Tag Archives | adjusting iron condor

Less Costly Method: Hedging with put options

I’ve joined the impressive group of writers who publish their thoughts at the new CBOE blog

The following excerpts comes from a recent post by the (Surly Trader)

Put Spreads as an Attractive Hedge

Hedging equity positions [with puts] can be fairly expensive, but there are very attractive ways to mitigate that cost.

Bearish Diagonal Put Spread

I like the (bearish/reverse?) diagonal put spread strategy for a number of reasons: [MDW: I would call it ‘reverse’]

I am purchasing implied volatility at much lower levels by buying the short dated put, making the short dated downside protection fairly inexpensive.

I am selling implied volatility that not only takes advantage of the steep skew, but also takes advantage of the fact that longer dated options are trading at higher implied volatilities than short dated options.

I hope this brings some new ideas to your option trading strategies.

My all-time favorite hedge is one step removed from here – a bearish ratio diagonal put spread in which I buy short dated put options and sell a larger number of far out of the money longer dated put options….

He (ST) is advocating buying a front-month, less expensive, put option and selling extra longer-term, farther OTM puts. Two points:

  • Less expensive because it is front month an d has much less time value (obviously), but also
  • Less expensive because it has a higher strike price and thus a lower (becasue of skew) implied volatility

    I like part of this plan, but prefer not to sell naked options.

      Example, Surly Trader’s play may be:

        XYX is trading ~520 to 540

        Buy 10 XYZ Jun 500 P
        Sell 30 XYX Nov 420 P

    I’ve previously written about a similar plan. It’s the coward’s version. He sells naked options and I sell option spreads. But we both suggest owning the short-dated options. I encouraged that idea as a risk management method for adjusting iron condor positions in The Rookie’s Guide to Options.

    In the coward’s version, I sell 30 or 40 put spreads (vs.10 puts bought): It’s not easy to know which strikes because so much depends on IV. Yet a reasonable guess is the 420/430 P spread or the 430/440s.

    If the market makes a steep decline, My long put will prove to be very profitable – perhaps explosively so due to a much larger IV increase (as measured by IV points, not in $) in the front month options . This represents a situation in which positive gamma becomes our ally – and there is no worry about fighting negative gamma.

    The shorts are spreads, with limited losses. Profitability for the whole trade depends more on how far the market moves and how much time remains in our long options (time value can be significant, even during the last few days prior to expiration) than on the price of the short spreads.

    This reverse ratio diagonal spread produces favorable results when:

    • Rally occurs with volatility decline. Longs expire, Cover shorts cheaply
    • Large, rapid decline
    • Time passes, longs expire, but shorts decline by enough to turn the whole position profitable. This is the result of owning cheap Jun options (and not costly Nov options) as protection against the Nov shorts

    This trade is uncomfortable for many traders because they know must buy new protection, or exit the trade.

    Despite the apparent ‘backwardness’ of this trade, at times it can be the best choice – if not as a stand alone trade, then as an adjustment for a credit spread gone awry. I would not make this my strategy of choice. But it has enough going for it that it is always a consideration. And it is ST’s favorite.

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A reader’s concern: Did I manage this iron condor well?



May I ask you to have a look at this "real" life (paper trading portfolio) situation?

In late September (SPY @ 114) I bought the following IC (40 lots): Dec SPY 124/126 C, Dec SPY 101/99 P @0.51 (no commissions included).

In early November (SPY @119), not feeling very comfortable with the rapid rise in SPY, I decided to roll  124/126 to 127/129 at a cost of 0.24. By doing so, my original premium of $2040 was reduced to $1080 (OK it is not important, I just want to mention it.)

Yesterday, I closed the puts 101/99 at a cost of 0.04.

So, I am left with #40 127/129 C. (max possible gain is now $920). Today (SPY @ 119.8), the greeks for my position are: Delta= -133, Gamma= -51, theta= 17, vega= -78 Delta for Dec 127C is 0.06 (very low) I feel comfortable looking at the greeks. But, at the same time, I have no idea where the market is going. SPY has only to rise by 6% (quite probable), in the next 30 days, to reach my short call (127).

If I want to close my position it will cost 0.07. Then, my final profit becomes $640. This is not what I had in mind when I planned the trade. My objective is to close the position once I can achieve 70-80% of the original premium (approx $1450). So, here I am, feeling comfortable on one hand but not feeling "safe" enough on the other hand.

