Tag Archives | adjusting iron condors

Managing Iron Condors: The Worst Adjustment

My oft-stated belief is that it is almost impossible to become a successful options trader without becoming a skilled risk manager.

When it comes time to decide how to reduce the risk of holding a position, there are many choices. The alternatives are too numerous to describe, however, the basic choices are

  • Do nothing. This is not risk management. This is wishful thinking
  • Adjust the trade to reduce risk
  • Cut position size by exiting all or part of the position

The best decision

making a decision

I believe that adjusting the trade represents the best choice, with the following stipulation: Once the position has been adjusted, the trader likes what he/she owns; believes it is likely to earn profits going forward; is no longer too risky to own, and satisfies the psychological needs of the trader. That last phrase simply means that it is comfortable to own the position and is not being held for the sole purpose of recovering a loss.

When it comes to adjusting, there are always going to be alternative trades from which to choose. Today I want to discuss one specific type of trade. I know that many traders like to adopt the example that I’ve chosen to highlight Despite that fact, I believe it is the worst possible choice.

The worst choice

    Assumptions: We opened an iron condor position and the market has declined to a point where the put spread has become worrisome. For this discussion, it doesn’t matter whether the put spread is 5% OTM (far too early to be concerned in my opinion); 3% OTM or ATM. The point is that the underlying asset has moved to a point at which the specific trader who made the trade is uncomfortable holding the position as is, and wants to make an adjustment.

    Let’s assume that the position is long 300 delta.

There is one adjustment method that I avoid discussing – just to minimize the possibility that it would occur to any reader to experiment with this trade idea. Keep in mind that the ONLY reason for making an adjustment is to reduce risk – as long as the new position is worth holding. We do not reduce risk to crate a position that we do not WANT to own.

So what is this adjustment that I think is so terrible?

It’s the sale of call spreads to add some negative delta to the portfolio. (Or put spreads when the market has been rising and the portfolio is delta short.) Selling call spreads accomplishes some noble goals: It move the position nearer to delta neutral. When trading with no market bias, that’s a good thing. It also adds more cash to the trader’s account, increasing the potential profit, and we all like to earn more money.

One other benefit of adopting this strategy is that it seems to work so often. Much of the time the market continues to drift lower, making this adjustment profitable. Of course the put situation has gotten worse. That’s not a real problem when the trader is on top of the situation and is taking steps to manage risk. However, all too often the steps taken include the sale of even more call spreads. Once again, taking in cash and reducing the immediate delta risk.

I must admit that this strategy works very nicely when it works. Sometimes the cash from the call sales is sufficient to cover all losses from the put side of the iron condor and the trader may eventually earn a profit. Sometimes the market stops moving lower and the trader not only earns the original cash collected when initiating the iron condor trade, but is rewarded with extra profits derived from the call sale.

That’s the good news.

However, the primary (if not the only) purpose of making the adjustment is to reduce risk. This method does reduce delta risk (temporarily), but it adds negative gamma and a significant downside risk. when selling those additional call spreads, too often the trader sells a cheap spread (so it is reasonably far OTM). That does notr add very much cash to the kitty, and adds major risk of loss – if the market turns – for very little cash. If the trader makes the better (but still terrible) choice of selling calls spreads that generate a ‘decent’ amount of cash, then there is at last a reward worth earning for taking the risk.

But that’s the point. Adjustments are risk-reducing trades (or should be). The idea that lessening delta risk makes for a good adjustment is not the way a successful or experienced executes adjustments. I understand how powerfully profitable this plan looks. But it only takes one large and sudden market reversal to blow up an account with far too much loss exposure.

But there are two potential disasters that await. I believe that the sole purpose of adjusting a position is to reduce risk – not to seek extra profits. [I am not against earning extra profits, but the primary purpose is to make the current position safer and worthwhile to hold.]
When extra call spreads are sold,nothing is done to reduce the risk presented by those put spreads.

Problem number One: If the market continues lower, the loss form the puts is going to increase rapidly. The sale of call spreads is not going to generate enough cash to offset these losses. Thus, the primary purpose of making an adjustment – to keep risk of loss at a reasonable level. Once those puts move into the money, it becomes far more difficult to manage the entire position. Not only are the put spreads problematic, but the continuing sale of call spreads can result in blowing up the trading account if there is a sudden market reversal.

Problem number Two: When keeping risk in line is not the MAJOR (it should be the only) consideration when making an adjustment, far too often risk builds and goes unnoticed. The type of trader who employes this ‘sell more calls’ method of risk management seldom bothers to buy back those now, far OTM call spreads. It’s bad enough to create downside risk – where none existed before – but to not buy back the cheap options creates a scenario in which a traders account can disappear overnight.

