Iron Condor Adjustments

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.


7 Responses to Iron Condor Adjustments

  1. Jim Lindor 12/01/2008 at 7:41 PM #

    Hi Mark,
    I can see why you say there isn’t a best way to adjust. But I would think there would be a range in which it could be said it would be best to adjust.
    For example, if I received $1 for the put leg and I currently have a $5 loss, then wouldn’t you say I should have adjusted earlier?
    Or lets say I adjust after a 5 cent loss. Wouldn’t you say I adjusted too soon?

  2. Mark Wolfinger 12/01/2008 at 10:42 PM #

    Hi Jim,
    Yes to both.
    Sure, there is a range for adjusting. But:
    1) It’s not a good idea to use a rule that is cast in stone. There can be a good reason for staying with a specific trade longer.
    2) If you buy (sell the call and put spreads) a 10-point iron condor and collect $5, your maximum loss is another $5. Thus, if this trade moves against you by $3 and you want to pay $8 to close, that’s probably not a good idea. You have only an extra $2 at risk.
    But if the initial cash credit was $1, then you still have $6 to lose and only $4 to gain. This position is worth closing (if your comfort zone is violated) because there is still so much to lose.
    Thus, the fact that the loss is a specific amount ($3) is not, in itself, a reason to shut down the trade.
    3) If uncertain where your first adjustment point should be, a decent rule of thumb is not to lose more than x% of your initial credit. I suggest establishing x as between 100% and 150% as a starting point. Your own trading experience will dictate how to set that ‘maximum loss’ level – as time passes.

  3. Jim Lindor 12/02/2008 at 7:45 PM #

    Thanks Mark. That is helpful.
    I’ve noticed in paper trading ICs that if one leg needs adjusting then the other leg has gained anywhere from 50% to 90% of its maximum profit.
    Lets say the puts have a 100% loss and the calls have a 50% profit. I am unsure of what to do when I consider rolling the calls closer to the current price. I would like to take the profit to minimize the loss on the puts.
    But with the wild swings in the market I am concerned the if I roll the calls they are more likely to require adjusting when the market swings back.
    I would like to hear your thoughts on how to approach this situation.

  4. Mark Wolfinger 12/02/2008 at 10:40 PM #

    100% losses are to be avoided if you plan on being successful over the long term. Also, it’s never a 100% loss until expiration arrives. A spread may be 50 RUT points ITM, but can be 100% OTM again in a day or two.
    I separate the decision into two parts.
    1) If the call spread has become ‘cheap enough,’ I buy it – and sell nothing to replace it. What is cheap enough? It’s a comfort zone decision. For me (I usually sell call and put spreads in the $1.50 to $2 range), I am happy to pay one penny per trading day that remains in the option’s lifetime.
    Under normal conditions, which we may never see again – I would not pay more than 35 cents (with 7 weeks remaining), but today would pay more.
    I try to cover any short spread at 15 cents. I do not like to hold out longer. I few nickels is simply not worth the risk. I cover everything at some point. No Friday settlement surprises for me.
    2) If #1 does not apply, then I roll by covering the short call spread and selling a new iron condor that includes a closer-to-the-money call spread in the following expiation month. But, two conditions must apply:
    a) I collect a sufficient credit to be willing to undertake the risk of being short a call option that has a much lower strike price than when I opened the trade. I can ignore the risk of leaving the original put spread in place. If it has lost 100%, there is no further risk.
    b) I must like the new position. If there is any discomfort – perhaps the call strikes are too low – I simply do not open the new iron condor at this time. It’s not forced. Open new position when you find one that meets all your ‘new position’ criteria.
    Warning on TERMINOLOGY: This is important to help you think along logical lines. If you innocently use the wrong word, that’s ok. But I want to be certain you do not believe that your choice of words is correct.
    “I would like to take the profit to minimize the loss on the puts.”
    There is no profit to take. When you roll the call spread, you are taking in cash – and that’s your possible profit. But do not call it profit. Not yet.
    It does not ‘minimize’ the loss on the puts. It has the potential to reduce the loss on the puts, but this new call position may soon incur a loss of 100%. In this case, all you did was shift the loss from the puts to the calls.

  5. Mark Wolfinger 12/03/2008 at 8:22 AM #

    It dawned on me that we may not be speaking the same language.
    What do you mean by ‘the puts have a total loss’?

  6. Jim Lindor 12/03/2008 at 6:50 PM #

    I can see how my terminology is misleading. I was referring to the loss on the puts in the same way you did earlier – a 100% loss on the credit.
    Your reply has given me a lot to think about.

  7. Mark Wolfinger 12/03/2008 at 7:06 PM #

    By 100% loss, I had assumed you meant that the spread was so far in the money that there was virtually no chance of ever closing the position for less than the maximum.
    Thus, please disregard the suggestion (above) to ignore this losing put spread when opening a new iron condor. The decision must be: roll the call spread or don’t roll it. It’s always a difficult choice because you DO want the extra cash to offset the current loss in the puts, but you DO NOT want the risk of being short calls that are much closer to the money.
    My experience tells me there is no good solution. If you fear the rally, you cannot afford to roll. If you have no market opinion, you can make your position closer to neutral by rolling that call spread.
    If you can shrug your shoulders without emotion if the decision turns out to cost you cash, then you have the makings of a trader. If you feel the need to win almost all the time, these decisions are more difficult to make.