What shall I do? OK, I do not pay attention to profit and I decide to close the position (I think I will sleep better). I will open a new one expiring in February. Obviously, I do not expect you to tell me if I made the right decision or not. But maybe you can comment on my thinking process. My feeling is that I did not manage this trade in the best possible way.



I'm very disappointed in how disappointed you are in what you have done with your position.  I believe you are dissatisfied because you did not achieve the maximum possible result.  You faced some trouble, chose to spend cash to temporarily get out of trouble, and you earned a substantial profit.

Why are you disappointed?   Your trading goal should be to make good risk management decisions at the time that such decisions must be made.  That represents the long-term path to success.

In my opinion, you handled this very well.  I have minor quibbles, but they are minor:

a) You must look at commissionsI think that 40 lots of SPY is too many to trade.  Why not trade 4 SPX spreads and cut trading expenses?

You traded 160 contracts to open; 160 more to roll, 80 more to close and will trade an additional 80 to exit the calls.  How much profit disappears through costs?  You cannot ignore commissions, especially when trading 480 contracts.  With some brokers, that would eat up all the profits – and then some.

Try SPX next time.  Do a 4-lot, 20-point, SPX spread and see how it feels to manage that position.  That's one purpose of paper trading.  It allows you to experiment.


b) You were uncomfortable and reduced risk.  That's good.  You paid a lot for this call roll – approximately half the original cash – but if that's what it takes to get comfortable, then that's what it takes.  Holding positions that you want to own comes first.  Nothing wrong with this trade.

Minor quibble: paying 24 cents is a big cost.  But don't let that prevent you from doing the same thing next time.  The real decision for you was: roll or exit (or reduce size).  You chose the roll.  Very reasonable.

Your short options were still 4% OTM, and for most traders that is too early for rolling.  However, you are not most traders.  You are Dimitris and must satisfy his comfort zone.  It's ok to be conservative.  However, there is a limit.  If you adjust every time the underlying moves 2%, then this is not a good strategy for you.  However, another purpose of paper trading is to get a feel for making adjustments and when to make them. 

I hope you are keeping a journal of your trades – and more importantly – of your thoughts when you make those trades.  Don't forget to include your thoughts when you decide NOT to make an adjustment.

Once you pay this much for the roll, there is no possibility of meeting your original profit objective.  You must come to recognize that this is ok.  Your primary goal is not to incur a large loss.  Your secondary goal is to earn a profit.  Your tertiary goal is to meet your profit objectives – over the longer term.

You are overlooking one substantial point.  Your profit objective, to be kind, is unrealistic.  Surely you do not anticipate earning that profit on a consistent basis.  Your margin requirement was $200 per spread.  And if your broker allows, it was only $149 because you can use the cash from the trade to meet part of that requirement.

If you had been able to earn a 70% profit, that would have been $35 per spread (70% of $51).  That's a profit of more than 23%  (35/151) on your investment in less than two months.  Please tell me that this is not your normal expectation. 23% for a year is a good result, one that is met by very few investors and traders.  To anticipate that result every couple of months, and to be disappointed when you don't earn that much – is… Well, I have no kind words for that.

As it is, a profit of $640 represents more than a 10% profit, or better than 5% per month.  How can you not be happy with that result? Yes, the true gain is much less due to commissions.

When markets are dull, you may earn something near that 20% return for some of your trades. But you will not earn that consistently.  No way.  When the market makes an unfavorable move and your comfort zone (and prudence) dictate making a change to the original position, there is not going to be enough credit remaining to meet your current lofty goals.  And believe it or not, you are going to lose money some months.  If you get overconfident, you may lose a bundle. And quickly.

c) You covered an inexpensive OTM spread.  That's also good.  You paid the equivalent of $0.20 for a 10-point spread.  For December options, I see nothing wrong with that.

What to do now?  That's easy.  Do you want to hold this trade when you can exit at 7 cents?  If yes, hold it and the next decision is just how much to bid.  Then enter the bid.  If you do not want to trade front month options, then look to exit now, on weakness, or on time passage.  Perhaps Monday.

One more quibble:  If the delta is 6, then it is not 'quite probable' that SPY will rise 6%.  It is unlikely, based on statistical analysis. If your gut tells you differently, then go buy that call spread.



I share some lessons learned and some of my philosophy of trading.  eBook. $12

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Nightmare on Put Street


I have 20 may 640/630 and 20 may 620/610 rut put spreads that were placed prior
to Thursdays doomsday. Felt fine at the time. Now showing big potential
loss and fear of gap or heavy drawdown prior to expiration.
I'm past the point of shutting down and walking away due to heavy debit.