This is unacceptable risk (Obviously an pinion and not a statement of fact). But it is a tempting methodology. It works most of the time. It can lead to extra profits. It’s easy to fall in love with this strategy. But good luck does not hood forever. Markets do get volatile again, and despite promises that the trader makes to him/herself to act in plenty of time – f necessary – the personality that sells those extra spreads to bring in more cash – is not the right personality type to be able to rush in to cover those call spreads when the market turns. In fact he sale of additional put spread would probably be the trade of choice.

This is a disaster waiting to happen. I feel it is the worst possible adjustment chocei and would go as far as to say that if you are considering this play – selling more calls without buying back the original call position – it’s better to exit and take the loss, rather than to build risk to unacceptable levels.

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Adjusting iron condors: Choosing among the alternatives


Making the "right" adjustment, at the "right" time is, by far, the most difficult part of trading iron condors, as far as I am concerned. In my real trading, the only type of adjustment I dare try is to close part of (or all) the position or roll over. All other types of adjustments seem too difficult to manage for me.

Most probably I am asking too much but , if not, and if other visitors of your blog also find it helpful, may I suggest that for a period of one or two weeks, you set up a simulation game where every day you give us a specific position (IC) and the necessary data (price of underlying, volatility, the Greeks etc) and we are asked to make a decision whether we need to adjust or not and if yes what strategy we choose, and then, the next day you give us your own proposal. I fully understand that everybody has his own comfort zone but it would be a great opportunity to see in practice how all the different adjustment strategies are used and why.

If this is not realistic, is it possible to publish in "Expiring Monthly" a new "Follow that trade" like you did last March?

Thank You



It's not realistic because of the huge amount of time required.

However, what you ask is not nearly as beneficial as you may believe it is.  Asking for the greeks?  Isn't that easy enough to do yourself?  However, that's not the point.

As a rookie, you cannot always expect to read about something and immediately put it to use.  Sure, that happens part of the time, and one example is becoming aware of the risk associated with trading too much position size.

However, not everything is so easy.   Adjusting iron condors is complex.  There is much to understand.  You cannot expect to examine a few example and then know what to do.


Your job

You have two main tasks: understand the adjustment method and then practice.

Understand:  Think about the reason for making an adjustment of the type under consideration.  Decide if it makes sense to you.  Try to guage the amount of risk reduction to be gained vs. the cost.  Compare with alternatives.  Decide if the whole deal fits within your comfort zone.  When you find something suitable, it's time to go to work.

Practice:  Use a paper trading account.  There's more detail on this idea below.


You know that I have no idea whether you should adjust when the underlying is 5% OTM, 3%, 1% or any other number.  How can I know your tolerance for risk or your investment objectives?  Or just how much you understand and how much of a beginner you are.  Each of these items, and much more must be considered when adjusting an iron condor,  Remember that there is no right answer.  There is merely something that is good for you, and hopefully you choose something very good, or even 'best' for you.

Then if you decide to adjust, I don't know if you should exit, reduce by 10 to 30%, buy a debit spread, buy a kite spread, roll, etc.  I'll go further:  If I were to tell you what to do, and not teach you how do make that decision for yourself, then I would not be fulfilling my goals. No one knows what you should do. 

I have no idea what is right for anyone but myself.  Even then I may have a difficult time making a decision.


My job.

I cannot show you what to do.  What I can do is offer a list of suggested strategies and try to explain why each may be a good idea, depending on conditions.  I can be certain you recognize the risk involved.  That's all I can do.

If you cannot make a good choice from the information – and I understand that as a rookie it's far from easy – then you must practice.  You suggested that I undertake a specific task.  Instead, you do it.

Each day for a week, open a new iron condor in a paper-trading account.  Each new IC should be require an immediate adjustment. Because you don't know 'when' to adjust, try this.  Open the trade based on this assumption:  It was a good, netutral trade at one time,  but now the calls (or puts) are 2% OTM. It does  not matter how much premium you collected.  It does not matter how long ago you made the trade.  Today the position is uncomfortable for you to hold.  Thus, an adjustment is in order.

Pick one adjustment method.  If you don't know which to choose, buy some credit spreads.  Guess how many.  Guess which stirkes – based on what I have previously suggested.  Try to be comfortable with the cost.

Make an adjustment.  Follow the trade.  Determine how well you like the adjustment method being tested.  They try again with another straegy.

Follow the trades.  Record your thoughts and collect data.  Gain experience.  That will be far more useful to you than reading my opinion on specific trades.  My objective is to teach you to think for yourself.  I know that as a beginner, you want to learn everything NOW,  That is not going to happen.  You must have some patience and learn at your own speed.  Here, practice trades offers the best learning experience.

Over several months you will collect much data and have many entries in your trade journal.  Some trades will be comfortable for you, some will not.  Be certain to record which adjustment types fall into which category. 

Among the comfortable trades, try to decide which seems to work best for you.  This is not to be determined by which makes (or save) the most money, but that is one consideration. 

Use that startegy as your primary adjustment method, but at the same time, continue the paper trading to gain more experience with other iron condor adjustment methods.  It's an ongoing proposition.

