Tag Archives | iron condors

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


The second issue of Expiring Monthly is coming soon: Monday Apr 19, 2010


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Position Size: When Is it Safe to Increase?


bring up an interesting point about increasing position size. You
mention increasing to two kites with a max of 20-lot of iron condors. But assume
that you don't use kites to protect against excessive moves, and
prefer covering part of the position to reduce risk.

By how much of an
increment would you recommend increasing your position size if you're
used to trading 10 lots? And once you've become comfortable with the new
size, how frequently would you consider increasing size again and by
how much? This assumes limited capital constraints — within reason of




Owning insurance allows a minor size adjustment.  But it's minor.  Insurance does not guarantee that you will not incur losses.  If you trade without insurance – as most do – size increase can only occur when it is justified.

My basic philosophy of trading is involved with this answer.  There's more of that philosophy in Lessons of a Lifetime.  I caution you to find a trading philosophy that suits you, and not blindly follow my suggestions.  The reply below is based on my comfort zone and experience.

1) Do not increase position size until you believe you understand how to manage risk for the strategy (or strategies) being traded.

2) Be certain that you get the nuances of the strategy and that you are comfortable with your positions and confident that you can earn money using these methods.

3) As a side issue:  Most people who trade have no idea that the average result for people who try to become short-term traders is to lose money.  That's the average result.  Most never become profitable.

I don't know how true that statistic is for us.  As option spreaders, we hold positions longer than the short-term trader.  Our success does not come from reading short-term trends.  It comes from managing risk efficiently and adopting methods that are appropriate for our psychological needs.   I suspect than earning any reasonable profit represents an above average result.

4) Before you even think about increasing size, you must be profitable.  Comfortably profitable.  Only you can determine what that means, but it does not mean earning $50 per month, after expenses. You must be able to see your account value increasing.  If you are withdrawing money for living expenses, then it's especially important not to increase size and jeopardize a significant portion of your account.

Although it may not be easy to determine, I'd want to know that profit did not result only from good luck, but instead was based on action taken or decisions made.

5) You must have faced several risk management decisions and handled them effectively.  If it all went smoothly and you had no pressure and no tough decisions, you have no method for measuring your skills.  I know that a string of profits is encouraging, but it is not enough to begin trading larger size.

What's a good decision?  It's not that the 'adjustment' made lots of money. It is knowing that the decision accomplished your risk management objectives:  it reduced risk, it resulted in your owning a position that met your needs and fit within your comfort zone.  It means you did not take defensive action just to do something.  It means that you wanted to own the newly adjusted positions and did not own it because it was 'the best' you could do. Furthermore, it means that additional handling of the position was done carefully and intelligently.

6) If you pass those tests, next comes your comfort zone.  Try a 20% increase and trade 12 iron condors, and remain at that level for several months.  When you believe you are ready to move to larger size again, repeat the entire process. 

Carefully examine what has been happening.  Do not rely on 'profits' as the sole factor that determines how well you are progressing.  Examine the same questions you tackled earlier.  If you do not find proof that you are handling the positions skillfully, do not increase size.

Yes, that advice is easy to ignore when you are making money.  But if you cannot prove to yourself that you have been skillful, rather than lucky, trading larger size will make things more difficult.

7)  Here's the problem:  If the market is kind to iron condor traders – as it is part of the time – you can get lulled into a false sense of confidence and when it hits the fan, you may have too much size to handle comfortably.   It's really easy to lose a year's worth of gains in a hurry – especially when trading too much size.

8) Don't ignore the size of your account.  I note that your question does take this into consideration.  But overconfidence can bring big trouble.

If your account value is not growing steadily, then it's too soon to increase size. No matter how much you decide to risk on a specific trade, it must never be large enough to jeopardize your being able to stay in business – if something terrible happens.  And it will happen – if you trade long enough.  You can own insurance to offset the major part of the problem, but that's not a cheap fix.



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CTM Iron Condors

I've been mulling over your earlier comment on this thread. Ordered your "Lessons" booklet (very interesting) and as I started skimming through I read some deja vu. Did great for a while, lost a bundle in an instance, got it back and felt overconfident, got side swiped again.

You said earlier that low delta trades will be a losing battle over time but do advocate iron condors and credit plays in your writings. So have you found higher credit, lower probability trades come out ahead with proper risk management? Is that what you were suggesting?



The bottom line answer is 'yes.'

But I must confess that I do not have a specific recommended type of iron condor to trade.

Some experienced traders convinced me that buying (I know, many prefer the term 'sell') fewer CTM (close to the money) spreads is mathematically superior to trading other types of iron condors.  I no longer remember the 'proof' but
never tried to trade those 10-point iron condors while collecting a premium of $6 or $7.

