Tag Archives | credit spread

Advice for the new options trader

I ‘borrowed’ (and modified) the following question from the EliteTrader Forum.

I have been studying, paper trading, and real trading – using mixed options strategies with mixed results. I mainly sold call & put spreads and did ok – until I got hammered on one trade. I’ve tried weekly & monthly expiration because I was attracted to these trades and their high probability of profit.

I have a $5k account and pay $1.50/contract flat rate commissions. At the moment, I am being lured into iron condors.

I am not dependent on my account but I want to grow it. I prefer strategies that require low monitoring/maintenance, but I am open to suggestions. What strategies should I try to incorporate and why?

Good news for this trader

This rookie trader is seeking advice, has experimented with several trade ideas, has a good attitude (does not expect instant riches), and incurred a loss from which he has learned a lesson. He appears to be patient and is seeking new ideas to consider.

This person has a nice edge: He has a flat rate commission per contract. That allows him to trade small size (yes, even one-lots) without having to be concerned that the ‘per ticket’ charge will consume too much of any profit. This was an intelligent item to negotiate and I strongly recommend this idea for all traders who trade small size. The savings can be significant – if you can get them.

The not so good part of the story

He is being ‘lured’ into a new strategy, but he should only adopt this play if he feels comfortable using it. In truth, it’s merely a combination of the strategies he has already been using – and in my opinion, anyone who understands the risks associated with selling vertical spreads is ready to consider trading iron condors.

The other problem is the size of the trading account. I understand that brokers allow customers to trade with even less capital, but it is a difficult task. It is simply too easy to lose the entire account when it is small.


As a young person with a job, he is in position to make a deposit into this account every time he receives a paycheck. That’s an outstanding method for increasing wealth over time. However, with this advantage comes the responsibility of carefully managing risk.

Learning to do this well takes time. The best recommendation I have is to be very careful with trade size because that is the simplest and most efficient method for managing risk for any trader. Smaller is better. Less risk and less profit potential is better – especially when the trader is first getting started. There is plenty of time to increase size as experience and confidence grow.

Patience is necessary because some strategies (such as selling credit spreads) may take some time to perform as hoped. [It’s true that selling a put spread can become very profitable quickly when the stock rises, but in a neutral market, iron condors require patience and good risk management.] Experience does not come quickly.

I also offer this advice for our rookie trader:

  • Rapid time decay may look great on paper, but (as you already learned) it comes with explosive negative gamma, making these trades riskier than they appear
  • Longer-term options come with higher premium and more protection against unwanted market moves. They also lose time value more slowly
    • Trading involves trade-offs. Less risk requires accepting a smaller profit target.
    • Your problem is to find the trade-off that feels ‘just’ right.’ Not a simple task – but it gets easier with experience
  • Choosing a good strategy is important. You want to feel that you understand how to use it effectively
  • However, risk management is more important and will have the greatest effect on your overall performance
  • Which strategies?

    The list is long. Options are very versatile and provide many alternatives. If you are comfortable with credit spreads, they make an excellent choice because losses are limited, margin requirement is small – allowing you to diversify, and they are easy to understand.

    Then there is something you may not yet recognize: Selling the put spread is equivalent to the very conservative collar strategy. More than that, selling put spreads is the same as buying call spreads (same stock, strike, and expiration date), and selling call spreads is the same as buying put spreads (same stock, strike, and expiration date).

    That means you are already using a much wider variety of strategies than you realize.

    I believe you are on the right track. Don’t get greedy. Increase position size one contract at a time, and don’t do that too frequently. Keep asking questions and don’t accept all replies as ‘correct.’ Use your own judgment.

    Excellent reviews for first live discussion session at Options for Rookies Premium. Become a Gold Member and get invited to future sessions
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    Profit and Loss Targets when Trading Options

    The beginning

    This detailed discussion began here, in the comments section.

    Roberto is asking about profit and stop loss targets for an iron condor and also for a ‘classic’ credit spread.

    Where we are now

    Thanks Mark.

    But I still don’t understand why you prefer to set a stop loss around $300 in a trade (10-point credit spread) where $800 can be the maximum loss.

    In a classical vertical spread, $200 credit and $800 risk, we agreed that the take profit should be around $150 but we disagree about the stop loss. Can you do a statistical example of why, over the long term, using a stop loss in $300 area, its better than a stop loss in $75 area?

    Thanks again



    Hi Roberto,

    I do not set a $300 stop loss for all trades that have a maximum loss of $800. That’s not how risk management works. There are many factors to consider.