You may want to view my Oct 12, 2010 one hour webinar at TradeKing on this iron condor adjustments.

A lengthy example may be educational, but it's not a substitute for doing the work yourself.  I'm here to help or offer guidance.  But this request is more than I can handle


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Adjusting Iron Condors: General Concepts

Get Started

When it comes to trading, beginners are especially overconfident.  I have no clue as to why that is, but they often trade before becoming educated, trade too much size, seldom manage risk, and far too often – blow up their accounts, and quickly become ex-traders.

At some point – early in your career as a trader – the importance of managing and controlling risk must be recognized or there is a significant chance you will not survive as a trader.  Today's post is not to argue that point.  Assuming you are convinced (or very soon will be) that it's true, let's discuss how to manage risk when trading one specific option strategy:

If you are unfamiliar with iron condors, here is a very basic description.


  • You own an iron condor on a broad based index (INDX)
  • INDX has rallied (fallen) since the position was opened
  • INDX is trading at the edge of your discomfort level

    • You believe this position can be salvaged and there is no reason to exit
    • You believe now is a good time to adjust the position


Making adjustments

There is no single 'best' strategy to use when adjusting positions.  The primary goal is to reduce risk. You are adjusting because risk has reached an unacceptable level.  At this point there are basically two choices:

  • Reduce size by closing some or all of the position
  • Reduce risk by making a new trade – bur ONLY when the adjusted position is worth owning

The secondary goal is to own a position that has a better chance to earn a profit – from this day forward.  I am not talking about recovering any losses.  Losses are in the past and should play no role in choosing your current trade (or investment).

Earning money in the future is all that counts.  Whether it turns out to be enough to offset earlier losses is not important.  Your goal as a trader should (obviously this is my opinion) be to make money today, tomorrow and for as long as possible.  You have no control over what has already happened.

My goal when choosing an adjustment is to make the position something with a good probability of earning a profit.  A satisfactory reward potential, along with an appropriate level of risk are necessary considerations.  If I cannot meet those, I'll exit instead of adjusting. 

From my perspective, I suggest not owning a position that is already outside your comfort zone when it is opened.  It's common for traders to do just that when making an adjustment.  Why?  Because the adjustment is made with the objective of getting back to even on the trade, rather than focusing on making money today and tomorrow.  Both ideas are similar in that the goal is to earn money, but the 'getting back to even' mindset focuses on earning a specific amount – and that may easily result in your owning a position with too much risk.

Below are some of the adjustment possibilities for an iron condor gone awry.  Each is appropriate under the riight conditions.  I suggest that you consider the list and find one or two that suit your needs.  There is no space to provide detailed descriptions of each strategy, nor is this an attempt to provide a complete list.  It's a group of ideas worth considering.

Basic Adjustment types

  • Exit or reduce size
  • Buy extra options for protection.  These options must be less far out of the money than the options being protected.  If your condor is short calls with a strike price of 900, the adjustment is to buy calls with an 890 (or lower) strike price. 

    • Maintain those options unhedged for potentially unlimited gains.  This is often too costly for most traders to consider
    • Hedge the option purchase to reduce cost

      • Convert it into a call (or put) debit spread

        • Sell lower priced option with same expiration date.  For example, buy the 880/890 or 890/900 call spread to adjust a position that is short the 900 calls.  This trade offers good ban for the buck.  Protection is limited, but the cost should be acceptable (unless you waited far too long to adjust)

      • Convert it into a kite spread

        • Sell a few farther OTM call (or put) spreads
        • Example: Buy one 890 call and sell three or four 920/930 call spreads (same expiration date)

      • Convert it into a long strangle by buying puts (or calls).  This is expensive

      • Sell more premium.  This adds to risk and is ONLY appropriate when the current risk level of your account is well below your maximum level

        • Sell OTM put spreads when delta short (INDX rallied)
        • Sell OTM call spreads when delta long (INDX has declined)

        • AVOID selling spreads for small premium.  This is not a risk free trade, and if you are going to take this specific risk, be certain the reward is worthwhile.  It's easy to believe (incorrecty) that a low delta spread is 'safe' to sell.

    • Cover troubled spread, roll farther OTM, sell extra spreads.  Example buy to exit your short 900/910 call spreads and sell a larger quantity of 920/930 spreads (expiration month may be the same or different)

        This trade often usually made for a cash credit

        Warning: The position looks better right now, but those extra short spreads translate into extar risk.  Be certain your portfolio does not become too risky to hold

    • Buy OTM calendar spreads.  These offer limited protection and may lose money when the underlying moves too far.  Choose a strike price that offers profits when you need them the most – and that is near the strike of your current short options


The iron condor strategy is often used by traders who think of it as an income source.  It is not free money, nor it is guaranteed to produce income every month.   Risk must be managed well.  If you take good care of your option positions and limit risk at all times, the chances are good that they will take care of you.


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Iron Condors and the Greeks

Hi Mark,

I'm so happy that I discovered your website after subscribing to Expiring Monthly. I commend your devotion to educating new traders.

