) after doing a), then don't adjust.  If you don't want to own b), then don't own it.

I understand that you may feel this is too simplistic and that it does not truly provide the guidance you seek. The truth is that there is no 'best' answer.  I suggest you do two things, both realistic:

1) Look for alternative adjustment methods

2) Adjust earlier, perhaps in stages


The second issue of Expiring Monthly is coming soon: Monday Apr 19, 2010


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10 Responses to Adjustment Headaches

  1. Henry Tzuo 04/12/2010 at 10:22 AM #

    Hi Mark:
    I agree with you — actually, whatever strategy it may be, I believe that, as an op spread seller, the worst case scenario has been known in advance. Maybe I am a coward, so I always assume that I will lose all of the spreads positions I am selling, then, after deducting that simulated amount from my trading capital, I know how many units I can do in this month. That’s my way to do it.
    I only know that, dinosaurs got extinct long time ago and turtles/tortoises are still alive today.

  2. Mark Wolfinger 04/12/2010 at 10:40 AM #

    Cowards survive. Cowards live to trade another day.
    The risk takers can become immensely wealthy over a short period of time. That’s the attraction. Risk takers also go broke.
    One word of caution. If your worst case comes to pass, I hope you have not invested the maximum amount available to you. Coward or not, that would deplete your account.

  3. Henry Tzuo 04/12/2010 at 10:43 AM #

    Thanks for the reminder. I will always keep that in mind.
    Have a great day. 🙂

  4. Henry Tzuo 04/12/2010 at 10:57 AM #

    BTW, from the info provided by John in this post, my sense is that, maybe he can pay more attention to the liquidity issue of his open interest — this is very serious. Once one wing of the IC becomes in-the-money, it will be very difficult to close the ITM part. ITM options have much lower trading volmue than ATM or OTM. The floating gain/loss of his account should not be his concern — because everything is mark to market. The current trading system has automatically assumed that everything is closed NOW. The the rest, Mark got the exact point.

  5. Mark Wolfinger 04/12/2010 at 1:58 PM #

    He did not mention any liquidity problems. Nor did he mention difficulty in getting fills. I also believe he is adjusting well before the options move ITM, bu he did not mention that point.
    I do want to point out that ITM options have lower volume because fewer people are interested in trading them. The low volume – all by itself – does not suggest poor liquidity.

  6. Henry Tzuo 04/12/2010 at 7:49 PM #

    Hi Mark:
    Thanks for the ITM point — I am a little bit surprised — is it real that ITM options , despite lower trading volume, have adequate liquidity for the sellers to close??? Sorry for asking again because sometimes, many of us have to deal with this problem…. ???
    Or, perhaps, diversification to differnt stocks, or different kinds of options, may reduce the price breakthrough risk???
    Thanks for sharing your experience…
    Henry Tzuo

  7. Joe 04/12/2010 at 8:00 PM #

    Im trading ICs with kites on a few different indexes over different months which makes me feel like Im diversifying and also benefiting from slight differences in each index. I have previously read on your blog that you only trade the RUT.
    Could you explain why you choose to do so?

  8. Mark Wolfinger 04/12/2010 at 10:28 PM #

    The truth is that these are as liquid as the market makers want them to be. But there is seldom any customer interest. Each stock may have its own characteristics. I’m sure deep AAPL options are liquid enough to trade, but many stocks whose options are always thinly traded would present a different story.
    If a deep ITM option is quoted $8.20 to $8.40, you know you can buy or sell at a decent price. But, if the market is $8 to $9, the only way to test the market is to enter a reasonable bid. Or better yet, enter a spread order in which you close that short and open another.
    Obviously all such orders must be limit orders. I assume you are well aware of that.
    I recognize this problem, having dealt with it myself.
    Diversification is always one way to reduce risk – but you don’t want too many positions to handle. If it hits that fan all at one time, trying to fix 10 positions simultaneously is impossible.
    Glad to help.

  9. Mark Wolfinger 04/12/2010 at 10:31 PM #

    I find it easier to handle risk when I have only one underlying to consider.
    I also discovered that some of the indexes I was trading were impossible. The bid ask spreads were wide and the market makers only traded when you paid offers and sold bids. I gave up trading those.
    I had trouble getting fills in SPX, and although there is lots of volume, it was difficult for me.
    So I settled on a single index. Not as good from a diversification perspective, but much easier mentally. I never have more than one problem at a time, and that’s worth something.

  10. Henry Tzuo 04/13/2010 at 5:29 AM #

    Thanks Mark. Tons of appreciation.
    Henry Tzuo