Iron Condor Option Course Part Five

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:

Part 1Part 2Part 3Part 4

20 Comments

  1. […] Let’s finish up with Part Five // […]

  2. Jason Wingfield on August 18, 2010 at 5:25 pm

    Rolling sounds pretty straightforward, and less hoping for market direction than with buying back the short option and holding the long option.

  3. JAVIER on October 24, 2010 at 6:57 pm

    when you made adjustment using the butterfly,you have to close the initial position de short iron condor ?

    • Genius on October 25, 2010 at 11:34 am

      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

  4. Tom on January 30, 2011 at 10:45 pm

    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?

    • Genius on January 31, 2011 at 2:52 pm

      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.

  5. MERRILL on July 4, 2011 at 10:58 am

    THANKS GOOD INFORMATION AND A LOT OF HELP.

  6. Keith Harrison on September 20, 2011 at 6:49 pm

    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.

  7. Mike on April 23, 2012 at 3:30 pm

    Hi,

    What program do you use to determine the probability of the trade being successful?

    • Genius on April 23, 2012 at 5:44 pm

      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.

  8. carol on May 13, 2012 at 7:45 pm

    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?

  9. pradeep on June 18, 2012 at 8:51 am

    Is it a good strategy to make adjustment only when market moves one step like for Nifty 100 points ?

    If it has gone 100 points down, collect losses in put side and book profit in call side. Since there will be some time decay , overall it should be profitable.

    Is this right kind of adjustment or will it lead to too many trades and hardly any profits ?

  10. wbstrangler on June 29, 2013 at 10:13 am

    I like to leg into a condor by entering into each credit spread separately as you actually mentioned. I use technical indicators to determine an entry point. I also try to obtain a credit of approximately 40%-$2 on a $5credit spread. I try to write spreads that are 60-90 days remaining so that on a stock reversal I still have time to obtain a reasonable sum on the credit spread of the second leg. If I can get 40% for the second spread I can end up with 80%of the spread covered instead of 10% and with still a high probability of success.

  11. MIKE BAIN on September 19, 2013 at 8:15 am

    When I first learned of IRON CONDORS I thought I found the HOLY GRAIL. After trading the SPY for some time I come the conclusion that IRON CONDOR sucks. I have traded 80+% out of the money and lost on every trade. The premiums are small and the spreads and commissions eat up your money and when you adjust the little that you get just does not cut it. I tried the IRON BUTTERFLY and had better luck because the premium is much more and you always get to keep one side but they both just sound good on paper. I am doing real well with deep in the money longs following the trends or playing strangles.

    • Genius on September 19, 2013 at 1:35 pm

      To each his own. I know several traders you make good money with condors. As do I. Your trading plan is the key.

  12. Lonnie Mattison on February 1, 2018 at 3:15 am

    is there away to loose very much money (more than the spread) if I use a vertical spread?

    • Ameen Ka on February 7, 2018 at 5:29 pm

      No. That is why we use a spread so that the risk is defined, meaning that we know in advance what is the most we can lose on the trade.

  13. Tobin Martin on February 9, 2018 at 10:31 pm

    If you roll the side that is in trouble farther away from the money wouldn’t you just be increasing risk since the strikes you are rolling to aren’t worth as much as the ones you just sold?

    • Ameen Ka on February 13, 2018 at 6:37 pm

      If you increase the size of the trade than yes, you have more money at risk. If you keep the same number of contracts than the risk is about the same, although it increases a little since you have a loss on the spread you are exiting.

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