I was an overconfident trader and had a long run of luck before taking too much risk and nearly destroying my account. Now I'm pausing and learning everything I can.

My question regards the greeks and iron condor selection. When I setup an IC 4-6 weeks prior to expiration, the theta is negligible.  Actually the greeks in general are all very small. How important are the Greeks when you set up an IC?

I understand the general benefit of putting an IC many weeks away for a higher premium, are there other benefits? Are there guidelines on selecting the distance between strikes? I know as expiration approaches the long option loses it's effectiveness.

Thanks in advance.



Hello Mark,

Thanks for the kind words.


I've often said that beginning with a string of winning trades is not necessarily a good thing for the new trader.  Sure, the money is wonderful, but the overconfidence that results can destroy a trading career.  For some reason that I cannot understand, beginning traders (stocks, options, forex etc.) believe that it's easy to earn good money consistently – with zero training or practice.

I'm sorry for the bad experience, but very glad to hear you are going more slowly.

Greeks measure risk

1) Remember this: The Greeks are important, but they serve only one purpose.  They allow you to measure risk. They are not magic bullets that solve all problems.

That ability to measure risk gives option traders an avantage over other traders.  Your job, as risk manager, is to learn to read warning signs and know what action is needed to reduce risk to an acceptable level. That ability does not come overnight.

2) When the Greeks feel 'small,' then you are well within your comfort zone. If your trade is neutral, the Greeks should be small.  Except for vega.  Iron condos are short vega (volatility risk).

3) When deciding which iron condor to trade, an important Greek is delta.  Consider delta to be the probability that an option will finish in the money, if the position is held to expiration.  Sum the put and call delta (ignoring the sign) and you have a good estimate of how often one of your short options will be ITM at exoiration. NOTE:  The chances that the iron condor will move into the money at some time during it's lifetime is much larger than the probability that it will finish ITM. You can find this number by using a 'probability of touching' calculator.

Why bother? To find a trade that suits your needs.  Although adjusting can lead to extra profits, most traders believe that making an adjustment is something to avoid.  They mistakenly believe that it automatically locks in a loss.  But even when that is true, that's better than taking too much risk.

Many successful iron condor traders consider adjustments as a way to increase their annual earnings.  Instead of fearing an adjustment, they consider it to be an opportunity. For now, let's just assume that making adjustments is something you prefer to avoid.

Thus, delta helps decide which options to sell. There must be a compromise between a low delta and collecting a sufficient premium.  The ideal scenario is to sell a spread using options with very low delta, and collecting a very high premium.  You will not find that scenario.  The goal is to find the best compromise for your situation.

For the true rookie, a paper-trading account is the ideal place to get experience that helps with the decision-making process.

4) The very important Greek, gamma, comes into play only after the underlying has moved.  Gamma is small when you open the position. 

Theta is your ally, but it's also a temptress.  Do not go out of your way to build a position just because it has a high theta.

5) Once Greeks are determined and risk is measured, it's up to the trader (and his/her risk manager persona) to decide when risk is acceptable.  If it has moved outside your comfort zone, that's not good.  Do something intelligent to improve your position.

Look at position graphs and change prices and dates.  See how much can be lost if the stock price changes or implied volatility changes.  When that (potential) loss is not acceptable, it's a warning.  By paying attention to the graph, you will find a price at which "this is uncomfortable for me, and if we get to that point, or perhaps as we approach that point, I am going to take some action to reduce risk." 

That's how I suggest using the Greeks.


Longer-term iron condors

The advantages are

  • Higher premium
  • Shorts have lower delta
  • Position has less negative gamma.  This is important, and the primary reason I prefer to trade 3-month iron condors.
  • If willing to sacrifice the period of rapid time decay in exchange for avoiding the period of maximum risk, longer-term iron condors often offer the opportunity to exit 3 – 4 weeks before expiration.


  • Reduced theta
  • More time for something bad to happen


Distance between strikes

a) The call spread and put spread

A 20-point iron condor is equivalent to two adjacent 10-point iron condors.  There is no significant difference in strategy.  You should trade positions that feel comfortable.  Two consecutive10-point spreads have the same margin requirement and similar P/L as one 20-point spread.

b) Distance between the calls and the puts

Makes no difference.  I ignore this.  Instead, choose the call spread and put spreads based on their individual properties: delta and premium.  Whether the short options are 200 points apart or 150 points apart (I trade RUT), makes no difference.

One position or two?

I look at the iron condor as two separate trades.  I sell a call spread with an appropriate delta and premium.  I do the same for the put spread.  The one way that I consider the entire position is when I initiate the trade.  I enter the entire iron condor as a single order, but seldom adjust or exit the position in its entirely.  I have two positions, each with its own risk management requirements


Effectiveness is a relative term.  If your long option becomes worthless as expiration nears, it does not matter.  When trading iron condors, your want that option to become worthless.

