Q and A. More on Iron Condor Adjustments


Just found your site 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?

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.



I tried to squeeze a lot into this response, so it may feel that I am 'rambling' at times.

Sorry the lessons have been expensive, but at least you recognize that adjustments are often necessary.  Obviously we love it when iron condors go quietly into the night, but that does not happen often enough to make this a mindless strategy.

Expect to take losses.  It's impossible for iron condor traders to make money every month.  I once had a 14-month streak, but I know that will never happen again.

In replying to your questions, please understand that I am telling you how I think about making adjustment decisions.  That means I'm sharing what suits my comfort zone.

Also understand that there are so many different personalities that not everyone can agree on what works.  Clearly I believe my suggestions are good methods to follow, but I do not recommend them as gospel.  What I do recommend is that you consider my ideas and then decide if those methods are suitable for you.  If not, they may give you ideas that allow you to find alternatives that suit your personality, trading style, comfort zone etc.

1) I do NOT try to extend break-even points. In fact, I strongly believe you will be far better off if you ignore break-even points.  Once I own a position, I no longer worry about whether it's making or losing money.  I manage risk, not profits.  I do what I believe is necessary to make the most money – or lose the least money – from the current time.  It does not matter how much I have gained or lost up to this point.  My position is what it is, and I must decide whether to add to it, hold it longer, or adjust (and that includes exiting).  What matters (to me) is how much I have to gain or lose going forward.  If risk is too high, I modify the position.  If potential gain is too small (because the remaining premium is small), I exit the position (to lock in the profit.  But, I don't think of it as taking profits; I think of it as 'there's too little reward for holding longer').  That works for me.  If I do a good job managing risk, the profits will be there (in my account).

2) I don't specifically manage risk by delta, but being aware of the total delta of your position is important.  I consider 'what happens' if the index moves another 1 or 2%.  How bad can this get?  I look at the risk graphs and think how far must the index move before I lose $X (X = 'too much').  If I think there's a high probability of losing 'X' then it's time to do something.

I'll say this about delta:  If you establish a maximum position delta, that will work as a boundary for your comfort zone.  Just remember that if you eventually trade more contracts, that delta number will have to be increased.  

But, my primary indicator is that I hate when my short option moves into the money.  At that point I must do something – even if I have already made previous adjustments.  One other iron condor strategist whom I respect, suggests that having your short options move to within 3-5% of being in the money requires  a full  adjustment (exit or roll). 

I also note that Erin adjusts when the delta of the short option reaches 20.  He adjusts very aggressively.  I've communicated with people who firmly believe that no adjustment should ever be made to an iron condor.  To me, those are extreme ideas and you will probably be more comfortable somewhere in the middle.

3) Gamma is the most important of those greeks.  Gamma tells you the rate at which delta is changing.  If delta is becoming too large for your comfort zone, you must be aware of how fast that delta is moving against you – and that's gamma.  The higher the gamma, the more quickly you will want to make an adjustment. 

When I own extra gamma, as I do when I buy extra options as insurance, I have staying power because that gamma soon turns the deltas in the right direction.  But staying power is not 'stubborn power.'

I don't manage each iron condor position as a standalone position.  I manage the risk of my entire portfolio simultaneously.  If I have a bunch of iron condors (I do), of course I adjust the riskiest one first.  But, if I own enough extra puts (I do right now), I am a bit less concerned with the downside.  I still adjust as needed, but there is less of an emergency.  When I no longer need my extra long options, I sell them.

I am aware of the other greeks, but don't dwell on them.  Iron condors traders are short vega.  If you feel you have too much negative vega (the volatility component in the value of an option), there are ways to pick up vega: buy a few extra options or perhaps open double diagonal spreads, instead of iron condors.

4) Opinion about adjusting methods covers a very wide range.  I don't believe anyone is exactly right because we all have our own needs – financial and psychological to satisfy.  In other words, if you would personally find it devastating to make an adjustment, only to see the market reverse – and the result is that a position that would have been a winner has been closed at a loss, then adjusting is probably not a good idea for you.  You want to avoid those feelings.  If you can keep your emotions in check, that's wonderful (essential).  But, if you cannot, at least try to avoid putting yourself into a position in which you may be emotionally clobbered.

I don't believe in 'playing results.'  I believe you make the best decision you can at the time a decision must be made, and that's the path to success. In fact, I don't check back to see how I much I would have made had I done something different.  I keep emotions out of the trading game.

Here's my bottom line suggestions for you.

a) Assume you define your comfort zone boundary as: when the short option gets within 1% of being in the money – although you can choose any point. 

Before that happens (choose your own preliminary adjusting point), adjust 10 or 20% of your position.  You can do that by closing some of your position.  You can buy in 10-20% of the deltas as protection.  If you are short a 500/510 put spread, I'd suggest buying 520 puts, rather than further OTM puts.  Yes, these are costly. [Cheaper insurance can be had by owning pre-insurance.]  There are other choices, but
the point is: do something small.

If the underlying moves even nearer to the boundaries of your comfort zone, do more, leaving only 50-60% of your original position unhedged.

At some point, exit the whole position.  If you do that, it's usually best to also unload the extra options you bought as a partial hedge.

Please understand, if you don't like the prospects of your position, then get out.  Don't exit piecemeal and don't hedge in stages. If you don't like the position there is no point in holding longer.

I cannot tell you exactly what to do, because I just don't know the right answer for you.

5) Rolling.  At any time you want to make an adjustment, rolling all or part of the original position into a newer one is an acceptable thing to do.  One requirement:  Do not roll just to do something; you must like the new position and want to own it.  If there is no suitable roll, then just take your loss and wait for a better time to make a new trade.

I hope this helps.  Your own experience is going to help guide you, but I know you need some ideas to get started.  You may want to reconsider how you choose iron condors – if you find you are adjusting 'all the time.'

6 Responses to Q and A. More on Iron Condor Adjustments

  1. Jim G. 03/14/2009 at 11:41 PM #

    Hi Mark, I have one question. I believe there are two ways to make a profit when you buy a call. First, if the option is in-the-money prior to the expiration date, you can sell the call and make your profit. The second way is to exercise your option. But isn’t it true that you could buy a call that is out-of-the-money at an ask of, for example, $0.40, watch it rise to a bid of $0.80, and sell it for a profit while it is still out-of-the-money prior to expiration? It seems to me that this is entirely possible. Could you elaborate?

  2. lynx 03/15/2009 at 6:47 AM #

    Excellent post, Mark. This is why I subscribe to your blog. Could you elaborate more on your selection process for iron condors? I have read your comments about trying to get ~$3 of premium for an iron condor in order to get a comfortable risk/reward ratio, but what greeks, risk graphs, etc. do you use in the process?
    Thanks in advance,

  3. Mark Wolfinger 03/15/2009 at 10:44 AM #

    A call DOES NOT have to move into the money for the call owner to earn a profit. The same is true for puts.
    An option is the same as any other trading vehicle. Any time you can sell it at a price that is higher than the price you paid, you have a profit (less commissions).
    Advice: Forget about the idea of exercising an option. Sure, you may want to do that in specific situations, but for the most part, if you never exercise an option during your entire lifetime, I doubt it would be a mistake. Sell the option when you no longer want to own it.

  4. Mark Wolfinger 03/15/2009 at 10:58 AM #

    I don’t use much because I have been doing this for a long time. When first getting started, it’s a good idea to know some of the major risk factors – before you make the trade. But keep in mind – those risk factors change so quickly, that if you initiate a trade that fits into your comfort zone, that should be good enough.
    Not good enough to close your eyes and hope. But good enough as a starting point. Once you own the position, risk management comes into play. But, that’s a different discussion.
    Here is a subtle point: Traders want to time entries and exits. they take legs (sell one spread now , planning to sell the other one later). They time the market. If you are that trader, then it’s important to you to enter at a favorable time.
    For me, a short-term investor, I don’t time the market. i don’t trade much based on my opinion. I do the best I can when opening the trade.
    But, no matter whether you are an investor or short-term trader, the entry and exit points are going to count. they are going to add to the bottom line. But, far more important that that, is the skill you display when managing risk. IMHO, risk management is the key factor in determining your overall success or failure as an option trader. Thus, I suggest you pay more attention to managing the trade than opening it. Don’t be careless when entering a position, but it’s not the end-all, be-all of iron condor trading.
    To open a trade, I suggest you begin by being neutral [But, if you have a market bias and want to start by being long or short, that’s a personal choice – and it’s not unreasonable.]
    I suggest beginning by one of these methods. I usually prefer #1, but it’s no better than the others.
    1) Distance neutral. The put and calls I sell are equally far out of the money.
    2) Dollar neutral. Sell put and call spreads at prices that are nearly the same. $1.50 and $1.50 is better than $2.00 and $1.00, but $1.60 and $1.40 is fine.
    3) Delta neutral. Use your broker’s software to see that you are nearly delta neutral.

  5. lynx 03/16/2009 at 11:00 AM #

    I tend to go with a combination of #1 and #3. I basically enter my positions nearly delta neutral as well as nearly distance neutral. Perhaps a more direct question, if you do not mind, is what is the delta you enter at? I am sure your entry point is closer than mine, especially since having many years more experience at this. I am just curious…if you do not mind sharing.

  6. Mark Wolfinger 03/16/2009 at 11:38 AM #

    Hello again,
    1) i don’t mind.
    My preference is to sell 10 delta options. But in today’s market and it’s higher volatility, I find that 10-point RUT call spreads with delta that low have too little premium. Thus, I am selling in the 20 delta range now. That ‘feels’ too high, but the iron condors fall into a zone where I still like the trades and want to own the position.
    2) Experience does not affect the decision on which options to sell. When I’m more concerned with imminent moves, I choose lower delta and take a bit less credit. But this remains true: I must be comfortable with the new trade – or else I wait for a better opportunity.
    Lower delta means less chance of loss. It also means lower profits. It also means a huge move results in a larger loss. It’s all a bunch of trade-offs. You want to find the combination that suits you.