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Iron Condor Option Course Part Five
July 29th, 2010 
Genius 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 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:
Part 1 – Part 2 – Part 3 – Part 4
[...] Let’s finish up with Part Five // [...]
Rolling sounds pretty straightforward, and less hoping for market direction than with buying back the short option and holding the long option.
when you made adjustment using the butterfly,you have to close the initial position de short iron condor ?
That is actually what you are doing. But you only do this with one side of the condor.
So if you have a put spread:
short 1 700 put
long 1 690 put
And you want to roll it down one strike: you would have to buy back 1 700 put, sell the 690, then sell a 690, and buy a 680. Your position is now
short 1 690 put and long 1 680 put. What you did could have been done easier as a butterfly.
Buy 1 700, Sell 2 690, and But 1 680. the end result is the same. And since it is one trade, it is easier to execute for newer traders
This is 101-level stuff – where it gets really difficult is making decisions on timing for adjustments (how close to the short strike; how close to expiration; etc.), AND, how much of original credit to re-establish. For example, if credit was 0.50 on call side, but to rollout within same expiration to higher strike you have to close out the position at 1.25 (0.75 loss), how many additional spreads should you sell to make up for the loss and re-establish the credit (i.e., if can re-sell at higher strike again for 0.50 credit, then would need to sell approx. 2.5x # of spreads and hence doubling your risk 2.5 times the original amount.) Can you address these more detailed adjustment challenges?
So you want all the secrets for free? All the secrets that it took me years to discover through trial and error and thousands of dollars????
If you are going to roll, you want as few new contracts as possible because each new contract adds to margin and risk. But you need enough to cover what you have already lost. It also depends on when you adjust. I do not like to add more than 1.5 times the original. Sometimes 2 times. But 2.5 times is a lot of extra risk.
Another option is to roll the other side as well. This will result in needing fewer contracts but opening yourself up to pain if there is a whipsaw.
THANKS GOOD INFORMATION AND A LOT OF HELP.
Excellent stuff, Allen It would be very useful if you gave ONE example of what appeared at first to be a solid Iron Condor, and how you adjusted when the market, surprisingly, moved against you and how much you ‘saved’ by making an adjustment. Would that be possible? It would certainly be very helpful for a paper trader member who hopes in 3 months to trade for real. Thanks,
Keith H.
This was just meant to be an overview. if you look at the 9 option trading lessons that you get when you opt in to our newsletter, there are 2 examples in those.
http://www.optiongenius.com/Lessons/Lesson1.html
Hi,
What program do you use to determine the probability of the trade being successful?
There is a formula, but I let my broker’s software figure that out for me.
I did a video on it too about how to calculate it for yourself. It should be here on the blog.
I realize I am not familiar with all of the option language used in this mini course and need a mini course in basic options even though I have read and studied options for some time. Is there such a course by you?