The sole purpose of buying the wings (the options bought in an IC) is to LIMIT losses.  It serves that purpose right up to the very last second.  It limits losses.  It is 100% effective when providing that function.  


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Iron Condors: Risk Management and Position Size


My query relates back to your post on trading iron condors for a living which I found very informative. Without going over old ground, I am interested to know how traders who do choose to trade 100s of ICs each month on a single underlying manage the risk.

I ask because I found articles such as this one and also remember your having mentioned in the past that you traded much larger size. Any thoughts on this would be great.



This simple sounding question opens the doorway to a wider discussion.

When trading, choosing an appropriate position size is a crucial factor in the trader's ability to practice sound money management.  However, I don't believe size matters from the perspective relating to your question.  The requirement is that each trader use size that is appropriate for his/her account size, experience, track record etc.

If you trade 10x the size, adjustments would also be 10x larger.  You can easily make minor changes to achieve the desired result.  For example a 2-lot adjustment for a 10-lot position  may not be exactly 20-lots for a 100-lot position.  If its 18 or 23-lots, that's merely the effect of rounding.

Let's assume that a trader who has been using iron condors has opened a separate brokerage account that is used exclusively for trading iron condors, and that it has $20,000 in cash.   Important note: This is the amount that our trader is willing to place at risk for this strategy.  It is not his/her entire investment portfolio.

If we trade 10-point iron condors [The call spread is 10-points wide and the put spread is 10-points wide.  The distance between the calls and puts is not relevant], the margin requirment for each is $1,000 [although some brokers require $1,000 for each of the two spreads, and this practice may become more widespread].  The maximim position size for this account is twenty of these iron condors. [Some brokers allow customers to use the cash generated from the sale of iron condors to open more iron condors, but I believe this practice is being phased out].

Go all in?

Let's assume this trader frequently goes 'all in.'  That should not result in a portfolio of 20 iron condors.  It's essential to have cash available to make adjustments.  Adjustments are vital to your ability to prosper over the long term, and many traders (your reference for example) believe that adjustments add to profitability.

With this size account, I prefer to trade 16, or no more than 17 iron condors (and 14 to 15 is a lot more conservative), leaving $3,000 to $4,000 to meet margin requirements for some types of adjustmens.  Some adjustments require extra margin and some do not. Being prohibited from making necessary trades is equivalent to being placed in the penalty box and being forced to close positions (to generate margin room) or wait through expiration.  Most of the time when an adjustment is made, the entire iron condor is not involved.  The half iron condor that is at risk is frequently adjusted while the less risky portion is left as is – at least for the moment.

Don't allow that to happen.  Maintain enough free margin to provide freedom to trade.  Those readers who use portfolio margin instead of Reg T margin ($100,000 minimum account) should always have extra room.  If you use your entire margin allotment with portfolio margin, you are trading size that is far too big for your account.

More cash = more size?

Next, consider the trader with a $200,000 account.  If this trader wants to go all in I'd recommend doing approximately the same thing, but 10 x larger.  Keep in mind that if this trader feels that $200,000 devoted to iron condors is too much, then cash could be transferred to another account.

So to me, size trading depends on more than counting the number of contracts traded. If you have the ability to fund the account, are comfortable trading 160 iron condors simultaneously, don't feel uncomfortable with the money at risk, and have a successful track record of trading iron condors, then this is appropriate size for $200,000 account holders.

Joe, I don't believe there is any true difference.  When the trader can comfortably handle the size traded, and meets the criteria mentioned above, the risk is not too difficult to handle.  The smaller trader's $2,000 risk is the bigger guy's $20,000 risk, but each should feel about the same pressure when that amount is on the line.  The only warning I would give to the larger trader is to be certain that the underlying has enough liquidity to handle his orders. 

It's not enough to say that RUT is very liquid.   I have discovered that OTM 3-4 month options have far less liquidity [I've had several instances for which I was able to buy only one-lot of 3-4 month RUT iron condors.], and would not be comfortable trying to trade 100-lots of a RUT December iron condor today – unless I were willing to trade closer to the money options or accept a less than desired credit.

Worth repeating

I would NOT advise a person with a one million dollar account who is first learning about options to place significant money at risk.  That is true for any rookie.

I'd recommend using no more than $25,000.  In fact, I'd suggest paper-trading to give the new trader some much needed practice.

Joe, once you decided that trading $X is appropriate, and as long as the underlying has the liquidity needed, and if you adhere to the guidelines above, position size should automatically be at an acceptable level. The larger trader is not at a disadvantage.

Extra note:  I have some disagreement with the advice offered in the article that you referred to above.  The major one is this statement: "Condor manage­ment requires adding size when rolling."   Adding size is increasing risk, and is only appropriate under certain conditions.  That's a topic for another time.


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The Impossible Question: When to Adjust an Iron Condor


You have mentioned several times that, according to your comfort zone, you start thinking about some kind of adjustment, once the underlying has touched the short strike price of your IC.