    A huge part of the problem in understanding my original comments stems from the fact that you changed the conditions

    I was talking about an iron condor. You switched to discussing half of the iron condor position (credit spread), believing that the situations are similar. They are very different trades, with very different factors that go into choosing the profit and loss limits.

    Why is that difference so important? In your classic credit spread, one way to profit occurs when the stock moves much higher (Selling the put spread is a bullish position). When that happens, there is a very good possibility of being able to close the position and take your target profit. Thus, selling a credit spread gives you two ways to win: The passage of time and the correct market move. Those two profit possibilities play a large role in the probability of earning a profit

    With the iron condor, there are no profits when the stock moves higher. It just means that the call portion is in trouble rather than the put portion. There are no profits under those circumstances. There is no possibility of taking profits quickly. This position requires the passage of time before the trade can reach its profit target. It is important that you recognize that changes the probability of success by so much, that no matter how you set the risk/reward ratio for a credit spread, it must be set very differently for the iron condor. The iron condor is where this discussion began.

    I hope that’s clear to you. The credit spread wins far more often than the iron condor. If you ask: Why not trade the credit spread instead, the reply is that I don’t know whether to sell a call spread or a put spread.

    Time out for an important issue

    Experienced traders may recognize that there is another big factor that has been ignored: The effect of implied volatility. When trading an iron condor, a big volatility increase can result in being stopped out of the trade quickly. It is true that credit spreads are also short vega, but only half as much as an iron condor. When you establish a relatively small stop loss, you can get forced out of the trade, even when the underlying asset does not make a threatening move – just because IV rose by enough to make the position hit your stop loss target.

    That factor alone – the possibility of being forced to exit by a spike in implied volatility is the major reason why I would never use a small dollar value as a stop loss point. To me it is far too risky to stop yourself out of trades that quickly. I don’t believe you can stay in those trades long enough, often enough, to claim your profit. Thus, I choose a larger stop loss and know that my edge is that I’ll be stopped less frequently than you. Is that enough to make my method better? For me, yes. For you? I cannot know that answer.

    End of time out

    I make trade decisions by doing what I believe gives me the best chance to make money when combining my chosen strategy with my personal risk management decisions.

    You must understand that we do not disagree on anything. I believe that a stop loss at $300 is better for me than a stop loss near $75. You believe that a $75 stop loss will be effective for you. We must each trade according to our comfort zones. Neither one of us is wrong. I allow for a larger loss to reduce the possibility that a change in IV will force an early exit.

    I can understand why you may believe that one of us must be correct and the other person must be making a mistake. However, neither one of us is wrong. Here’s my best explanation of why believe that no one is wrong here.”

    • If you own the position and the loss reaches $100, or $150, you may become very uncomfortable holding onto the position. You may become upset and feel ill. You may lose sleep. A trader cannot allow that to happen. Even if we are investors and not traders, it’s the same situation. It is wrong to hold positions that make us nervous because it means that too much money is at risk. It is also very unhealthy. Losing money is part of the trading game, and if it’s going to upset you – then you are correct to cut losses before you reach that point.
    • It is far better if we can do a statistical evaluation of the trading plan. However, that’s impossible
      • We have no volatility estimate for the stock in question. I assume that you recognize that a very volatile stock will lose that $75 far more often than a non-volatile stock. And it will take a longer time for the profit level to reach $150 because options of volatile stocks hold their premium longer than options of non-volatile stocks. If you get stopped often and if it more time to make the profit, how can that be a profitable plan?
      • When dealing with statistics, time remaining is a crucial factor – and the time remaining before expiration arrives is unknown in our example trade
    • The single fact that we collected $200 credit trading that ‘classic’ credit spread is not enough information to solve this problem.


    Lacking enough information to solve the problem, and ignoring trading costs, we know this much:

    • The $75 stop loss and the $150 profit target
      • You can afford to lose twice as often as you win to break even
      • Thus, the probability of the spread reaching the stop loss point must be less than two in three (win once, lose twice, zero gain)
    • The $300 stop loss and the $150 profit target
      • I must win twice as often as I lose to break even
      • Thus, the probability of the spread reaching the stop loss point must be no more than one in three (win twice, lose once, zero gain)
    • You choose $150 as the profit target and $75 as the stop loss because those numbers have proven to be effective, and you have the profits to prove it. The other choice is that you have no such evidence but believe these numbers will be effective. However, using that 2:1 ratio as a strict guideline is a huge mistake. I guarantee that. If you use a ratio, it must change when trading more volatile stocks. It must change when the strategy changes. It may have been useful when trading stocks, but it’s worthless (in my opinion) when trading options

    Setting stop losses is necessary. Choosing the price at which to set them is a crucial decision, and no simple formula is going to be satisfactory.

