Iron Condors. Risk Management


Earlier
I discussed some of the decisions that go into buying an iron condor position.

Once you own the position,
you hope that time passes and that the underlying stock or index doesn’t make a
significant move in either direction. And that’s what happens – at least part of the time. But today’s market conditions are fairly
volatile and we’ve seen significant ups and downs. Thus, it’s likely that an iron condor
position can run into trouble.

How to handle ‘trouble’ is an
individual decision. I’ve read a couple
of bloggers who insist that there’s nothing to do. The position already limits losses and that
should be enough risk management for anyone. I strongly disagree.

From my perspective, limiting
losses is the number one key to long-term success as an option trader. The idea is to take some big profits, some
small profits and some small losses. By
avoiding the crushing losses, you will do well – assuming you understand how
options work and use them advantageously. Those who blindly buy and sell with no clue as to why they are trading
will not survive.

To manage risk of an iron
condor, you must make a decision at a crucial time. Do you accept a loss, reduce risk, and move
on? Or do you refuse to take the loss
and hold the position, hoping for a market turnaround. For me the answer is clear. Reduce that risk and live to play another
day. But, that’s not for everyone.

Some of those risk-reducing
decisions are going to turn out to be big winners because they save you from
incurring large losses. Alas, some will
be made in vain. Sometimes the market
reverses direction, and the trades made to reduce risk, cost money. My advice is to make the best decision you
can at the time you must make it and if turns out well, that’s great. If not, that’s just part of the risk
management game.

For a more detailed
discussion about iron condors and managing risk, visit my website where I recently posted some of my ideas on managing risk when trading iron condors.

Introduction to iron
condors

Setting up the trade

Philosophy of managing iron
condor risk

Specific recommendations
for managing iron condor risk

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