Do you take action irrespective of the time remaining until expiration? For example, if you open an IC position with 90 days remaining to expiration and the underlying makes a rapid move upwards and touches your short call strike within 10 days (so 80 remaining until expiration) do you still make the adjustment or you wait for some more time? (most probably, after a big rapid move in such a short time the underlying will move in the opposite direction)

Many thanks for your time and the great education you offer to us every day.




Hi Dimitris,

I have revised my adjustment methodology.  And expect to do so again in the future.  This is  not something that can be written in stone.  Each trade should have its individual trade plan.  It's fine if the plans turn out to be similar, but thought should be given – in advance – as what/when action to take.  

I no longer wait until the strike is touched.  I found that for me, that plan is far too dangerous.  I adjust significantly earlier.

One reason for doing that is the high IV environment make it attractive to adjust earlier.  That higher IV makes it much easier to get a higher premium for any new position that I choose to open.  Thus, I can exit (or reduce size) and painlessly find something new to trade.

When IV is low, it's difficult to find OTM spreads that fetch a good premium.  Nevertheless, making a painless adjustment is not my goal.  The goal is to get that adjustment made before the position suffers a large loss.

Time remaining has no relevance for me.  Risk is risk and I take steps to 'do something appropriate' when I perceive risk. When the underlying gets near enough to the strike, that's my signal.  Today 'close enough' tends to be between 20 and 30 RUT points.

If you believe that the market will reverse after a big move, my question is what determines a big move?  It seems to me that you are arbitrarily establishing the definition of a big move to mean the move from wherever the move started to your strike price.  In my opinion, you have no idea whether the big move is barely underway or whether it's exhausted.

If you want to play for the reversal, and thus not adjust, that's your choice.  Adjusting is not an exact science and there are many iron condor traders who claim that they never adjust.  I don't see how they can survive for long, but they are out there claiming to make a pile of cash by never adjusting. 

The point for me is simple:  Adjust when no longer happy with the risk/reward prospects for the position.  Right now you are attempting to define when that occurs.  

That's the correct approach.  I'll answer your questions, but you cannot allow my comfort zone to become yours.  There is no single best method for trading iron condors.  Your objective is to find one method that allows you to collect profits without losing too much when the markets move too far.  How you solve that problem does not matter – as long as you solve it.  But remember this:  You must solve it without going broke.  That's why risk management is important.  Combine all the elements:  seeking profit, managing risk, defining your comfort zone and perhaps you can find a (profitable) method for trading this winged spread.

I prefer not to wager on a reversal.  I'd rather take the loss and move to a position on which I am willing to wager – and that is a fresh position.  And the wager is the same as always:  Not seeing too much of a market move before enough time passes to allow me to exit the trade.

Of course, I do add my fear of the downside into the equation when trading, and would probably only cover the calls and find a new call spread to sell, rather than opening a fresh, complete iron condor.  I would probably also cover the (now cheap) put spread without reselling any new puts.  That's my idiosyncrancy.  My post-adjustment trade is not market neutral, but is well within my comfort zone


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Trade Plans


Thanks for another thought provoking column.

Would you be willing to
share the template of your trading plan? What factors you deem
important, trigger points, why or if you modify the plan, etc. Nearly
everything I read talks about preparing a trading plan, but nobody gives
an example or explains how to build one.

I always start out by sizing my trade, establishing my maximum
downside limit and expected profitability, then I look at the Greeks,
but I'm sure that I'm blind to factors or processes that will help me
execute better trades. I mostly trade covered calls, with some spreads
and iron condors added from time to time.




Hello Gordon,

I appreciate the kind words, but it's readers such as yourself who provide the fodder with excellent questions.  Thus, I thank you.

One reason you don't see a lot of plans is because too few traders use them and they are very personal.   Besides, what suits one trader is not likely to suit others.

My trade plans are different from those of most traders.  While I initiate positions as iron condors, I always manage them as two separate trades.  I look at the call and put spreads as separate positions – from the point of view of exiting at a profit, and adjusting  for risk.  I almost never have an opportunity to exit both sides of an iron condor simultaneously.

One of the valuable inputs for a plan is:

If something unforeseen happens, which trade am I likely to make? If I list one or two, I can make a trade in a hurry.

For covered calls, the choices are few.  You can exit or you can roll the call.  Or you can sell extra calls (this is a risky choice and I would never choose it).

For iron condors, there are many alternatives, and having a specific plan in place is helpful. 

I don't mean a plan that includes this statement:

'I will cover this call spread and sell this call spread for these prices.'

But I do mean one that reads like this:

'I'll exit 50% or 100% or ?% of this trade when the underlying reaches this price area by this date.  After I do that, I see three good choices: a) do nothing; b) sell a new call spread (list possibilities) if the trade meets my requirements for new trades; c) use this opportunity to buy, or at least bid for, some cheap put spreads – so that I don't get hurt if the market reverses.'

