The Impossible Question: When to Adjust an Iron Condor

Mark,

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.

Dimitris

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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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2 Responses to The Impossible Question: When to Adjust an Iron Condor

  1. Joe 09/28/2010 at 7:30 PM #

    Great post Mark. Defining guidelines for making adjustments are difficult and think it comes down to the individuals own comfort level.
    My query relates back to your post on trading iron condors for a living which I found very informative. Without going over old ground I am interested to know how traders who do choose to trade 100s of ICs a month on one underlying manage the risk?
    I ask because I found articles such as the one below and also remmember you having mentioned in the past that you traded much larger size. Any thoughts on this would be great.
    http://www.option-wizard.com/features/SFO%20200811_Dan%20Harvey%20Reprint.pdf

  2. Mark Wolfinger 09/29/2010 at 9:43 AM #

    Joe,
    I thought this was a simple enough question, but decided it’s worth further discussion. Tomorrow’s post (9/30/2010)
    Thanks