Those CTM positions don't leave me in a comfortable place.  I know I would often feel the desire to adjust.  That's self defeating when collecting such a high premium. The idea of buying an iron condor at a 'high' price is to have a comfortable risk/reward ratio, guaranteeing that the maximum loss is low enough to be acceptable.  In other words, there's no need to adjust frequently because both the size of the trade and the max loss per spread are already within your comfort zone.  Adjustments may be needed, but there is less urgency.

However, an investor is not forced to choose between far out of the money (FOTM), low delta, high probability trades and CTM trades.   There's a ton of space between those choices.

FOTM iron condors – perhaps $0.50 or less per 10-point iron condor -  appeals to many.  Just not me.  When collecting so little premium, I don't believe most traders would be willing to pay whatever is necessary (perhaps $2 or $3) to exit the trade.  If that belief is true, then these iron condors become gambles – with no exit other than expiration.

When the position becomes a 'let's hold to the end and see what happens' trade, then it's a pure gamble.  That's fine for some, not for me.  I don't like the odds.

I choose my iron condors between those extreme choices.



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Scaling into Iron Condors


Someone wants to have a portfolio with more than one IC position.
Once he established his first trade (eg 5 SPY April 118/120 CALL,
112/110 PUT, with SPY @115), he wants to add a second position and then a

What is the thinking process and which data does the trader
consider to decide

a) whether it is wise, at this moment, to add this second position,
and if yes,

b) which strike prices he should consider

Let's assume that he established his first trade 80 days before
expiration and he wants to add another one 60-70 days before expiration
and a last one 40-50 days before expiration. Let's also assume that he
wants to receive a premium of at least $100 for each IC (similar to the
one mentioned above).

I guess that he has to study the Greeks for his first position, the
current volatility and how SPY has moved since the first trade was
established but I am not sure I understand the details.

Many thanks


Hello Dimitris,

1) It is wise to add the 2nd and 3rd position if they have been planned in advance.  That requires you to size the first trade appropriately, knowing that more trades will be added prior to expiration.

Clarification:  If you want to trade 15-lots of this iron condor, I'm assuming each trade is for 5 spreads, per your example. 

2) Choose strike prices independently.  Find the iron condor that you believe is best – just as was done with the initial trade.

There are three points worth mentioning:

a) If the first position is already out of balance – according his his comfort zone – make an adjustment before initiating the second trade.  As an alternative, modify the second trade to take the imbalance into consideration.  

One way to do that is to sell 5 put spreads and only 3 or 4 call spreads. Or perhaps take less money and sell the call spreads farther OTM.

b) It is easier to follow your trades when you hold 'whole' iron condors.  The experience trades does not care if the second trade partially closes the first (sell out long options or buy back shorts), but the rookie may care.  If a position is easier to follow, then it's a good idea to make a minor sacrifice to hold that position.  

If your preferred spread turned out to include the 120/122 call spread, I suggest doing the 121/123 instead – just to avoid selling the 120s.  this is not necessary.  It's only when you feel the need to maintain the initial position intact.

c) This is very important.  I don't know how you can plan on how much cash to collect before you see how the spreads are priced.  If you force a $100 cash premium, the options may be too CTM for your comfort zone.

It's true that sometimes iron condors fetch high prices and at other times the premium is low.  Planning on $100 is not not a viable strategy.  When the time comes to make the trade, is the right time to decide if the conditions are good enough to make a new trade, or if it's better to pass.  Forcing trades represents a (financial) death wish. 


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Risk Management: Are Rules of Thumb Applicable?

Don asked:

I recently ran into trouble with some high probability iron condors on
RUT. I know this has been a difficult month but would like to know
“rules of thumb” to apply to these type of trades.



I don't believe there is a generic set of rules or generalizations that works for everyone. 

I know this rule of thumb is important:

Don't allow the position to move outside your comfort zone.

However, that's not a useful rule. To begin, there's no way for anyone to understand where your comfort zone lies.  It's even difficult for you to know. You'll know when the position upsets you or makes you nervous – but by that time you are already beyond your boundaries.  Thus, you must have a way to 'do something' before that happens.  Not so easy when you cannot recognize when the zone boundaries are about to be breached.

One way to make that 'stay withing the zone' rule easier to achieve is to adjust trades early, rather than late.  What will that do for you?  It makes the position less risky, making it less likely the position will reach the point of making you uncomfortable.  The problem with that idea is that many adjustments result in a loss – possible through a poor choice of which adjustment to make – but why spend money on insurance – unless that's your preferred approach?

But, there are side effects.  It makes you adjust more frequently.  Is that a good thing for your situation?  How can anyone know?  Why should you take a more conservative view just because it's not easy to determine when it's the proper time to make that adjustment?  

The point is that there is no suitable rule of thumb.  By definition, that's supposed to be a general rule, or one that applies to almost everyone.

How about this as a rule of thumb?