    The end

    When trading an iron condor, I often give up on the trade when one of the 10-point spreads reaches a price between $500 and $550. Thus, my stop loss is not based on the number of dollars lost. Is that heresy? If I collect $300 for the position, then my stop loss is about $250 (plus the cost to cover the profitable side of the trade). If I collect only $250 in premium, then my stop loss is about $300 (plus the cost to cover the winning side).

    I exit the trade when I believe risk has reached the point at which I am not willing to lose any more on that trade. It has nothing to do with my profit target. That is the reason I do not use a risk/reward ratio, and I hope this explanation makes sense. You don’t have to agree with my conclusions, but you should understand the reasoning behind them.

    I never said that it is ‘better’ to set the stop loss at $300. I said that is where I am comfortable setting it.

    We each have different comfort levels and must trade accordingly. When I trade an iron condor (or credit spread) I am not willing to set exit points as low as you set them. That does not make either of us ‘wrong.’

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    Finding the ideal trade strategy

    Announcing (new date): We are launching a membership site on April 1, 2011. Some information describing the new site is available.


    A follow-up question.

    I guess the reason I was looking at this comparison (buying collars, buying call spreads and selling put spreads) this morning, is because I was looking at various limited risk bullish positions.

    I concede that the following thoughts may not be well directed, nonetheless …

    I noticed that in a typical bullish spread, the position has a break-even point that is roughly equivalent to the position’s extrinsic cost above the base strike. For example, to buy a 35/36 call spread (as of last Wed), with DBA at 34.90 would give a break-even around $35.50, which is about the same as the extrinsic cost of the position. So, to profit, the underlying has to move by more than .60 by expiration.

    I also note that when one buys stock, there is no extrinsic cost and the break-even is the same as the price paid for stock. For example, if it goes up a penny by expiration, the buyer profits a penny.

    Basically, the question I want to ask you is: Are there any option positions that can act like something in between these 2 examples?

    For psychological comfort reason, I’m interested in a break-even trade – like buying stock – and limiting maximum loss to that of buying an OTM call spread. I’d trade-off something else in exchange for that.

    One idea to accomplish this is with a collar. Instead of buying 100 shares only use 90,80,70,60,or 50 shares. I’d lose delta and compromise the upside protection, but I would meet my objectives. Plus, I could buy cheap FOTM put options as black swan insurance. Maybe this approach just makes sense for low $ stocks.

    Crazy? Is there a better way to achieve objectives? Are objectives misguided?



    Hello Dave,

    The simple answer is no, there is no such animal. The reason is that you want the very low cost of an OTM option spread, but you want to buy it by paying no premium. That’s why the collar looks so attractive. You can buy puts and sell calls for little, if any cash out of pocket.

    People choose to buy call options as a replacement for owning stock for two basic reasons. The first is leverage, allowing a small amount of money to be used to control stock and benefit if and when the stock moves in the right direction – before the option expires. The other, and more important reason in my mind, is to gain the benefits of reduced risk (after all, the stock may undergo a steep decline – even when you are bullish). The trader must pay for that protection (it’s the same as buying a put: long call is equivalent to long stock plus long put). You want it for no cost.

    However, if you are willing to come along as we think outside the box, I believe I have a workable idea.

    Thinking differently

    It’s good that you are willing to trade something in return for what you seek. You want so much, that the only thing you have left to ‘trade’ is the sum you can earn.

    To begin, consider selling an OTM put spread. We both recognize that it is the equivalent of a collar, but this time you are using lower strike prices than that of the ‘traditional’ collar (often both the put and call are OTM).

    First, this trade can provide a profit, even if the stock declines (at expiration) down to the first OTM put strike price. So you are already better off than your first requirement that a profit be available if the stock moves higher.

