Tag Archives | adjusting iron condors

Adjustment Headaches II

To Mark,

Hi John (Addendum: MDW response in blue)

Here's what I do when trading iron condors (IC)

  1. I initiate positions
    without any market bias, which means I do not know whether the stock is
    going to rise or fall or remain in a narrow range.
  2. When the
    stock swings to one direction, not a lot, probably a few points, then I
    will rollover the spread on that side to further strikes.

    How far OTM are your current strikes when you 'rollover'?  Are you adjusting too late or too early?  Most important of all:  Are you rolling just because that's what you always do?  That is not a good idea.  Please be certain
    that the new position is a 'good' one.

    Another thought:  If trading stocks, perhaps the strike prices are simply not very far OTM.  You may be more comfortable with higher priced stocks or index options.  You find rollovers to be unprofitable, yet you do them when the stock moves 'a few points.'  If you are rolling when the stock moves only 5%, perhaps your options are too near the stock price.  Can you move more OTM and still get a reasonable premium?

  3. Doing so allows me to have a good position, but only for the
    I still do not know whether the stock will continue in that direction,
    stay there, or retrace.

    That's true for most traders.  If a trader had a market opinion when opening the trade, that opinion has been proven to be incorrect – when the adjustment was made.

  4. This adjustment gives me an unrealized
    loss. My observation is this happens in every adjustment, and the
    reason for this is fairly straightforward. Calling it deferred loss is
    only a matter of opinion. Regardless of how I call it, the unrealized
    loss is real. 

    Yes, it is real.  But it seems to be a 'realized' loss to me. What is your method for the
    'rollover'?  Farther OTM strikes in same month?  Next month? 'Rollover' is
    not the only type of adjustment available.  This is obviously not working for
    you.  Have you considered alternatives?  a) buy back 20% of the short
    spreads and hold the remainder until you feel it's time to repurchase
    more.  This is adjusting in stages, rather than all at once.  b) Buy one
    or two of your short calls.  c) etc.  There are other alternatives.

  5. Since I do not have market bias, I will never know whether my
    new positions will be profitable going forward.

    True.  But if you don't expect them to be profitable; if
    you don't 'feel' good about owning these positions, then don't own them.  Perhaps
    there is a different strategy that you can adopt?  

    The new position is
    just less risky compared to the old one, again, for the moment. Less risky is good, but it's not good enough.  The risk/reward potential must be acceptable. 

  6. On
    the other hand, if I exit the trade, then it will result in an
    immediate loss.

    To me that is not
    important.  If you don't want to own the current position and if the
    rollover doesn't appeal to you, then exiting is a good idea.  Holding onto a trade just to avoid taking a loss means you are going to own bad positions frequently.  When you do that, you are gambling.

    look like a good choice to me because of 3
    reasons: i) if I adjust immediately, theta decay can still come to my

    I don't like this rationale.  If
    you open a brand new position, theta is also on your side 

    gives no benefit because without market bias, I do not
    know when to initiate a new IC;

    I see
    your point, but without a market bias, isn't it safer to own a new,
    market-neutral, IC than the current position?  Don't forget that 'neutral' is a market bias.

    iii) if
    i exit and stay around hoping
    to roll with better strikes, then I am just guessing the stock will
    continue in the same direction, but I may be wrong.

    The basic decision remains:  Do you feel comfortable
    with the current trade, or would you prefer another?   Maybe you should consider an alternative strategy:  Less volatile stocks; selling options
    that are farther OTM and have a lower delta.  I don't have a specific suggestion, but I sense the
    frustration. I understand that you feel helpless doing what you believe is
    'right' and losing money.  Keep in mind that IC are not suitable for
    all markets.  They only work part of the time.

  7. My opinion is when I adjust, one side of the spread has
    already gone bad. Adjustment prevents it from getting worse. I don't
    see why I would adjust if the stock price stays at the middle of the
    range enclosed by IC.

    When you do that 'unnecessary' trade, it's the purchase of insurance. 

    In other words, I adjust to prevent the bad side
    from getting worse

    Yes, that's one reason.

    As a
    consequence, there will also be deferred

  8. Here lies the problem of deferred losses. If the stock
    heads in
    direction suddenly and quickly, the deferred losses are quite big. If
    that stock do this for few days in a row…well you get the idea.
    Although still unrealized, that unrealized loss gives you the shivers.

    I look at risk.  If it's too risky, I get out of the
    trade – either by adjusting or exiting.  Perhaps you don't look at
    adjusting the way I do.  It is not just a risk-reducing trade.  It is
    not just a 'reduce the position size' trade.  It is a trade that gives
    you a good position – a position you want to own.  It does not give you
    a position you are forced to own.  Adjusting is voluntary.  If you don't
    like the trade, don't make the trade.  As mentioned in yesterday's response, adjusting affords profit opportunities.  If you don't find that to be true, then you are not making the best adjustments.

  9. I believe this is the nightmare of IC, apart from a big gap
    that put the trader ITM without a chance for adjustment.

    Yes.  That is one argument for owning insurance in the
    form of extra options.  It doesn't always help enough, but it helps. 
    The problem is that the extra options must be closer to the money than
    your short options, and that makes them expensive.

  10. I
    do not have any solution for this, and market making seems like the
    only valid strategy to me. Everything else has a market bias built in.