Some traders may prefer to exit the iron condor and open a new one.  This choice is not for me (don't want to move to a more dangerous put position), but it is a viable alternative.

I don't use a template. 

When I own insurance (I don't own any at the moment), I feel less urgency to exit a touchy situation. However, I must make an important statement:  Just because you own insurance and just because potential losses disappear when the market moves far enough, that does not mean that the spread being protected can be ignored.

Repeat: Owning insurance is no reason to ignore risk.  It may appear that your position is well insured and 'safe,' but most of the time if you examine the risk graphs by shifting the date to expiration week, you will notice that the protective nature of the insurance has disappeared [The reasons why this is true is a whole separate discussion]. 

Thus, please treat risky positions as risky positions.  Do not depend on insurance to save you from a large loss.

1) Like you, I have a target profit – with an estimated target date to exit.  When that profit is available, I re-examine the position to see if I still want to exit, or perhaps go for another incremental profit.  I am referring to an extra profit that can be earned in a day or two.  I am not referring to changing a 20 cent bid to only 15 cents.

2) I also have an underlying price at which I expect to make an adjustment.  Obviously, the date that the price is hit makes a big difference in my adjustment choices.  For example, I cannot expect to move the position to another in the same expiration month when time to expiry is short.  That is one good reason for updating the trade plan as time passes.

When expiration is nigh, and I am still holding a trade, if an adjustment is needed, I simply exit.  That's personal because I avoid front-month positions.  I don't just roll to a new position.  I exit.  that's the end of the trade and of the trade plan.

3) I may, and often do, open a new position – but that trade has its own, brand new, trade plan.  In other words, rolling to a new position and combining the trade plans and profit/lost numbers together – is not something I believe is a good idea.  Each trade stands on its own.

4) Although I have a portfolio consisting of several different iron condors (maybe three for each of three different expiration dates), I manage each 'risky' situation on its own.  Sure, I can look at the risk of the overall portfolio and choose not to adjust a specific trade, but I have discovered that this is a losing proposition (for me).  I manage each trade on it's own.

5) If I exit a trade that was insured, I make an immediate decision:  hold that insurance for other trades, or exit the insurance, recovering part of the cost (or sometimes, exiting at a profit).

6) My written plan cannot contain all of this.  However, I can make trades based on experience, even without every detail being written.  The trade plan serves two primary purposes.  It allows the less experienced trader to plan ahead and not face a panic of an 'I don't know what to do' scenario.  When the situation arises, the plan may no longer represent the number one choice that you would make given more time to work on the trade, but it gives you a GOOD trade under stressful situations – and that has real value.

The other reason for a plan is to provide a record of trades and thoughts.  As you review them later, you may be able to see a error in your planning.  Good.  That's a mistake you can avoid making in the future.  Or perhaps some situation will occur a few times and you can see if you handled it well or poorly.  That's educational and information to be used later.

As a new options trader, use the plan to help speed up the learning process, not as a 'written in stone' trade that must be executed if such and such occurs.

7) Right now, I use size as my primary risk management tool. Then I have 'points OTM' guide that is flexible.  When a short spread reaches that point, I make an adjustment.

8) My adjustment strategy varies with market conditions, and whether I own insurance.  When IV is high, I prefer to roll to a position with the same expiry – assuming there's enough time remaining – at a higher strike.  I prefer to increase size – usually in a buy two and sell 3 ratio.  But I only increase size when overall risk allows for it.  More size is often a very poor adjustment choice. 

9) I tend to cover 10 to 20% of the short spreads at one time when making my first adjustment.  I do NOT 'roll' into a new trade.  I'm always looking for new trades, and add them when appropriate – not just because I exited a risky position at a loss.

10) If a position is too risky – because the market moved a bit too far or because I got stubborn, then I exit the whole position.  I truly don't feel that I must make a new trade to recover the loss or that I must roll to give myself a chance to recover the loss.  The next trade I make – whenever that turns out to be – will, by definition, be an attempt to recover all, or part of that loss..

11) A plan written with 90 days to expiration is no longer valid when only 30 days remain, so rewriting plans weekly or bi-weekly makes sense to me.

12) I don't believe that your plans prohibit you from finding better trades.  There is only so much you can do with a covered call.  Once you pick the stock, the biggest part of the task is finished.  Choosing the option is probably not a methodology you can set in stone.  Whether IV is high or low may influence the expiration date.  Your gut feel for the market, even if you claim not to have a bias, may influence the strike price.  Thus, sticking to one unshakable CC strategy probably does not work for most people.  I recommend consistency, but common sense and comfort zone boundaries must count for something when planning a new trade or adjusting an existing position.

13) Gordon, from your description it seems to me that you are covering the important points with your plan.  For me, the plan's purpose is to provide an idea in case of an emergency market move. It's designed to prevent a panic decision.  It's not so much used to make the daily decision on whether to hold today or exit.  Once your trade is near that 'take the profit or hold' point, you must manage the position to satisfy the risk/greed ratio.