High probability iron condors are not your friends

That doesn't seem right, does it.  More than that, what is high probability?  Is it 95% or 90% or 80%?  The way you define the term is probably nothing similar to the way others define it. 

If you choose 98% probability iron condors (that means there's a 2% chance, if held to expiration, that one of the options will finish in the money), the low premium makes this methodology unsuitable for the majority .  The delta for each short option in the iron condor is 0.01 – and that means a low premium.

Why unsuitable for most?  Because undisciplined traders cannot bring themselves to adjust, or exit, a position to lock in a loss.  When you trade 98% iron condors, any adjustment is likely to lock in a loss.  That makes trading them a losing strategy for most investors.

The problem is, can that rule of thumb be used?  I don't think so.  Especially for anyone who considers a 75% to 80% chance of success to be a high probability.

You can use this rule of thumb.  I know it will help with the problem.

Trade smaller size

The easiest method for managing money (and thus, managing risk) is to be certain the size of the position is not too large.  Imagine a gap opening that makes one side of the iron condor completely ITM.  If the amount lost would hurt, then the position is too large.  Trade smaller.

Don, if you manage money properly, the position will not be too risky.  That already helps when the markets don't behave.  Outside of that rule, I'd suggest that you look into becoming a bit less aggressive and consider making small adjustments earlier than you do now.  Even an early one-lot can make a difference.


Unsolicited comment from Don: "the author is an experienced floor trader who replied to all questions asked. If you are inclined to purchase $2000+ in software and another
$2000-5000+ in so called "training" or "education", please save your
money and seed your options trading account with it instead. But before
making ANY trades, nail down what this book teaches. It is all you need."


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How Kite Spreads can Become Embedded Back Spreads

James and I have had a back and forth discussion regarding whether certain positions are back spreads.  The discussion began here and there's an interesting aspect that's worth consideration:

How can a kite spread – in which you own a limited number of long options (on top) turn into a position with back spread properties?

First, some definitions:

a) A kite spread is generally purchased as insurance when an iron condor or credit spread threatens to move into the money.  It's either a bullish position using calls, or a bearish position using puts.  It's constructed by buying one option (the kite string) and selling (usually) 3 or 4 farther OTM vertical spreads (the kite sail).  A more detailed description is available.

b) 'On top' means closer to the money.  It's a call option with a lower strike  than the options being protected.  Or it's a put option with a higher strike than the options it is protecting.

Example:  Please note:  These are randomly selected fictional trades, generated today, with RUT @ 675.  I don't have prices for these 'old' trades. The discussion involves the appearance of the portfolio, how it came to be constructed and says nothing about profitability.

Assume you sold 20 call spreads:  RUT Apr 650/660 when RUT was trading below 600. 

As RUT moved above 620, you became concerned about the position and decided to make an early adjustment (a Stage I adjustment). The trade you chose was to buy 2 RUT Apr 640; 670/680 kites [This is the C4 variety]

Adjustment I:

Buy 2 Apr 640 calls

Sell 8 Apr 670 calls

Buy 8 Apr 680 calls

You now own 2 Apr 640 calls and are short a total of 28 call spreads

The market continues to move higher, and when RUT passes 635, you are very uncomfortable with your position.  It's time (you decide) to get out of some of those 650 calls.  The simplest trade is to buy back a few of the Apr 650/660 [typo corrected] call spreads, but you decide to buy kite spreads instead.

You buy 5 Apr 650; 670/680 C3 kites.

Adjustment II:

Buy 5 Apr 650 calls (to close)

Sell 15 Apr 670 calls

Buy 15 Apr 680 calls

Comment:  Increasing position size is usually a poor choice.  The reason it's acceptable with a kite spread is that the adjustment trade (as a stand-alone position) adds no additional risk to the upside, other than the debit incurred when placing the trade.  It does provide plenty of upside profit potential when RUT is not near 680 at expiration.

When RUT moves past 640, one reasonable trade is to sell the 640/650 C spread.  This feels counterintuitive, especially when the upside is where risk lies and making the upside worse doesn't feel right.  But if you sell this spread between $6 and $6.50, the maximum loss is only $350 to $400 per spread and it does make the down side better.

The true rationale for selling the call spread is to use the proceeds to buy more kites, reducing my short position on the 650 line.

Adjustment III

Sell Apr 640/650 spread 2 times

Buy 3 more Apr 650; 670/680 kite spreads

The position now looks like this: [with errors corrected]

– 10 Apr 650 calls

+20 Apr 660 calls

-32 Apr 670 calls

+32 Apr 680 calls

James calls this a back spread and I'd prefer to describe this position as one that contains a back spread within.  The characteristic that gives this backspread-like properties is the fact that the extra long options are no longer 'on top.'  The long option is the April 660 call.