    Second, this trade limits losses. The problem is that the potential loss is greater than you could lose by buying an OTM call spread. However, here’s that trade-off you were willing to make:

    • Instead of selling (for example, 10-lots and collecting $1 for a 5-point spread)
    • Sell only 3 or 4
    • The maximum gain is reduced from $1,000 to $300 or $400
    • The probability of earning a profit is much higher than when buying stock
      • The stock does not have to move higher to earn money.
    • Loss is limited to $1,200 or $1,600
      • You control that maximum loss by the limiting size of the trade
      • You control that maximum loss by exercising sound risk management
      • Just as you would (I hope) sell the stock to limit losses at some point, so too do you limit losses by adjusting or closing the position, when necessary

    You make that trade-off, which is reduced profits. Your losses are limited. You may earn money when the stock declines. What’s not to like for the bullish trader who is willing to accept limited profits in exchange for the specified benefits?

    If you prefer, you can be more bullishly aggressive and sell a put spread that is ATM or even a point or two ITM. That reduces the chances of winning, but the maximum loss per spread is reduced and you can sell more than 3 or 4 of them.

    No your objectives are not misguided – they suit the specific investor. However, not all objectives can be sought because it is not always possible to find a strategy that meets all of your requirements.


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    Premium Selling in Low IV Environments

    I've received a few questions about selling option premium when IV is low.  This is one example:


    For approximately 1 month stocks have gone up without the volatility that we had become accustomed to in the fall.  At the same time the vix has gone down to approximately 16.

    It pays to look at the multi-year picture to get a better feel for what can happen to implied volatility.  We are indeed below long-term averages at this level, but as recently as Jan 2007, VIX was 10.  The point is that we may look back at these IV levels and think of them as being relatively high. I have no idea which way IV will be trending in the coming months.

    I usually sell option premium and with such low implied volatility on individual stocks, it has become very difficult to sell premium without being exposed to higher touching or expiring risk to get the same premium.

    Those last four words describe the problem.  Whether you are trading credit spreads, iron condors, or even selling naked options, the decision on which options to trade MUST be based on something other than option premium.  Premium is one of the important consideations, but allowing that to be the one and only factor is a big mistake, in my opinion.

    I urge you to think seriously about collecting the same premium when that involves taking greater risk.

    When IV is low, it's low.  You must accept that fact and adapt your trading habits.  If you want approximately the same level of risk as your previous trading, then there is no alternative: you must accept a reduced premium.

    Taking on more risk is always wrong – unless the extra reward more than compensates.  If you must take more risk, trade smaller size.  You are dealing with statistics. Unlikely events will occur at random times.  If you do not trade as if that fact were the gospel, then you must get rich quickly (and then retire from trading) because you have almost no chance of surviving over the longer term.

    Positions that originate when already outside your comfort zone have too much probability of not working.  You may not like my answers, but I implore you: 'Please' do not take more risk just because the markets have not been volatile. 

    This is a different market, and perhaps a different strategy should be used during these times.  Positive gamma can be added to your premium selling portfolio, but that would cost some cash, and your note tells me that spending money for any options is not something you are anxious to do.

    In your webinar (at Trade King, on debit spreads) you discussed how the debit spread was very similar to the credit spread with a small advantage to the credit spread as you can do whatever you want with the cash.

    In times of low volatility such as this holiday season how does it impact the strategies?  Selling credit spreads with such low volatility is very likely to result in problems with vega increasing faster than theta decay making it an unattractive strategy.  

    More than similar, it's equivalent when the trades are initiated at equivalent prices, using the same strike prices and expiration dates.

    You have drawn incorrect conclusions: It's not 'low volatility' that is 'very' likely to result in problems.  It's your personal need to collect the same premium.  You are increasing substantially the probability that those 'problems' will arise.  It is not mandatory to do that.

    Remember that premiums are smaller for a good reason.  The market has not been volatile and thus, the expectation is that low volatility will continue. In fact, the market has been less volatile than predicted by VIX, and that's one reason VIX is still trending lower. 

    You could be happy with a non-volatile market.  You could look at it as a less-risky situation.  Yes, it offers less profit potential per spread, but it also increases the probability of earning a profit.  What's so wrong with that?  You may prefer the higher risk/higher reward scenario, but that is not what this market is offering.  You have chosen the higher risk/SAME reward strategy.  Surely you must understand that this may work for you, but it is not wise and it fights those statistics mentioned earlier.

    One reasonable solution is to alter your methods.  My solution to these 'IV is too low' situations may not suit you, but I try to own positions with less negative vega.  Thus, if I trade iron condors (I do), then I may add some OTM call and put spreads – just to add positive vega and gamma.  That reduces risk. But be sure to add positions that reduce risk, and do not add to it.