14) However, here's something you can add to your plan:  "Why am I making this trade?  What will convince me that I made a mistake and that the underlying is not going to behave as expected?  Dare I still hold onto a covered call (or iron condor) and the downside risk?  Is this price decline likely to be temporary, or must I abandon this trade now?"  The answers may be the result of technical analysis, a re-evaluation of your stock selection process etc. But this re-evaluation becomes part of the plan.

15) I don't look at the plan as a big money-maker.  I look at it as good method for being certain that a trader understands the specific trade and what he/she hopes to accomplish (some traders slap on a position with no idea of what they expect to happen). 

Plans help.  They are not essential, but they offer guidance and help solve the anti-greed problem.  You may even discover (too late for this trade) a good reason why a choosing a different strike price for the initial trade would have been better for your specific situation.  I am not saying:  Strike should have been lower because the stock declined.  No.  I'm referring to a real, logical reason: Something you could have seen, but missed.

Use plans to provide guidance.  Don't allow writing the plan to drive you nuts.


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Short Course in Risk Management: Introduction

In my opinion, there is only one hard and fast rule about managing risk:  You must get it right.  Most beginners accept the fact that it's important to trade very small size and/or use paper trading accounts to gain experience. Few jump into trading with large trades.  There's no denying that sizing trades is the most efficient and easiest method of managing risk.  But that's where risk management ends for beginners.

When a rookie gains confidence because of his/her ability to earn money, it's natural for that trader to want to increase position size.  And making a gradual change is justified. 

However, it's not a string of profitable trades that should be the determining factor.  The best approach is to demonstrate the ability to profit by making good decisions before considering the possibility of increasing size.  This does not mean three consecutive winners. 

It means several months of success – both in dollars earned and in terms of holding positions that do not involve more risk than you should be taking.  It may be difficult for the rookie to tell the difference between good luck and good trade management, but it's necessary to make that distinction.

If I'm making money, isn't that all there is?

Risk management is never considered from the same perspective as profits. Most traders who are able to earn profits – especially when they earn profits as soon as they begin trading – make the unwarranted assumption that they are talented traders.  They don't consider that the market may have behaved perfectly for their chosen strategy.

It's very important to understand the difference between trades that are well-managed and those that luckily end well.  This is a subtlety lost on too many.  The 'obvious' but inaccurate conclusion is often: 'If I made a profit then it was a good trade and I must have handled it well.'

To understand the risk of any given position (or portfolio), it's essential to know

  • How much can be lost, if the worst case scenario occurs
  • How much can be lost today, under unusual market conditions
  • What you have to gain by holding the position; i.e., potential profits
  • The probability of earning a profit from the position as it exists now
  • How theta (the passage of time) affects the position
  • The effect of a large change in implied volatility (vega risk)

To manage risk successfully, you must know

  • What is your first line of defense?
  • When will you take that defensive action?
  •     At some specific number of delta away from neutral?
        When your short option reaches a certain delta?
        When your position loses a specific sum?
        When you get nervous?
        When the risk graph tells you something specific
            Lose $X if the market moves another 2 or 3%?
            Lose X$X if one week passes or if IV drops by 10%?

  • What is your general plan when trouble looms?
  • Will you exit the entire trade?
  • Will you buy back a portion of the losing side?
  • Will you trade shares of the underlying asset to get delta neutral?
  • Will you buy extra options?  Which strike price?
  • Will you roll the position to farther OTM strikes?
  • If rolling, to which month do you plan to roll?  Same?  Next?
  • Do you plan to adjust in stages, or all at once?

As a rookie, you cannot be expected to have the knowledge or experience to prepare a plan with all this information.  But, you can pick a small number of items. 

I'd suggest that you know your first line of defense.  To me that means whether you plan to get out of the whole trade or plan to find a suitable adjustment.

The other important topic is when you will implement that line of defense.

That's a good start.  When you find it's time to make a position adjustment, the decisions you make may help you find another couple of items to add to your trading plan.

Over time, you will develop a sense of what you want to know in advance.  The better the plan, the better you can manage risk.

It's not essential to know these items in advance, but if you do, you will be in much better shape.  You can make decisions, when necessary, even when conditions are stressful.  Having a well thought out plan makes a big difference, especially when you lack the experience or discipline to make good decisions under pressure.  If you have never been short a bunch of puts in a rapidly falling market (with exploding implied volatility), then you cannot know how you will react.  It's far better to have a plan in place and then act on that plan when necessary.

As you gain more experience over the years, as you gain more confidence in your ability to react well under pressure, then these plans will be easier to compile.  If you prefer to make decisions on the fly, and are confident you can do that well (without emotions getting in the way), you can continue making trade plans with rough guidelines rather than specific trade ideas.

But don't give up making those trade plans.  It's good risk management to prepare for contingencies.

to be continued


Kindle edition

Lessons of a Lifetime


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