Q & A. Adjustment Discussion

Continuing an earlier discussion:

"When I put on the adjustment I am not really thinking of it as a stand
alone position that I want to own.

I think the question is do I want to lock in a loss
(when probabilities are still on my side) on the initial spreads and then put on
another position? Or do I want to own the new combined position, that is the one
where I sell an equal amount of iron condors for equal money, where the delta of
the original position is now offset by half or so.

I think in a way the loss and
new position is not that different in terms of aggregate risk from what I am
proposing. But, I admit I might be wrong here."


1) Most adjustments are made with the primary purpose of reducing the risk of holding an existing position.  However, that is insufficient.  It makes no sense to reduce risk and then have a position that you hate.  Thus, when adjusting a position think of it it terms of:

Can this position be salvaged?

What are the chances of doing some good, instead of just spinning wheels?  In other words, do you anticipate the adjusted position will make money going forward?

Is there a better position to own?  Should you exit this trade and open a new position?  The problem with the new position is that it may require a longer time period to earn the profit.  I don't let that bother me, but I know some people want to make a profit every month, despite the fact that this is an unrealistic expectation.

2) If you ever open a separate position, i.e,, not as an adjustment but as general portfolio protection (for an example, click here), that profits from a market move in one direction or the other – then that is a standalone position that may offset losses from a current position.  In other words, it's just semantics.  I buy pre-insurance as a standalone trade – and occasionally close that trade, earning a profit.   At other times that standalone trade is needed to offset a loss from a previously existing iron condor.

3) Just a comment: There is more to a trade than just the probabilities.  When you own an iron condor that is not behaving well, the probability of success may still be more than 50% (and thus, the 'probabilities are still on your side') , but that does not always translate into a position in which the risk/reward ratio is satisfactory.  

4) There are different mindsets that a trader can use, and we each have an opinion as to which best represents reality and a reasonable method. 

I ignore whether a trade has made or lost money.  I look at the position as it is TODAY and decide whether I want to continue to own it at the current price (the original trade price is meaningless) with its current risk/reward potential.  Then I decide whether I prefer to exit this trade and own another.  I also have the choice of modifying (adjusting) the position.  It does not make any difference whether the current trade has lost money. 'Locking in a loss' is a blind spot for many investors who cannot see that money has already been lost.   Because I prefer to own a less risky portfolio that has an increased chance to be profitable, I'll give up an a bad trade and move on.  This thinking may be inconsistent with the boundaries of your comfort zone.

My goal as a trader is to own a portfolio with the best chance of making money from today forward.  I am less concerned with recovering assets that are no longer mine.

My goal as a risk manager is to be certain that the decisions of my trading persona are acceptable and within both of our comfort zones.

The point: Do you want to adjust the position or would you prefer find something better?

5) The adjustment you suggest – opening a new iron condor that is not neutral – in an attempt to partially neutralize the Greeks for the entire position, is reasonable, but it does violate one of my priorities: When adjusting a position, do not increase position size or risk.

If the new position, with twice as many iron condors as you originally owned, is acceptable to you, then there is no problem.  There is no reason why this adjustment is better or worse than any other: if used in moderation.  But it does increase size and thus, risk.  Keep in mind that the Greeks are improved, but if you were short a call or put spread that is threatening to move ITM, nothing has changed.  That threat has not been eliminated. 

The new and improved position may require another adjustment.  You must be careful not to repeatedly increase position size.  That's just looking for trouble.

6) Are you wrong?  You are neither right nor wrong.  It depends on what you believe.  I feel that your suggested adjustment results in increased risk.  Adding iron condors to a portfolio, increases both profit potential profit and risk.  Of course with Greeks that are closer to neutral it appears that immediate risk has been reduced. 

It depends on how your comfort zone feels about  immediate delta risk vs. risk of a major market move.  I'm more worried about the latter.