    Or I may add diagonal or double diagonal spreads to an iron condor portfolio, making it more vega neutral.  You may decide to go long vega – if you expect that IV will increase quickly.  There are alternatives to your chosen methods.

    More often I do not sell credit spreads but sell uncovered options further out of the money and this too is very unattractive with low volatility.

    This is a strategy with higher risk.  I have nothing extra to say about this except that moving strikes nearer to the stock price is not the way to go. 

    Another possibility for careful traders is to sit on the sidelines until finding something comfortable to trade.  You are not forced to trade right now.  As a compromise, trade one half as many contracts as you do now.

    We must be prepared to modify our strategies when market conditions make those strategies less comfortable to use.  Flexibility – not increased risk – is the way to prosper.

    Please explain your spread strategy preferences pro and con for very low volatility. 

    This is more of a 'lesson' than a quesion, and I respond to questions such as this in the comments area (nor via e-mail.

    Answer: I trade iron condors in smaller size – i.e., I trade fewer spreads and just accept that I'll try to make less money.  If you are successful, if you are making money, then it has to be okay to earn less when you feel risk is too high.   I also consider owning a portfolio that is far less vega negative.  I also consider buying insurance (naked strangle)

    And please explain your spread strategy preferences pro and con for very high volatility.

    Again, this reply required a book chapter, and I cannot go into detail here.

    Answer: As an iron condor trader, or credit spread seller, I go farther OTM when IV is high.  I do not go after the higher premium.  I anticipate more volatility and move farther OTM to accept the same, or even less credit.  I like being farther OTM and will take 10% less premium to move another strike OTM.  I trade negative vega strategies and  recognize that some months afford larger profit opportunities than others.

    For spreads one is always buying and selling volatility.  For deep in the money there is little impact for volatility as there is no time premium, but in most other circumstances one option is being sold and one is being bought and it seems to me that a change in volatility will have in general a similar impact on spreads of nearby strikes.

    Similar, yes.  Nearby strikes and DITM strikes, yes.  But when selling OTM spreads, there is enough difference that the spread widens as IV increases.  This is more obvious with put spreads, where the skew curve plays a larger role.

    There is no best answer to this situation and there is no set of rules to follow.  There is only good judgment and risk management. 

    There is a lot of hit and miss when trading – it is not an exact science.  I suggest avoiding extra risk, even when that means trading less size.  I advise accepting smaller premiums, and maybe taking a trading break.  However, there are appropriate alternative strategies when you believe IV is moving higher. When it is low and you don't know where it is headed, it seems to me that vega neutral trading is the safest path. I know safety is not your current concern.  It's not too late to reconsider.


    If you are interested in writing an article for ExpiringMonthly:The Option Traders Journal, send an e-mail to me at: mark (at) expiringmonthly (dot) com with a proposal for an article.  This is not a contest and there is no guarantee any ideas will be accepted.  Nor is here a limit on how many may be accepted.  Any topic relating to options meets the initial conditions for acceptance. More detials available.  Just ask.

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    Adjusting an adjustment

    September and October are behind us.  There was no market collapse and those who paid high prices for VIX futures contracts (or options) lost money on their expectation of a substantial increase in market volatility.

    The holiday season lies ahead, and that is often a period of reduced market action and volatility.  Has complacency arrived?  Is now the time for unexpected market moves?  Who knows?  What I do know is that paying careful attention to position risk continues to be the name of the game.  Keep alert. Avoid the large losses and survive.  That's goal #1.  Find appropriate strategies and prosper – that's goal #2.


    Adjusting an adjustment

    Let’s say you sold some call credit spreads (either as a standalone trade or as half of an iron condor) before a market rally and that your position became delta short as the market moved higher.  Let’s also assume that you bought 5 Nov 350/360 INDX (a fictional broad-based index with Europeans style options) call spreads to offset a portion of your upside liability.  The original position is probably 25 to 50-lots if this 5-lot is to be consiered as an early (Stage I) adjustment.

    Unfortunately (for you), the market continued to rally and you make another adjustment (or two).  The position is still viable, but if INDX moves another 3% higher, your plan is to exit the trade and re-invest your money in a better position.

    However, right now that 350/360 spread you bought has done well, and can be sold @ $8. It seems obvious to adopt this thought process: My complete position has upside risk and I need all the protection I can get.

