Tag Archives | comfort zone

Establishing a Maximim Loss for a Trade

Hi Mark

I know you always refer to the comfort zone to decide when to exit a losing trade, but to me, that concept is too vague.

If possible, I'd like to know if there is some ratio that allows the approximate calculation of the maximum price you can repurchase a spread (considering the other half of the iron condor is cheap) when the market is attacking the strike price.

Sorry to be insistent, but I have the idea that to be successful in long term, your losses   shouldn't be too big.   The underlying price usually touches one of the short strikes of the iron condor when you open a new position every month.

Anyway I'd like to know what is the amount you consider as the limit to repurchase one spread – if threatened out of your comfort zone -  to compensate with good trades.   I don't need you to say a particular number, I'm asking about the way of calculating the maximum losses to benefit in long term.

Yours, Antonio



I re-worded a portion of your question for clarity.  I hope you don't mind.

I truly have no good reply, but will offer the following advice:

Let's assume I make an almost identical iron condor trade every month.

There is no easily calculated set number that represents my maximum loss.  Here are some reasons:

1) If I trade one 10-point iron condor and collect $100, I can lose as much as $900.

If my plan is to make $100 most of the time, I cannot afford to take a loss of $900, even if it occurrs only once per year.  The remaining profit would be too small.  So far I know you agree.


I must set my maximum loss at a price that takes into consideration the following:

  • If I exit when the price reaches $300, I will never lose more than $200 per trade
  • If I exit at $300, I will not collect my $100 profit as frequently
    • I cannot know in advance how often my spread will reach that $300 exit price
    • I cannot know, in advance, how often to expect to earn my $100
  • I must gather data by paper trading and make this trade many times before I know the best exit price to choose.

    • This can be done, but it takes time and patience
    • Simultaneously, I would experiment with different exit prices
    • One year's worth of data may be enough to begin trading with real money, but I would want to continue the paper trading experiment to collect more data.  I may discover that $300 is not a good exit price.

2) If I collect $350 for my monthly iron condor, I will earn the maximum $350 less often than I would earn the $100 above. I still must know how often this trade will be successful.  I cannot use probability statistics because I don't know how often the iron condor will reach my exit price. 

If I decide to cap losses at the same $200, that means I would not allow the position to move beyond $550. Without a bunch of trades as history, I don't know how often to expect to exit, nor do I know how many times per year I would earn my $350 (or less if I decide to exit early at a low price)

3) Next consider this additional problem that must be considered to get the reply you want.  How much of the exit price do I reserve for the call and how much for the put spread?  When paying $550, clearly the spread in trouble is going to eat up most of that premium , but if I don't reserve enough for the spread that is not in trouble, I'm going to be forced to pay more or else remain short that spread – with little to gain and lots to lose.

4) Next consider this.  What hapepens when the market gets very volatile.  Say -3% one day, up 4% the next and then down 5% again.  The iron condor is not in any trouble.  It has probably moved only 2% (especially if it is a broad based index).  It is far from both strike prices and you feel calm (for the moment).

However, no one else is calm and the implied volatility of the options that comprise your iron condor has increased by 15 to 20 points.  That spread you traded for $100 is now priced at $300.  You are forced to exit by your methods at a time when you are not really in trouble.

It is true that it may be wise to exit an iron condor in a volatile market.  But if you prefer to hold, what can be your excuse?  What would your new exit price be?

5) Here's another situation for which it is difficult to use a formula. If you collect $400 for an iron condor, then the maximum loss is established at $600.  Would you really want to exit any lower than that?  You surely don't want to pay $8 for that iron condor when the risk is only $200 and the potential reward is up to $800.  So how can you make an intelligent stop loss decision?  Perhaps setting it at $200 would work, but I'd be afraid of reaching that point fairly often when collecting as much as $400.  As you know, when the premium is that high, the options cannot be very far out of the money.

Rule vs. Judgment

6) If you use a rule to make these decisions, you don't have much room to exercise your judgment as a trader.  If you want such a rule, I'd suggest the following – but please understand that this is my guess. 

Exit when your loss is between $150 and $200 if you trade iron condors at approximately $1 for a 10-point spread.  If you trade near $2, I suggest a maximum loss equal to the premium or perhaps $50 higher.  If you collect $300, my guess is that $250 – $300 should be the maximum loss.

However, market conditions affect my decisions.  I don't know about yours.

A different strategy

7) How about another strategy.  Let's say you buy a butterfly or an out of the money debit spread and pay $0.50.  Isn't that 50 cent maximum loss good enough?  Or would you feel forced to exit if it drops to 10 cents?  For that last 10 cents (you would have to pay commissions, so you would collect even less), doesn't it pay to take a chance and just hold the position?  There's almost nothing to lose, and every once in awhile a miracle happens.