Trying to find if there is a way for insurance now in this late stage.
To close to the money for kite; correct?
If so looking at either rolling down which still makes me nervous or
selling call spread to bring in some extra premium, or simply buying a lower
number of puts to at least help negate some of the potential.

Is it too late to protect? Is combination of rolling, selling call
spread, and purchasing puts a good "option". What would you recommend?
Any advice is appreciated.



Hi Tim,

Very sorry to hear of your problems. I'll tell you what I think and hope it helps.  First, it's never too late to protect. Keep in mind that anything that reduces risk is good.  So if you elect to try a combination of trades, that is ok,  As long as the resulting position is not too complicated to handle.

1) "I'm past the point of shutting down and walking away due to heavy debit."

I am not advising you to shut down.  But, you still have more to lose than gain – if the market tanks.  It's okay to decide to hold – I know how painful it is to exit here – but try to decide if you can afford to take the risk of holding.

2) It is late for the kite.  It loses effectiveness as expiration nears.  But you can do a more expensive kite.  Buy one 640 put and sell only 2 put spreads at a lower strike – perhaps 590/600 or 600/610 or even more 610/620s.  This costs cash, but wins in a huge downside move. Check the risk graph to see.

3) Many traders choose to collect extra premium by selling calls. I believe this is the worst possible choice.  If the market reverses, you can incur the same devastating loss on the upside. And for what?  You probably can't collect enough cash to do you much good on a market drop.

4) Rolling down means closing one spread and selling another May Put spread with lower strike prices.  But it also means NOT selling extra spreads.  It means paying a debit for some immediate comfort – but in these volatile conditions, that comfort can disappear immediately.  This does not feel right to me – especially if it makes you uncomfortable.

5) As a compromise you can cover 5 of each spread, or perhaps 10 of the 630/640 spreads.  Obviously, there is nothing magical about the quantity.  You may feel better doing 2 at a time on any rally.

6) You can roll this way:  Cover the 630/640 put spread and replace it with Jul iron condors.  I say Jul because that month allows you to be farther OTM than Jun and it gets you short extra vega.  If selling vega does not appeal to you right now, that's fine.  Do Junes instead. 

Yes, you sell calls, but this way it's a fresh position, is farther OTM, and depending on how you choose your strike prices, will not cost much cash.  By the way, that last part is a side comment.  I believe it's very wrong to choose your new position based on the total debit for the roll.  You must like that new IC – or else this is a very bad idea.  No sense opening a July position when it is already outside your comfort zone.

DO NOT trade extras just to bring in more

Obviously if you trade put spreads and not iron condors, then just roll the puts.  Don't force a trade you don't want in your portfolio.

7) Sure you can buy 600 or 610 puts, but those are no longer cheap.  Here's the main reason I dislike that idea:  Owning protection in the form of farther OTM options is fine.   They do a decent job.  But, if the plan is to hold them to a point near expiration, then it's no longer a good idea.  You can't sell them because they are still needed.  Thus, the most likely result is that they will expire worthless.  If you were planning to exit your put spread early, then these OTM options can work (because you get to sell them early).  But I think it's too late for that.

If you want insurance against a complete market collapse – that's another story.  Then owning any options will help.  But as to using them to protect this specific trade, (again – and not as black swan protection), there are better choices.

NOTE:  Buying Jun farther OTM puts works very nicely.  A down move explodes volatility and these can pay off big time.  Unfortunately the time to buy them was before the IV explosion.   But look to owning some extra Jun puts.  Choose your own strike.  600 is better than 580 etc, but even 560s may help.

8) It is not too late.  But anything you do is going to cost cash.  You can walk away and end the nightmare, or you can try to salvage the position.

The best trades are the ones that buy net puts.  That's black swan protection.  To minimize the cost, you can sell puts (this is buying put spreads) or put spreads (kite).

Have you considered buying the 640/600 (or 640/610) put spread?  Lots of cash, but good protection.

Tim, the bottom line is that anything may work.  It's just that we cannot know in advance.  If you exit, the agony ends.  If you work with this you may lose more, or have a very successful trade.  In either event, unless you close your eyes and come back in two weeks (I could never make that choice), some cash must be invested.  You have the rest of the day to work on this, consider alternatives, use risk graphs and devise a plan.

That plan should include a small gap opening (say 10 points) – both up or down.

Best of luck.  If you choose to follow up with what happens, I'd be interested.  But I also know that it's personal information that's best kept to yourself.

I wish you well.


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