4 Responses to Q & A. Adjustment Discussion

  1. Josh 10/08/2009 at 7:42 AM #

    Greetings Mark:
    Thanks again for taking the time and effort to answer my question. First I feel the need to clarify the point about increasing risk by putting on an offsetting position as an adjustment. This is the point you bring up in (5) above.
    In my original comment/question the paragraph just above the paragraph you quoted above read:
    “Thanks for your response. So, there are a couple things that I think I should clarify. First, my idea is predicated on starting out with a half position. I assume that I am going to need to make at least one adjustment per month (I trade front month positions initiated 30-50 days from expiration). So if I want to have ten iron condors on I would initially sell 5 and look to sell another 5 (collecting about the same credit as on the first 5 spreads) to cut any delta imbalance about in half.”
    So, I understand that if one just keeps increasing risk/size as a position goes bad this is a martingale strategy and likely to lead to ruin.
    My second point is more of a question. In principle I agree with and understand the trade as of you had no position stance. The loss already exists and hoping that the position will come back is not a viable strategy. But I think that thinking about the position as, say, a RUT SEP iron condor, where all trades related to the position are accounted for in the PnL makes sense. If you adjust by rolling, taking off the old iron condor and putting on a new one in the same month on the same underlying, I think it is not unreasonable to the loss already taken on the original position as part of the new position. Maybe this is a mistake on my part and I should not think about it the way I do but I suppose the way I think about it is not that uncommon.
    For a little evidence of this watch some of the Dan Sheridan webcasts on trading iron condors on the CBOE site. (There is a very good one where he goes through several different adjustments over a single month in RUT showing how and why some worked and so didn’t). After an adjustment he does not wipe the slate clean and start with a new PnL. Rather he incorporates the PnL from the original position into runny tally of PnL for the position after adjustment. My point is not that this is good or bad. My point is that this is how I think and I believe many others trading iron condors (and other spreads) think.
    Now, I would not count a loss in the RUT SEP iron condor as part of the RUT OCT iron condor. I guess because options expire, but if I do the same iron condor strategy in RUT every month then the relationship between the initial SEP iron condor and a subsequent adjusted SEP iron condor is not all the different than that between “the” SEP iron condor and “the” OCT iron condor. If you see what I mean.
    I guess that part of what I am getting at is the putting on another iron condor to adjust an initial positions (IF AND ONLY IF THIS IS THE PLAN ONE HAD SINCE BEFORE GETTING INTO THE TRADE AND ONE ALLOCATED CAPITAL ACCORDINGLY) can be the first part of an adjusting in stages strategy . It can change the greek profile to be similar to what it would be for a new position. And, if you are afraid of a big market move, as you wrote above, that could just as easily negatively affect the new single position as it could the adjusted position. (Of course, as specified above this is all predicated on the idea that one does not increase the over all capital allocated to the position, i.e. in stead of putting on a ten lot and the rolling one puts on one 5 lot and then when adjusting puts on the second 5 lot). Once all the capital is allocated, if you have to adjust again you cannot simply add more spreads. You have to close spreads, and if you so choose open new ones.
    So if I put it this way does t make sense? Would I be better served in my trading by trying not to think about things in this way?
    Well, I hope that made some sense and thanks again.

  2. Mark Wolfinger 10/08/2009 at 9:34 AM #

    1) Starting with a half position does allow room for adding more iron condors to the position.
    2) That mindset is very common – I had it for many years – and thought in terms of P/L from the original position and making an atempt to come out ahead when the final bookkeeping entry is made. Most traders think of rolling a position as just a modification of the original, and combine PnL. And keep doing that until the position is eventually closed.
    You can keep books and records any way that suits you – including the ‘transfer cash to a rolled position.’ Just be careful: being locked into a mindset that demands a profit from almost every trade will encourage you to keep positions that you know are too risky to own.
    Thus. my suggestion to ignore P/L is for the sake of better risk management. It’s not for any other purpose.
    3)There is a HUGE difference between carrying the PnL from a position that is closed and rolled into a new position in a new month – and including adjustments in the PnL.
    Obviously if you make an adjustment to a position, the changes become part of the PnL. How could it be otherwise?
    4) You would be much better served not to worry about things like this. MUCH, in my opinion.
    As I said, keep your PnL records in any manner that you find suitable.
    My warning has nothing to do with record-keeping. It has everything to do with risk management.
    I believe that if you focus on PnL, rather than on safety of the position AS IT EXISTS TODAY, you will take more risk than you really want to take – all in an effort to recover loses and turn losing positons profitable.
    This is not so much a large philosophical difference that can be argued. Every trader sees the situation as he/she sees it. And is wiling to fight to defent that mindset.
    From my perspective, this discussion is an idea on how to make more money by not deveoloping bad habits, such as rolling a position because you refuse to book a loss.

  3. Cliff 10/08/2009 at 9:47 AM #

    Mark: Today’s blog is very timely for me, as I am still “licking my wounds” from the thrashing my IC positions took in August and September due to the big (and unaccountable?) market upswing. I’m looking at position adjustment from another angle and would like your thoughts.
    My concept is fairly simple: As you teach, on a portfolio basis I am concerned with the Greeks more than the actual positions. Assuming I have a satisfactory (to me) position in terms of gamma, theta and vega, but my delta has been trashed by market movement, I “adjust” delta – and only delta – by buying ITM call(s) or put(s), as circumstances dictate, with a delta of 1 or about 1. The adjustment requires a greater cash outlay than putting on additional ICs or verticals, but far less cash/margin than buying/shorting the underlying, and changes delta in extremely useful 100 point chunks per each option. If the market continues to move “against” the IC positions, the long option(s) will increase in value at about $1 for $1 rate. If the market were to reverse, which would serve to improve the IC positions, the long option is simply resold for whatever loss it has incurred – a loss that will almost certainly be less than would be incurred by the damaged IC positions.
    Please let me know your thoughts on this practice. Thanks much, as always.

  4. Mark Wolfinger 10/08/2009 at 12:54 PM #

    I don’t like it.
    More tomorrow when this question and reply becomes the blog post.