Part 5: Iron Condor Adjustments
Adjustments are what separate the men from the boys. Some traders and advisories say that you do not need adjustment. That they only lower your return and increase your commissions. That without adjustments your trades should work out due to the probabilities.
That has not been my experience. I have backtested several no adjustment iron condor strategies and have not found one that worked on a consistent basis without very large drawdowns in equity.
So why would an advisory not like adjustments? I think it is because it makes it much harder to keep subscribers. The easier the trade, the more people will stick around with the service. Even with my service when a trade gets hairy and there are several adjustments, members lose confidence and drop out. But I still have to trade the way I know how. If some people drop out, there is nothing I can do about it.
The iron condor trade will need an adjustment about 50% of the time if you are a conservative trader. When to adjust and how to adjust are difficult concepts that can take several trades to master. When it comes to iron condor trading, experience really is the key to success.
You should know when you will adjust before you enter the iron condor trade.
One common method of choosing an adjustment point is by watching the deltas of your short strikes. For example, one trader I know enter a condor spread position 27 days from expiration using short strikes that have a 18 delta (or as close to it as he can find). He then will adjust his position when his short strike is one or two strikes away from the money.
So if he was trading the RUT, and his short call strike was 600, he would adjust his call spread when the RUT got to 590. And he would adjust by using a butterfly to roll his call spread up one strike.
If he is trading one spread, he would be short 1 600 call and long 1 610 call. To adjust he would Buy 1 600 call, Sell 2 610 calls, and Buy 1 620 call. The result of this adjustment is that he is now short 1 610 call and long 1 620 call.
Keeping It Delta Neutral
Another method of adjusting the iron condor trade is to keep the position delta neutral. The delta of the trade tells you much you will make or lose should the underlying move up or down 1 point. If your trade has a delta of 50, you will make $50 if the underlying goes up 1 point. Thus, the lower your delta the less you make or lose when the underlying moves.
If you keep your trade as delta neutral you are looking to stay in the trade until the time decay kicks in.
Staying delta neutral sounds great, but it is very hard to do since delta is always changing. A position of delta – 100 one day can be a position of positive 40 delta the next if you decide to go this route, you will be adjusting often and your commission costs will be much higher.
Other Ways of Adjusting Iron Condors
A very popular method of adjusting is called rolling. If one side of your trade gets into trouble, you simply buy back that spread and sell another one farther away from the money. If there is not enough time left in the trade, or the premium of the farther away options is not high enough you can even roll forward to the next month.
Buying puts and calls can also be a good adjustment. By buying options, you will bring your delta closer to zero and even out your current p&l line. Long options act as a buffer to the market moving in one direction against you.
Another method that some bold traders use is to buy back the short option in a credit spread and keep the long option selling hoping that the underlying keeps moving in the same direction. So if the RUT is moving down rapidly, you can buy back the Put you sold, and keep the one you bought. If RUT keeps dropping, your long Put can make a lot of money.
This concludes the mini iron condor course. If you have any questions feel free to post them or email them to me.
If you missed any of the lessons, here you go: