Q and A. Trouble With Iron Condors


I have been trading IC for some time now and have become accustomed to different types of adjustments, some with great success and others not so much. The point is, the timing on the adjustments are proving difficult to master. 

My IC tend to be opened approximately 3 months out – I like to give myself some time to let them work.  However as a few weeks pass and the underlying has moved within a few % of my short strikes I find myself deliberating whether to hold a little longer before adjusting. Ordinarily, my comfort level would be to wait longer, but no later than a month before expiry to adjust. That being said, I am now considering adjusting earlier. I would be interested to hear your thoughts on this situation? 



I believe very few people can successfully time the market.  That's true for new investments as well as for adjustments.  So don't beat yourself over the fact that timing is difficult to master.  It's difficult, period.  Forget about the 'master' part.

As to adjusting earlier – there's nothing either good or bad about that in itself.  It's simply a more conservative approach.  You will probably have fewer wins and more losses, but the losses will be smaller.  And if you adjust early enough, you may convert what would have been small losses into small wins instead.  [See the idea about adjusting in stages below.]  Does that work for your trading style?  It's a personal decision.

Trading philosophy

My philosophy (it may not suit you) is that you make the best decision you can at the time a decision must be made, and then you live with what you have done – until it becomes time to adjust once again.  Closing the position because you are happy with the profits does count as an 'adjustment.'

You may not be able to master the timing, but you can master knowing when risk has increased beyond your desire to carry that risk any longer.  Right now you are using "within a few percent of the short strike."  To me, that is a very reasonable adjustment point. 

Apparently you are not always pleased with the results.  Be fair when judging your performance.  Are you dissatisfied because the adjustment proved to be unnecessary (market reversed direction), or are you unhappy that a different type of trade would have worked out better?  If you made a good decision – a decision that was appropriate for your comfort zone at the time it was made – that's a good decision in my opinion.  It's not fair to call it a bad decision if result in a monetary loss and a good decision if it's a winner. 

Keeping score by 'the results of the adjustment' is fine for a very short-term trader whose goal is to time the markets.  But you hold iron condors for a month or two, and market timing is not your primary concern when adjusting.  Making sure you don't get blown away is your primary consideration. [My #1 rule for option traders:  Don't go broke.]


 Stage Coach

Have you considered adjusting in stages?  You may decide to adopt different strategies, depending on the stage.  When you adjust a portion of the position at a time, you can encompass your idea of 'adjusting earlier' by making a Stage 1 adjustment earlier than your current methods.

The following is merely one idea for establishing stages. Please consider it as a possibility, not as a specific recommendation.  I assume you trade more than 2-3 lots of those iron condors.  Small positions are difficult to adjust in stages.  In fact, they are difficult to adjust.

Stage 1.  Adjusting 20% of the offending position.  How do you do that?  Several choices:

a) Close 20% of the position.  You have the option of rolling to a new spread, but you already have a risky position and there's no good reason to open another position when your portfolio is in a bit of jeopardy.

b) Buy extra options – enough to cover more than 20% of those deltas.  Also enough so that the risk graph is less scary than it was before you adjusted.  Again a choice:  Buy options that expire at the same time as your risky position, but spend the necessary cash to get options that are closer to the money.  For example, if you have a 750/760 put spread in trouble, buy the 770 put.  You may only be able to buy one or two because of the high price.  It's tempting to buy 740 or 730 puts, but thsoe only work when the market takes a big dive.  They make the risk graph look great, but there's a decent chance you could lose the maximum on your original position and also lose the cost of the OTM puts.

I prefer (but many traders cannot bring themselves to do this) to buy front-month options as temporary protection.  There are two excellent reasons [more details in Chapter 20 of The Rookies Guide to Options] for doing this:

i) They are less expensive (in dollars, not necessarily in implied volatility (IV).  But, we trade using dollars, not IV chips.)

ii) You can get an option with a more useful strike price at a decent dollar price.  In the example, you may be able to buy front-month 780, 790, or even 800 puts.  Those pack a powerful punch and provide excellent protection.  Even if it's a one-lot.

c) Roll part of the position to a same month, further  OTM strike.  This will cost you cash out of your pocket, but it's still a good idea if two conditions are met: 

i) You an get a decent premium for the spread you sell.  Don't pay $3.00 to close the dangerous spread and then sell a new spread for $0.50.  There is no point in opening the new trade with new risk for a mere 50 cents.

ii) If, and only if, your position is smaller than usual, you may choose to sell a small number of extra spreads – to pick up some of the cash you are paying to cover.  But, DO NOT believe that all you have to do is sell enough extras so that the adjustment trade is free (no out of pocket cost).  That would increase your size – and risk – by far too much.  That's a common trap.  Be careful not to fall into it.

Stage 2.  If the position continues to move against you and you are still not ready to exit the entire position, adjust an additional 30% of the original trade.  That cuts the position to half it's original size.

You can choose any of the adjustment ideas used in Stage 1, including the possibility of rolling (but please – roll only when you believe the new position is attractive to own.)

Stage 3. 
Comfort zone breached.  End of story.  Exit the remaining 50% and decide whether to open a new position at this time.


10 Responses to Q and A. Trouble With Iron Condors

  1. Gil 03/18/2009 at 8:00 PM #

    The author (S.) said: “My IC tend to be opened approximately 3 months out – I like to give myself some time to let them work”. I thought that time is the enemy – rather than the ally – of the IC owner. That’s why I never go for 3 Months IC. I’ll go for 6 weeks at most.
    Mark, what do you think about this?

  2. Mark Wolfinger 03/18/2009 at 8:16 PM #

    It works both ways. And deciding which type of spread is more comfortable for you is among the interesting decisions that an option trader must make.
    Time is the enemy from the point of view that the more time you hold a position with negative gamma, the greater the chance that something bad will happen.
    Time is an ally from the point of view that more time means you collect a higher premium for the position. That extra cash affords you more staying power – or the underlying must make a larger move before your comfort zone is breached and it becomes time to make an adjustment.
    If you consider those to be a standoff, consider these additional points:
    1)Time decay is faster when less time reamins. A posiive for those who prefer shorter-term iron condors.
    2)There’s a subtle reason why more time can be favorable. If the stock or index makes a rapid and good-sized move, and if the strike price of your short option is breached – a near-term spread loses significantly more money than a longer-term spread. That’s because of the effect of negative gamma. Thus, under some circumstances, even if something bad happens, the bigger loser is the owner of a near-term position.
    3) If the length of time you hold a position is important to you – and I assume it is, ask yourself this question: Would you rather trade a 6-week IC and hold for 5 weeks, or trade a 13-week IC and hold for 5-6 weeks?
    The shorter term iron condor earns money more quickly, but suffers from more negative gamma.
    The longer-term position earns less, but there is less risk of a large loss. Less risk = less reward.
    Thus, time is the friend or enemy. It really depends on how you look at it. Neither you nor S. is ‘wrong’ because you each trade iron condors to suit your personal preferences.

  3. Mark Wolfinger 03/18/2009 at 10:03 PM #

    Readers: What do you say?
    What’s your preferred time-frame for new iron condor positions?
    Has short-term negative gamma hurt more than the rapid time decay helped?

  4. Gil 03/19/2009 at 5:10 AM #

    (Actually I wanted to define it as a new post but could not; the best I could do is to append this as a response):
    Iron Condor adjustment – question by example
    Mark, I would like to share with the members a specific example, so we can all learn what to do, or more important what not to do … 🙂 . Here we go:
    Couple of days ago (16/3) I purchased the following April ^RUT (Russel 2000 index) Iron Codnor:
    P330 P340 C450 C460 for $2.
    Since this purchase ^RUT climbed from 396 to 417.63.
    I identify resistance at 430; the next one is 450. That’s why, as soon as the 430 is breached – I’m in trouble.
    My intention is to roll the bear call to:
    C480 C490, which is above another resistance level. While it might be too early to do so, The problem is that such rolling today already costs about $1.75, eating most of my credit. Moreover, If I defer it, it will cost more, meaningly I’ll start loosing money, even before making any additional adsjustments, which might be necessary down the road (or should I say up to ^RUT… 🙂 ).
    Looking back – purchasing the iron condor at that time might have been a mistake. However, as this is a done deal, I’ve to face it.
    My questions are:

    1. Does the above costly rolling make sense?
    2. Are there any better approaches?


  5. Mark Wolfinger 03/19/2009 at 8:23 AM #

    1) I see nothing wrong with the original trade. You sold calls at resistance. You collected a decent premium.
    2) Yes the roll makes sense. But, so do a bunch of alternatives. It’s a comfort zone decision.
    3) One approach is to quit now. I see no reason to do that.
    4) Other choices
    a) Risk a whipsaw and roll the puts higher when you roll the calls higher. That cuts your cost. This is not near the top of my list.
    b) When you roll down, sell a few extra 480/490 to reduce cost. Do that with or without rolling the puts higher. FEW means FEW. Not too many – although it is going to be tempting.
    c) Cover whole IC and roll to May. You will get more comfortable strikes. I think it’s too soon for this play.
    d) Stage I. Buy some Apr 440 calls. Don’t know how many IC you have, but one or two of those calls will help. Yes, it’s expensive. Alternative, buy some 450 calls – less protection, less expensive.
    If marker rolls over, you will decide at that time whether to keep or unload the extra calls you buy now.
    e) Stage I. Buy back up to 20% of your call spreads.
    f) Stage I. Roll some of your spreads now to 480/490; perhaps 20%
    g) If it gets to stage II – I don’t know where that is for you, consider doing stage I trades again in larger size. But do not build a huge position. Reducing size is always a very good choice.
    g) Stage III. When it’s time to take a loss, it’s time.
    Gil, there is no right answer. It a loss is emotionally crippling, then do whatever you an to reduce risk. If you know losses are part of the iron condor game, then keep that loss small enough so that it doesn’t hurt.
    Difficult decision, as it always is.
    Any other suggestions to share with Gil?

  6. Mark Wolfinger 03/19/2009 at 9:44 AM #

    Here’s an example of one of my trades, posted on Twitter (username: MarkWolfinger)
    Bought to close, Jun 420/430 call spreads; Sold twice as many Jun 490/500 call spreads to open. Paid 70 cent debit.
    Then, because I sold extra calls, I also sold one Jun 320/330 put spread @ $1.60 to open. This completes the new iron condor.
    Total additional credit $0.90. Thus I now have twice as many Jun iron condors. Normally I don’t double up. But I did it this time because I was going to trade more June iron condors next Monday, after expiration. I did it two days early and combined it with a roll down (calls to higher strike).

  7. Gil 03/19/2009 at 12:09 PM #

    1) Looking at the ^RUT chart, it looks like on January it was at 519. I would feel uncomfortable selling Jun 490/500 these days (the downside might be OK)!
    2) Looking at Iron Condors for indexes: in addition to ^RUT(Russel 2000) I do also trade ^XEO (S&100 100 European Style).
    a) These two examples are correlated, i.e. extreme in one of them will most likely occurs in the other one too. Isn’t this a receipt for a high risk portfolio?
    b) Which other indexes (HLDRS? ETFs?) would you also consider as good candidates for Iron Condors trades?

  8. Mark Wolfinger 03/19/2009 at 12:36 PM #

    1) I’m much more comfortable being short twice as many 490/500 spreads as 420/430 spreads for Jun expiration. I still have a position that is not too large. Last year I always had more than 400 IC open at one time. I trade smaller size now.
    I am within my comfort zone. I was outside the boundaries before I made this trade.
    2) Yes, correlation increases risk. But I decided to trade a single index to make it easier to manage the portfolio. I accept a bit extra risk. To reduce risk, consider overseas indexes or perhaps gold or oil (too volatile for me).
    3) I think NDX and SPX are suitable for iron condors – but I am biased because I prefer European style options.
    I found it too difficult to get decent fills in XEO. But you are right to avoid OEX. American style index options are dangerous to trade when you sell options.
    HOLDRs are strange beasts. They are never rebalanced and can become overweighted in one or two securities. I prefer ETFs. The biggies: QQQQ and SPY are fine for IC traders.

  9. Gil 03/25/2009 at 7:22 PM #

    Referring to my post above “From defense to attack” the resistance I refer is 410 not 390, So the post whould show up as follows:
    From defense to attack
    I’ve got the following ^XEO April IC: 300, 310, 415 425
    ^XEO is at 385. I’m afraid that in case it crosses the 410 resistance it might rally. Instead of defending myself with expensive 410 calls, my idea is to buy a bull call 410, 425.
    I’ll finance the buy of the 410 calls by selling the IC 425 calls (my original insurance). Apparently this is no more IC, but a bull put with a bull call, in light of my rally theory.
    And if later there is a reversal, I might still do the opposite. How about that?

  10. Mark Wolfinger 03/25/2009 at 9:37 PM #

    Speaking of ‘How about that!’ – do you remember Mel Allen?
    That’s as good a play as any. After all, unless you stay neutral, your positions should reflect YOUR bias.
    You have a slightly less costly alternative: 410/420. You would be less bullish to make this play instead of the 410/425.
    That would leave you with a call condor: 410/415; 420/425. Reminder: This spread is worth zero above 425.