Q and A. Iron Condor Adjustments. Calls vs. Puts

Hi Mark,
I've been trading ICs for a while now and typically adjust when my short put (or call) reaches 20 delta. If the short put is hit then the likely spike in IV means there is often a suitable spread I can roll down to. However, if the market has a huge rally (as it has done this week) and my short calls need adjusting, the likely IV implosion makes it very difficult to find a spread to roll up to that is within my comfort zone. I ended up closing the entire IC for a small profit but was wondering what sort of adjustments you would make in this situation (i.e. call spread is in danger and IV has imploded)?

Many thanks.



Hello Erin,

First, rolling is not necessary.  Sometimes you can simply take the loss (or profit in your case) and wait for a better time to open a new trade.  But I know that almost everyone feels better when the position is rolled.

Next, adjusting is a personal thing – something to be done when a position moves out of your comfort zone.  I find closing a position when the delta moves to 20 to be too aggressive for me, and I wait longer.  That's not a criticism, merely a personal preference.  The good news about your methodology is that you will never take a huge hit and you don't have to worry about your position moving into the money.  On the other hand, you make more adjustments.  Bottom line:  If this works for you, that's all that counts.

If 20 delta is the stop point, you must use low delta options as a starting point.  How much premium do you collect for those iron condors?  I hope you collect enough to make the risk worthwhile.  I am not a fan of low premium.  $0.50 for a 10-point iron condor in a high priced index is unsuitable, IMHO.

As to your question:  The good news about getting squeezed on the call side is that IV has decreased and that means you can use alternative adjustment ideas – rather than one which requires closing the current position.

Because you adjust at 20 delta, I'm assuming that you trade only front month options, but just on case you don't:

You may be able to buy a few front-month, OTM calls at a reasonable price.  Although not free, if you can get decent strike prices you gain a lot of upside profit potential.  This method works best when the options you are short are not front-month options – because you can buy options with lower strike prices.  Protection is short-lived, but it's also relatively inexpensive.

Another choice is to buy a bit of protection.  One way to do that is to close only a portion of your position, intending to do more on a continued rally.

Another choice is to buy some calls (as few as you believe you need) at a lower strike, with the same expiration date as your spread.  There's nothing like naked long options to make you feel safer.  Of course, they are not inexpensive.

A third choice I don't use any longer is to buy calls that are further OTM than your spread.  That only helps if there's a huge upward move, and time decay will be unfavorable.  It also allows for a big loss when expiration arrives, so this method is not intended for traders who hold positions into expiration.

But, if I must cover because I've run out of alternatives, or don't like the alternatives, then I close and take my loss.  Of course, I'd prefer to roll the position if something is attractive, so I look at further OTM call spreads with a more distant expiration month. I can usually find one that is far enough OTM to meet my needs.  But because you probably originate iron condors with options that have a delta of less than 10, your choices may be limited.  Especially if you (as do most people who roll) feel you must collect a credit for the roll. 

There's nothing magical about collecting a credit.  Sometimes you are going to lose money on a trade.  And if you roll for a debit, that's not so bad.  Please resist the temptation to sell extra spreads to 'make up' for that cash difference.  Sure, if your trade size was small to begin, you may feel ok selling a small number of extra spreads, but don't get tempted to double your size.  It's okay to take losses.  It's also impossible to win every month when trading iron condors.


3 Responses to Q and A. Iron Condor Adjustments. Calls vs. Puts

  1. Erin 03/13/2009 at 1:38 PM #

    Hi Mark,
    Many thanks for the detailed response, you’ve certainly given me plenty of ideas for next time the situation arises.
    I typically trade the 2nd and 3rd contracts and focus solely on the SPY. My short deltas are initially around 9-10 and I shoot for a $1.00 credit on a 10 point condor which is achievable in the current environment whenever there is a moderate IV spike. It does however mean I’m often sitting around waiting for the opportunity which requires some patience!
    Thanks again,

  2. atbright 03/13/2009 at 3:51 PM #

    Just found your sight and am enjoying it so far. I am new to trading condors and am currently learning a number of expensive lessons in how all of this works. I am most interested in adjustments given the current market conditions and found your response to Erin informative. My follow on question has to do with what are you personally trying to do when you make adjustments. Are you merely trying to extend break even points? Are you attempting to bring your delta to zero (or cut it by 50% or some other measure)? Do you focus on any other greeks? I understand your point about how much of trading is personal comfort zones but I am curious as to what things you are looking at when you are deciding your comfort level. Thanks.

  3. Mark Wolfinger 03/14/2009 at 10:13 AM #

    Reply as new blog entry