Traders who understand the importance of not allowing a losing position to inflict large losses have no trouble making an adjustment to an iron condor position that has become too risky.
Other traders ignore that risk and hold positions until expiration arrives. The advantage of ignoring risk is that you have fewer losses. But, those losses are often much larger (two or three times as large) than necessary. Over the longer term, I'm convinced that prudent risk management is the single most important factor in determining your success. With today's very volatile markets, an iron condor trader must be conscious of risk.
What's the 'best' adjustment?
There is none. The objective when adjusting is to reduce (or eliminate) the chances of suffering a large loss. You can accomplish that by buying protection or by closing all or part of the position.
If the market has made a strong move in one direction, and the put or call portion of the iron condor is becoming uncomfortable to hold, you can buy protection:
Note: These choices represent an 'advance' play. If you are not making any adjustments until your short option is already in the money, these two suggestions are not appropriate:
a) Note: The following suggestion is simply my recommended 'buy extra puts and calls' as described in The Rookies Guide to Options). But the purchase occurs when necessary, as opposed to every time a new position is initiated.
Buy a small number of naked long puts or calls – preferably with a strike price that is less far out of the money than the strike price of your short options. These are expensive options to purchase, and you may be unwilling to spend the cash. You won't need very many of these – perhaps one for each 10 iron condors.
b) Instead of buying a single option, buy a call or put spread instead. This is less costly and provides only limited protection. the spread should also be closer to the money than your current short option.
Example: If you are short the 870/880 put spread, and the index is trading near 910, you may decide to buy one 890 (or 900) put. Or you may elect to buy two or three of the 890/900 put spreads, or the 900/910 put spreads. Buying the 890/910 put spread may appeal to you.
The goal is to reduce risk before you are in 'big trouble.'
Alternatively, you may decide to simply buy in (close) a portion of your short position, perhaps 20 to 30% of the total. If it's appropriate, you may elect to open a new iron condor position. The new IC would be further out of the money and usually has one additional month before it expires.
Example: In the example above, you may decide to buy two (of the 10 you are short) Dec 870/880 put spreads and sell two Jan 830/840 (or other strike prices) spreads. If you do this, it's a good idea to buy the Dec call spread – especially if it's available at a relatively inexpensive price. That allows you to sell Jan call spreads to complete the new iron condor. NOTE: It's not necessary to sell those Jan call spreads, nor is it prudent to ignore the Dec call spreads.
Make trades that suit your comfort zone. If you prefer to wait longer before making an adjustment, that's fine. If you make an adjustment such as those mentioned above, it may be necessary to make another and then another – if the position continues to move against you. Your goal is to earn good profits when you can, but to minimize losses when risk has increased to the point of discomfort.
Adjusting iron condors is the path to success. It's part of prudent risk management. But, it's an art, not a science and there are no hard and fast rules I can suggest. You may be able to discover rules that work for you – as you face more and more of these situations.