My point is, there is no reason to establish a maximum loss when the cost is very low.  And yes, it's a very good idea to establish a maximum loss when potential losses are too high for you. Think about that: the loss is too large for you.  What does that mean?

That means the loss is outside your comfort zone.  If that remains too vague, by all means, establish a maximum dollar amount.  Perhaps that maximum will be based on a ratio that depends on the premium collected.  Perhaps it will be based on a specific dollar amount.

I do believe this is something you must work out for yourself. 

Unless some readers have ideas or experiences to share.  I'd love to hear from you.



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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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Exiting a Winning Trade


Thanks so much for your site and your book. Both have been invaluable
to me as I've learned IC trading over the past few months.

My question is: Can offer any guidance on when to
close a profitable position. I'm getting familiar with my comfort zone
and when to get out when my shorts are being threatened, but I'm not
quite sure when to exit a position when things are going well.

I tend to
be too quick on the trigger to exit a good position because I want to
lock in my profit.  I think I'm missing the really valuable time
decay from weeks 6 to 3 ('till expiration). (I am not comfortable holding
any closer to expiration than about 3 weeks)

As an example, I have an SPX IC open for Oct 1000/1010 puts 1180/1190
calls. I opened it 8/18 for a credit of 3.20. Both sides are still open
and it's current mid-price is 1.65. So I could close now for a
profit of 1.55 (or a bit less depending on where I can get filled).

However, I'm 72 points (6%) from the short call and nearly 100 points
(10%) from the short put, so I'm still well within my comfort zone. How
long would you let a trade like this ride.



Hey Kyle,

Thanks for the kind words.

We have a different way of looking at things.  In my opinion:

1) It does not matter when you made the trade
2) It does not matter how much you collected when making the trade
3) It does not matter how much profit you have now

Yes, I know that it's easy to disagree.  And you are with the majority who believe profit is the crucial number.  My recommendation is to try to join the minority.  There is no doubt in my mind that paying attention to original position cost will eventually cost you dearly (because it guides you to poor decision making)

What matters is that you own this specific iron condor today, and the price is near $1.65.  Are you comfortable holding this position TODAY at this price?  Does the current risk and potential reward (going forward) still fit within your comfort zone?  Would you consider opening a new trade at this price TODAY?

If your answer to any of these questions is 'yes', sit tight.  Ask yourself the same question every day until the answer is 'no.'  That's the time to exit.  How strongly you feel about that 'no' tells you how aggressive to be when exiting – i.e. how much to bid.

As the months pass, and you do this frequently, you get a good sense of how frequently to ask that question, and at approximately what price (assuming you have the luxury of waiting) you eventually decide to close.  NOTE:  Different market conditions (more or less volatile) will alter your plans.  But when you have a plan, you have a big head start on solving this dilemma.

Also be ready to close just one side when it reaches a certain price before a certain date.  For me that's 15 to 20 cents for the call side or the put side (of a 10-point RUT iron condor).  I'm very eager to pay that with 4 weeks to go, but still willing to pay that 15 cents – even with less than 2 weeks to go.  But, I'm conservative on this point.  People who have not been hurt badly by allowing cheap options to remain open when it costs so little to cover – seldom understand.

When you make the trade, try to make a trade plan that tells you when to exit. Write down how much you hope to earn when things go well.  I understand that right now you don't have enough experience to know that price.  But make a guess.  That guess does not have to be written in stone.  You already have a send of timing as to WHEN you plan to exit.

After a bunch of trades, these trade plans will be easier to create.  And they can be flexible.  But it gets you to thinking about exiting.

This is very important.  I've said it recently, but it bears repeating for all new iron condor traders:

The past several months have given iron condor traders ideal trading conditions.  Unless you sold front month options that were not too far out of the money, iron condor traders have had the luxury of opening positions and exiting when they want to exit. 

The one and only reason that you feel you are 'missing valuable time decay' is because you have not owned an iron condor position when the markets were volatile.  Holding would have been the winning decision in your previous trades. THAT DOES NOT MEAN THAT HOLDING WILL BE THE WINNING DECISION WITH CURRENT OR FUTURE TRADES.

Are you aware that at the most volatile periods during the 2008/2009 debacle, the markets were so volatile that they were averaging a 5% move every other day? How would you feel if SPX moved 50+ points every other day?  Would you feel that holding longer was still easy money?

We both understand that holding offers more time decay and more risk.  We know that exiting early feels wrong when the market just sits there and does nothing.  But, if you plan to open a Nov or Dec position after exiting, your new position will earn a profit when the market does nothing.  It's truly a matter of which position you want to hold and which gives you more comfort.  If you seek maximum profit from every trade, you will make extra money for awhile.  But at some point, you will discover the wisdom of not being greedy. But, that $1.65 still feels too high to pay right now.

Here's a guarantee:  As I noted above, the past several months have been almost perfect for iron condor traders.  However much you are making now – it will not continue.  You will earn less, or even lose money during some months.  i don't know when market conditions will change.