    To a point that's true.  However, the cost of that protection must be considered.  From my perspective, paying $8 for a spread that may, if the market doesn't tumble, be worth $10 when expiration arrives is a poor choice for gaining some upside protection.  You, the trader, want to own protection that can earn more than 25% of its cost and which has some positive gamma.  There is nothing to be gained by buying more of these $8 spreads.

    However, my suggestion is consider selling this call spread.  First, it affords little protection.  Second, if you sell that 5-lot and collect $4,000, you can accomplish two good things for your portfolio:

    • Take out some cash
    • Reinvest a portion of the proceeds from the sale and buy different protection


    The idea of selling a call spread when you are already short delta seems to be a big gamble.  However, I encourage you to look at it this way:  These five call spreads offer a maximum gain of $1,000 and that's not nearly enough to make much difference in the future value of your portfolio.

    Note:  If your original trade is 25 to 50-lots, as suggested above, then you can afford to forgo that last $1,000 from the adjustment.  But more than that, you may be able to get better protection.


    Original trade: Sell 40 INDX Dec 380/390 spreads when INDX was 320.

    Adjustment One: Buy 5 INDX Dec 350/360 spreads when INDX was 340

    Adjustment Two: You bought 5 Dec 370/380 spreads when INDX was  360

    At this point, the 350/360 spread serves little purpose.  Think about 'adjusting the adjustment' by exiting the 350/360 spread, collecting between $8 and $8.50 per spread.  Make another adjustment to the main position – if you find something suitable to do.  If you find nothing attractive, hold and decide when to exit.  This position can become very costly if you don't exit in time.  However,  the original 5-lot adjustment no longer affords any reasonable upside protection, making it a good idea to sell and look for something better.


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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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    Writers & Readers have Responsibilities

    One of the frustrating aspects of teaching via the written word is the difficulty in holding a meaningful real-time conversation with readers.  I receive email with well-reasoned questions, however, sometimes an email message demonstrates a complete distortion of my words. 

    I want to know how certain conclusions were reached, but additional correspondence seldom clarifies the issue.

    From a recent email: "when I really understood the PUT CREDIT SPREAD, I had difficulty sleeping at night."  That spells trouble.

    He concluded the following from my words:

    • "It seems too good to be true" 

    • "Earning 4 to 5% a month is almost certain"

    • "It's 'safe' to say that AAPL (last: $241) will not reach $200 in one month"

    • "If I play the APPL 190/200 or 200/210 range for next
      month expiry, it seems quite safe"

    I don't understand the source of any of those conclusions.  I always mention that these trades are not safe.  They may be safer than selling naked puts, but that hardly translates into 'safe.'

    I looked at the option prices for Sep expiration, currently three weeks away (when the email arrived).  APPL Sep 190/200 put spread can be sold @ ~$0.15 and has  a 95% chance of expiring worthless.  This is safe to sell?  Not in my world?

    How does he expect to earn 4-5% from this trade?  No mention of that.

    Next, I looked at the October 190/200 put spread.  This spread is in the correct price range and a seller should be able to collect $55.  If it expires worthless, the gain will be ~5.5%.  This is a two-month play, and does not meet the 4-5% 'safe' return.

    This trade has a 92% probability of expiring worthless. Remember: that ignores  the trader exiting early due to risk.  That is not 'safe.'  Make this trade 6 times in one year, and the chances of winning all 6 times is: 60% – for a gain of $55*6, or $330.  That means the  trader will lose money at least once (and possibly twice) in four years out of 10. And those losses could be as much as $945 each.

    That is not safe. It's not even profitable.

    If this is the trade he wants to make in an attempt to earn 5+% from now through October, that's his business.  What he does not understand is the potential loss, coupled with the likelihood of taking that loss, makes this a poor trade. 

    For the record: I never suggest selling credit spreads for small premiums and always tell readers that front-month trades are too risky for me. Thus, he did not get any of his conclusions from me.

    I've come to like this man, and truly want to help him get over his blind spot, but I cannot successfully communicate with him. It's my responsibility to present information in an easy to understand manner (and other readers tell me that I do that very well), but it is his responsibility to read carefully and not jump to conclusions. 

    Each person has his own adjustment point (but it's never in a panic for the trader who has emotions under control), but beginners panic too quickly and overconfident experienced traders often adjust too late.  Risk management and trading skills must be learned.  They are not inborn.

    ADDENDUM:  I heard from him again, and he tells me he is thinking of taking out a home equity loan to make this play in large size, and that he plans to use his IRA to do the same.  I must conclude that this is someone pulling my leg.