    There is nothing wrong with a market bias – if your
    track record shows you have good judgment.  You and I trade with a neutral bias.

The points you mentioned seem to suggest that you know the
will stay range-bound after adjustment.

know nothing about the future market.  What I do with an adjustment is
reduce risk, and maintain a position I like.  I suspect your options are
very near to being ITM when you adjust, and that means it's probably
too late to salvage the position.  

Judging from this
'believe the position will be profitable going forward'. That is having
a market bias in my opinion.

understand how you feel.  When I open an IC position, I feel the
position will be profitable going forward.  If I didn't, I would not
make the trade.  Sure, that assumes a market bias.   IC assumes a
range-bound market.  Every trade has some bias – bullish, bearish, or
neutral.  Not knowing which to choose, I choose neutral.  But that's not
'better' than bullish, it just more comfortable for me  – and 'neutral' has been drummed into my head by risk managers for more than 25 years.  Now I'm the risk manager.

from a technical analysis
background, I find that market bias is only guessing and consistency
can never be measured.

Well, thanks for reading my rather long details. If you have
something to add, correct, or alternative theory… please

I sense your frustration.  I'm  offering advice based on my opinion as to what I believe is
sound.  In the final analysis, it's up to you.


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Adjustment Headaches

Hi Mark,

Recently I have some mixed feelings about iron condors (IC), and hope to
benefit by sharing my thoughts here (and hopefully you have some input that
may enlighten me and others who trade IC).

While veterans like you have
mentioned that IC is not a free lunch, I think I have a way to put this
in context. Although IC adjustments are a must for long term success, I
believe these adjustments only make deferred losses (aka preventing an
immediate loss).

If all the positions are closed immediately after
adjustments, then it results in an immediate loss. The
deferred losses pile up as more adjustments are made.

adjustments are made, then the IC trader hopes that the market will
treat him kindly so that theta decay is accumulated by enough to cover the
deferred loss, and hopefully have some left as profit.

But hope is
not a strategy, as you have said.
So my conclusions are:

  • IC does not have a clear advantage compared to other strategies
  • The only feature that makes IC look promising in hindsight is
    the upfront collection of premium

Mark, I wonder you agree with my point of view.



1) I do agree with your point that IC do not have a clear advantage 

But there is zero advantage to collecting cash upfront, unless that gives you a psychological boost.  An equivalent strategy requires the payment of cash upfront, but the result is the same.  If that cash is the main reason that you trade IC, I strongly suggest that you reconsider, and perhaps find a strategy that is better suited to your trading talents.

2) I don't believe any strategy has a 'clear advantage' over most other strategies.  Some methods work better than others for a given trader because the trader is better equipped to manage the position

a) I believe the 'strategy' tells you which options to buy and sell as your ticket onto the playing field.  You can play the 'options trading/investing' game with a variety of strategies

b) Once you open a position, you are on that playing field. At that time, risk management takes over as the vital factor that determines your eventual success (or not)

5) I don't know how you choose to adjust your IC positions, and that information is not important.  But it's clear that whatever method you are using, it is not working for you

Here is what is important:  AFTER you make the adjustment, do you believe you have a good position?  (If the answer is not 'YES'! then you do not want to make this adjustment) Good being defined as:

a) You expect (not hope) to make money with the position as it is RIGHT NOW.  Not compared with the original price you received when opening the trade.

b) If you have a market bias, then you anticipate a profit when that bias becomes reality.  Neutrality is a market bias

c) If you don't believe the position will be profitable going forward, don't own it.  That means don't adjust the original trade.  Close the position

Adjusting a position is truly the same as opening a new trade.  The major requirement is that the trade is suitable for you.  The one advantage to adjustment is that you save a bit of money on commissions, but that should never be a factor.  If commissions are too high, find another broker.

d) If you look at adjusting as deferring losses, then I don't believe you are making good trades.  Adjustments can be profit centers – they are not only used to 'defer losses.'

Here's an excerpt from an earlier post:

'The bottom
line is that when you make a trade to adjust the position, it's going to
improve what you currently own.  That's why it tends to be a money
maker going forward.  No guarantee.  But you had no guarantee when you
initiated the iron condor in the first place.'

e) My view on adjustments is this

i) The new position is good, meets your criteria for profit and loss potential and fits snugly (with room to spare) within your comfort zone

ii) If EACH of those characteristics is not present, then DO NOT ADJUST.  DO not own this position.  EXIT

iii) Sit on the sidelines or re-invest your money in a fresh position

iv) Adjustments are not made to defer losses.  They are made to give you a good position.  Not a reasonable position, not a position you 'don't mind' holding.  NOPE.  A good position.

v) You have a choice:  Exit and open a new, good position.  Or adjust.  Why adjust if it's not something you WANT to be part of your portfolio?  Why defer a loss and keep a bad trade?  Don't do it.

6) Bottom Line:  Don't think of it as an adjustment.  Mentally think of it as a two-step process.

a) Exit

b) Re-open the adjusted trade

If you would not do b) after doing a), then don't adjust.  If you don't want to own b), then don't own it.

I understand that you may feel this is too simplistic and that it does not truly provide the guidance you seek. The truth is that there is no 'best' answer.  I suggest you do two things, both realistic:

1) Look for alternative adjustment methods

2) Adjust earlier, perhaps in stages


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