It's your results that make you feel that you are exiting far too early.  When you have seen more active and volatile markets, you will look at this situation differently.  Experience comes with trading.  The fact that you do want to get out at some point prior to expiry tells me that you understand how risk works – at least to some degree.

Back to the problem:  For my comfort, the current price is too much to pay.  I'd want to pay less.  I don't know how much less.  It's a day to day, or week to week decision. One thing that may help you decide:  If a new position looks so temping that you want to own it NOW, that could be a reason for exiting the current trade and opening the new [assuming you cannot hold both at the same time].



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Money Management

Here is a good, basic definition of the term ‘money management’ from Wikipedia:

Money management deals with the question of how much risk a decision maker should take in situations where uncertainty is present.

More precisely what percentage or what part of the decision maker's wealth should be put at risk in order to maximize the decision maker's potential.

Money management is a necessity for gamblers and traders. A good understanding of money management minimizes the Risk of Ruin, or the possibility of losing your entire trading account.

The two keys to successful money management are maximizing wins and minimizing losses.
Thus, the takeaway for us, as option traders is:

  • Trade size is a very important decision (how much to place at risk)
  • Minimizing losses is essential (do not stubbornly allow losses to grow)

  • Maximizing gains is a big part of the game (but do not ignore risk when seeking that maximum)

This last part – about maximizing gains for every winning trade – presents the trader with difficult decisions. To maximize profits, you must milk the trade for every last penny. But that's in direct contradiction with the concept of not owning positions when there is very little to gain and risk is large (very poor risk/reward ratio).

Assume a position with limited profit potential has worked well. Perhaps you sold a call or put spread and collected $1.50. When you earn $1.40 and can repurchase that spread by paying $0.10, you come face to face with good money management and careful risk management may appear to be in conflict.

When managing risk, both potential loss and the probability of incurring any loss must be taken into consideration.  When deciding whether to exit a wining trade with limited potential profit, can you afford to take the risk associated with going after the last $10? 
Obviously time to expiration and how far OTM the options are must be considered. However, I’m from the conservative school that believes it cannot be a sound policy to hold this position in an attempt to earn another $5 or $10 per spread.  The risk manager and money manager must come to an agreement.

The idea of trying to maximize profits may lead you to assume that it's always correct to seek that last nickel and allow all short options to expire worthless. That's not a valid assumption.

The term 'maximize profits' does not tell you to ignore risk. It refers to the concept of seeking additional profits from good positions – and that's a position is worth holding. Often risk is too large, reward is too small, and the best decision is to exit.

The definition of money management does leave room for debate on this point.
If you believe that being too cautious is unwise, and if your comfort zone allows trying to capture additional profits, I cannot argue. The borders of your individual comfort zone are yours to define. My task is to encourage you to define that zone and to recognize that it is not a lifetime commitment. Borders can and will shift over time.

I'll continue to pay a small price to exit the trade. Peace of mind has psychological value, and I'm willing to pay a small insurance premium to gain that tranquility.


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Expanding Your Comfort Zone


I'll have an exciting announcement:  Monday, Feb 1, 2010


From Dr. Brett Steenbarger @ TraderFeed:

Sometimes anxiety points to our growth.

all most comfortable with what lies within our comfort zones, of
course. Once we leave the comfort zone, we experience anxiety and

But we cannot grow if we forever stay in comfort. We need
a high enough coefficient of experience to ensure that we'll be
anxious…always stretching ourselves a bit farther than comes easily
or naturally.

So often traders look to me to reduce their anxiety.

But sometimes the best strategy is to follow your anxiety and take that ride beyond the comfort zone."


Dr. Brett's advice is sound, and it's directed to timid traders (timid and conservative are not synonymous). 

It does not apply to option traders who are holding risky positions.  The discomfort that results from too much risk is a warning to be heeded.  If your position has moved beyond the boundaries of your zone, please take prudent action and re-enter the zone.

If you are a timid trader who never wants to lose money – or at least lose as little as possible as seldom as possible – then this advice is not for you either.

But if you are timid due to a lack of confidence, pay attention.  No one is suggesting that you move from trading one-lots to trading 20, but you can move to 2-lots.

Please understand:  This assumes you have the education and experience to become a bit more aggressive.  It does not mean 'full steam ahead' when you are not confident that you understand what you are doing.

If you sell put spreads that are very FOTM (delta of short is 3-4) that's not only timid, it's a poor strategy when the premium is very small.  Consider taking baby steps (delta 6).  If you manage that position well, you will earn more money.  If that baby step makes you uncomfortable – then try a smaller baby step.

One more reminder: The good doctor's advice is for traders, not investors.  It's directly targeted to day traders.  But if you are interested in getting more involved with the markets (and its inherent risk), this advice is applicable to you.


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