    He states that these spreads have "zero possibility of losing."  In other words, 'free money.'  And why do they have zero chance to lose money? Because one broker (using bad data) told him that the puts he plans to sell have zero delta.  

    I feel so sorry for my correspondent and have no idea how to help. 


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    Option Spread Terminology: Confusion. Bull Call Spread vs Bull Put Spread

    To my readers:  This is one of those lengthy, extra-detailed posts designed to proved a good answer to Carl's question.  I know the information is top-notch.  What I don't know is whether it's just too much.  I'd appreciate a bit of input:

    Hi, Mark!

    I’ve several questions about bull and bear vertical spreads

    1) First off, the confusion factor arises from the fact that any vertical,
    bull or bear, can be placed using all Calls or all Puts.

    2) What is the best way to place a bullish vertical BELOW THE CURRENT PRICE
    (using Puts or Calls)? Please develop this out with a couple of
    scenarios with the pluses and minuses for each.

    3) Which bullish vertical will be most likely to be assigned? Why?

    4) Which bullish vertical has the most inherent adjustment capabilities?

    5) Now, consider the case of a bearish vertical that is placed ABOVE THE

    This, I’m certain, is trivial for you, but my lack of knowledge is
    costing me money.
    Many thanks for your thoughts on this. 



    Hello Carl,

    The fact that this is costing money makes this question a priority for me.  I've incorporated enough materiel here to try to answer in detail.  I truly hope this helps you. By the way, this will be trivial to you also – after you understand it.  Don't be concerned about asking.  This is a very good and practical series of questions.

    This is not complicated – but it can be confusing.  The confusion is through no fault of your own and I anticipate that I can eliminate your problem.  If there are further questions, or if something is not clear, please submit another comment.

    1) Confusion indeed.  That's because most of the options world makes this far more complicated than necessary. There is no need to use all those adjectives to describe a simple position. If you think about these spreads as I suggest below, the confusion disappears.

    Spread terminology

    a) There are ONLY two types of simple vertical spreads:  Call spreads and  Put spreads

    b) There are only two actions: Buy and sell

    c) By definition

    When you BUY a spread, you buy the option with the higher market price. 

    When you sell a spread, you sell the option with the higher market price. 

    [To clarify, if necessary: The 'price' above refers to the option premium, not to the strike price]

    d) When you BUY a CALL spread it is Bullish (Thus, there is never a reason to refer to a bull call spread)

    e) When you SELL a CALL spread, it is BEARISH (Thus, there's no reason to refer to a bear call spread)

    f) When you BUY a PUT spread, it is BEARISH

    g) When you SELL a PUT spread it is BULLISH

    NOTE: Each of these examples is the same as buying or selling a call or put.  If buying a call is bullish, then buying a call spread is bullish.  Pretty simple, isn't it? 

    Why anyone has to add an adjective such as bull or bear to a spread is beyond me.  And then they go further, by telling traders that you can buy or sell a bull put spread.  Then they teach that you can buy or sell a bear put spread.  Far, far too absurd for discussion. Too many words just add to the confusion.

    h) If you choose to trade a put spread, then buying is bearish; selling is bullish.  That's exactly the same as when you buy or sell a put.

    i) If you choose to trade a call spread, then
    buying is bullish; selling is bearish.  That's exactly the same as when
    you buy or sell a call.It just doesn't get an simpler than that.

    Examples below


    1) Remember this:  Carl – the fact that you already
    understand that you can place a bullish trade with either calls or puts
    is significant.  Many traders go for years without ever grasping that
    simple concept.

    To take it one step further, when the strike prices and expiry are the same, buying the call spread and selling the put spread are equivalent.  [In your, hopefully former, terminology, when you buy a bull call spread or use a bull put spread, you are making equivalent trades] That means that the expected profit and loss is essentially identical.

    That also means it makes no difference which you trade.  This is important.  It makes no difference to the profit and loss. You can trade whichever is more convenient (more on this below).  There is no need to play out several scenarios.

    Example: RGTO trades at 63

    a) You can buy a call spread (buying the more expensive 55s)
    Buy  RGTO Aug 55 calls
    Sell  RGTO Aug 60 calls

    You pay a debit of $X

    b) You can sell the put spread (selling the more expensive 60s)

    Buy  RGTO Aug 55 puts
    Sell  RGTO Aug 60 puts

    You collect a cash credit of $Y

    When the markets are efficient, as they almost always are, X + Y = $5 (the difference between the strike prices x 100)

    In other words, if you can buy the call spread by paying $3.80, you will be able to collect $1.20 for the put spread.  Either trade offers the same risk and reward.  Maximum gain: $1.20.  Max loss $3.80

    If you grasp this truth, you are home.  If not, I discuss this concept of equivalent positions in greater detail in The Rookie's Guide to Options or in this blog post.