To completely eliminate backspread characteristics, there are alternatives:

a) Buy 5 Apr 650; 670/680 C3 kite spreads.  My preferred choice

c) Buy 5 Apr 650/660 C spreads. Perhaps sell one extra Apr 660 call to offset the cost cost, but only if the risk graph and your comfort zone allow that trade.  I see no good reason to make this trade

c) There is no necessity to make these trades, but if looking at the 'backspread' portion of the position is uncomfortable (too much negative theta), you can take steps to alter the position

That's how kite spreads can turn into positions that resemble back spreads.  And the process continues.  With RUT currently trading near 675, it's likely that anyone holding this position would have repurchased many of the 670 calls as part of a kite that sold more 690/700 spreads.


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Trader or Gambler. Which are you?

Trading options is not easy.  As is obvious, there is  no one handing out prizes just for playing the game.  You must work to make money.

Some traders are more successful than others. It's most likely that these winners put in their hours of study and preparation, but it's also possible that a few of them have been lucky.  The bottom line is that if you are hoping to be one of the lucky ones, then you are a gambler, not a trader. 

If you make an effort to truly understand what you are doing, if you devote time and energy to learning your craft, then that improves your chances of success.

The above is prelude to an email I received just two days ago.  It upsets me on so many levels, but mostly because I feel sorry for this trader.  He wants to be successful.  He studies charts and thinks about his trades.  But something is missing.

Here are a few excerpts from his message, along with my comments.  I am not going to identify that reader.


I realize that I am your student. I'm inexperienced and foolish.   I seek advice from the more experienced trader.

You are not foolish.  You are only inexperienced. I'm trying to help you learn, but I would not go so far as to call you my student.

I opened an iron condor position when RUT was lower.  This position has wiped out my profit from the previous three months. 

Looking at my charts, I decided that 650 was the resistance point, so I chose to sell the 660/670 call spread.  With RUT at 666 as I write on Sunday 3/6/10, resistance has been broken.

My reading of stochastics tells me the market is overbought and will soon trade lower. 

If 650 was resistance, why are you holing the position now, with RUT above 666?

If you rely on support and resistance to help you make decisions, why did you ignore the breakout above resistance?  If you don't rely on resistance, why did you bother to see where resistance lies?

You ignored resistance, but now you mention stochastics as an indicator that is telling you the market will decline.  Do you have more confidence in this as an indicator than you have in your charts?

Why?  Has this method of determining market direction served you well in the past? Do you have a proven track record of making money by using stochastics?

Or is this just another excuse to allow you to hold this position?

It appears to me that you are seeking any excuse to hold, rather than fold, and take the loss.

I always thought I could find the right place to roll the position to one that is safer, but I read that you believe 'rolling is not good.'

I never said that rolling is not good. 

It's so disappointing to find that you not only ignored all the rules of managing risk, but you also claim to be my student, yet do not understand what I said. 

Here's how I feel about rolling a position:

Roll only when both of these conditions are met:

i) You like the new position and want to own it

ii) You want to exit the current position

That's pretty simple, isn't it?  Nowhere do I say it's 'not good.'

When you hate the new position and would rather not own it, it's beyond foolish to roll so that you now hold that hated position.


Here's what I see, and it truly makes me sad.  The writer used technical analysis to choose his strike prices.  When that analysis told him that his premise was wrong (650 is resistance), he ignored that fact.  Note that he used TA to support his trade idea, but when TA sent a different message, he chose to ignore that message. Why?  So he could maintain his trade.

He considered rolling the position, but chose not to do so because I told him that was 'not good.'  Again, an excuse to hold the position.

The truth is that he owns this position, wants to own this position, and is afraid to act.  He is unwilling to do what he knows is best and is now looking to stochastics to prove that the position is good and will become a winner, if given enough time.

He is hoping that the market will reverse.  To tell the truth, so am I,  However I am not ignoring risk and relying on that hope.  As I have mentioned many times, hope is not a strategy.

To me there is a single word that describes my correspondent: Gambler.  He has placed his wager and the race has begun.  He looks at this as if it were a horse race.  He bought his ticket and there are no refunds.  Hedging his bet is apparently not allowed.  He feels he must hold on to the trade and accept the results, whatever they are.

He had every opportunity to buy plenty of protection when RUT broke through 650.  Now any protection is very expensive.  A prudent investor or trader would do something to reduce risk.  A gambler does nothing.

Dear correspondent:  I know how bad you feel about this loss.  You could have acted prudently.  I know that you would hate to exit now and see the market reverse.  But, if you had acted sooner, you would not be facing this dilemma. 

I wish you the best of luck because it seems to me that you are depending on good luck rather than on learning how to develop good risk management skills. 

If you prefer to be a gambler, then accept that is who you are.  If you want to learn to be a trader, then there is much for you to learn. The first step is to reduce your position size and place much less money at risk.


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