    2) I prefer to trade options that are out of the money.  I recommend you do the same.  And there are two practical reasons (after all, the goal here is to save money -right?)

    a) In general it is easier to trade less expensive options.  In the money (ITM) options  carry a much higher price tag (premium) than out of the money (OTM) options.  Why easier?  Because the market makers usually make tighter markets for OTM options.  That makes those options easier to trade.

    Speaking of saving money, you do enter your orders as spreads don't you?  Here are two absolute rules that you must (for your benefit) obey:

    i) Never enter a market order when trading options.  Use limit orders

    ii) Always trade these call and/or put spreads using a spread (or combo) order.  DO NOT trade these spreads as two individual trades.  If you don't know how to trade spread orders, get on the phone with your broker's customer service people and get them to show you how to trade spread orders.  Be certain you understand the difference between buy and sell.  This is not an insult to you: some software can get confusing or your broker may use a strange terminology.

    Thus, BELOW THE CURRENT STOCK PRICE, I SUGGEST SELLING THE PUT SPREAD because the calls are in the money and the puts are out of the money, and my advice is to trade OTM options.

    Thus, the better bullish position, using options that are below the stock price, I would sell the 55/60 put spread.

    3) Question 3 distresses me.  Which is more likely to be assigned? 

    I trust that you understand: the only options that are assigned are IN THE MONEY OPTIONS, not out of the money options.  If you do not grasp this concept, it is too soon for you to be trading options.  To have any chance to succeed, you simply must understand how options work.

    If you understand this, then your question is answered: Avoid selling options that are ITM and you face zero risk of being assigned.  Obviously OTM options can become ITM options when the stock price changes.  In that case, you once again face the possibility of being assigned.  But this risk is truly not a problem.  In fact, it is usually a benefit. 

    Bottom line: by trading OTM  options, the chances of being assigned an exercise notice are far less than when trading ITM options.

    I want to clarify:  You asked which vertical is more likely to be assigned.  You are never assigned on a 'whole' spread.  You can only be assigned on a single option – and it does not matter whether it is part of a spread.  Thus, I assume you mean: in which situation are you more likely to be assigned.  The answer is any time you are short ITM options you stand a chance of being assigned.

    Thus, if trading the 55/60 call spread (stock is 63) it is possible to get assigned on the call with the 60 strike price.  However, the chances of getting assigned before expiration are very small.  And if it did happen it would be a gift to you.  Take my word for it, it would be a good thing (assuming there is no dividend involved).

    Why does being assigned frighten you?  Can you let me know?  It is nothing to fear.  Of course if your reason is that it generates extra commissions and fees, then I understand.  That is something to avoid.


    4) "Inherent adjustment capabilities."  As mentioned above – and perhaps you did not know this previously – the positions are  equivalent.  You can easily adjust either position in exactly the same way.  Neither has any advantage

    I still prefer trading the less expensive, out of the money options, and suggest you do the same. 

    5)  If you want to place a bearish trade
    using options that are above the current stock price, then you can buy
    the 65/70 put spread or sell the 65/70 call spread.  Reminder:  These
    are equivalent positions.

    I strongly suggest that you trade the
    calls because they are OTM options.  Using ITM put spreads is a very
    (and I mean very) bad idea.  Whereas it is unlikely that you would be
    assigned an exercise notice ITM calls prior to expiration, that is
    not true for puts. 

    If a put is sufficiently ITM, and if
    the put owner feels there is little chance that the put will move
    OTM prior to expiration, it makes sense to exercise that put.  Let's
    omit the rationale (for now) due to space considerations.

    What you need to know is that selling ITM [AMENDED] puts is a poor choice.  Don't do it and I'll wager that your results
    will improve right off the bat.  Those pesky assignments on put options
    will cease. [To re-iterate, being assigned on calls is often beneficial]

    Carl, I hope all of this is clear.  Please let me know if it is not.  And if you need more help – tell me why this is costing you money.



    "I want to thank you so very much for writing your wonderful introduction to
    options. It's by far the best source of *useful* information that I have read. It explicitly addresses so many
    questions that other, more technical works take for granted."  KS

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