The ideal scenario occurs when you buy (reminder: buying an iron condor means selling a call spread and selling a put spread) an iron condor, time passes, and the underlying index (let's assume you are trading iron condors on an index) doesn't undergo a significant price change. Time decay erodes the value of the options and you close the position for much less than you collected earlier, or you allow all the options to expire worthless. In either case, you earn a nice profit.

Alas, the world is not always so kind. In fact, that perfect scenario doesn't occur often. Many times the index undergoes a significant move, threatening the profitability of your posiiton. When you bought the iron condor, you sold two options. If either of them moves into the money (ITM) then the spread associated with that ITM option begins to accumulate intrinsic value. As the intrinsic value increases, so does the cost of closing the position, and thus, losses increase.

If you find yourself in this uncomfortable position, you have two basic choices.

1) You can do nothing and hope the index reverses direction and the ITM option once again moves out of the money (OTM). If that happens, you will be well placed to earn a good profit from the position. But it's going to be a nervous wait - depending on how much time remains before the options expire. Is this something you are willing to do? Does trading this way allow you to sleep at night? Does it allow you to be within your comfort zone - where the potential risks and rewards of a given position are acceptable?

2) You can eliminate or reduce current risk by closing all or part of your iron condor position. That means taking a loss. For some traders, that's a very difficult thing to do. But it shouldn't be. Please understand: you cannot win on every iron condor position. Markets do move and OTM options, like the ones you sold, sometimes move ITM. You will learn for yourself as you gain experience - and I strongly recommend paper trading with play money before using your own money - that the road to success is preventing large losses. If you earn, for example, a maximum of $200 to $300 when your positions work well, and a lesser amount when you decide to eliminate risk and close the positions early, it's a bad idea to allow yourself to lose up to $800 every few months.

Should you have allowed yourself to be placed in the position of being short an option that has moved ITM, or should you have taken action to reduce risk sooner? I cannot answer that question for you, but this I make these suggestions:

• Own positions that are within your comfort zone.



• That's true when you open the position.



• That's true while you own the position and time passes.


Do not allow the fact that the positon is currently making money or currently losing money affect your decision. When you become uncomfortable, it's time to do something.


• If a position makes you uncomfortable for any reason, do something to move back into your comfort zone. Some reasons to adjust:
  
  
  • Potential losses are too large
  
  
  
  • Your position is too far from market neutral and a continuation of the current market move will hurt financially
  
  
  
  • You earned a good profit and the potential reward from continuing to own this position is not worth the risk of losing those gains.
  
  
  

Assuming you decide that you are uncomfortable with an iron condor position, what are some of your choices to 'adjust' or reduce current risk?

• If you have a large profit to protect, the adjustment is easy. Give up the last few nickels and dimes and close the position.



• If you have a short option that moved ITM (or is threatening to do so and you are out of your comfort zone), several choices are reasonable



• Cover (buy back) some of the call or put spreads that moved ITM or are threatening to move ITM. If the index continues to move against you, close more spreads until they are all repurchased.
  
  
• Instead of buying part of the position, cover all spreads that have moved, or are threatening to move, ITM



• Do not ignore the winning portion of the iron condor. When one side has moved far enough that you were forced to close, it's often the best strategy to cover the winning side also - especially when it's trading at a low price.




Example: Assume you buy an iron condor and collect $3.00 (that's $300 cash) and the market declines. If you decide to cover the put spread by paying $4.00 (thereby locking in a loss), it's a good idea to buy in the calls when they are trading at a low price (low is a relative term depending on how much time remains). But, I'd certainly pay $0.30 or less in this scenario for any such spread for two reasons. First, there's only a few nickels left to gain and second, it eliminates the risk of disaster - first losing on the put side and then, with a market reversal, losing on the call side.



• Instead of covering you can 'roll' a position. Rolling simply means covering one (risky) posiiton and opening a new position that places you within your comfort zone again.




Warning Some traders believe they should never accept a loss and that it's better to roll the position to allow themselves the opportunity to come out with a profit when the next expiration arrives. Do not fall into this trap.

Rolling is a good idea when two simple conditions are met. First you deem it a good idea to eliminate risk by closing the risky position and second, you want to own the new position. Do not roll a posiiton just 'to do something.' Close instead and open the new iron condor when it suits you.




Example of rolling a position:

Current iron condor position:

Sold 5 XYZ Jun 800 puts, bought 5 XYX Jun 790 puts

Sold 5 XYZ Jun 880 calls, bought 5 XYZ Jun 890 calls




Bad luck. XYZ has quickly declined to 799 and you decide to roll the position. You make the following trades:

• Buy 5 XYX Jun 790/800 put spreads (closing your current position)
• Sell 5 Jul (or Aug) 740/750 put spreads
to open a new position


• Buy 5 XYZ Jun 880/890 call spreads to close the position
• Sell 5 Jul (or Aug) 850/860 call spreads to open a new position.




This combination of trades removes the risk of the old position and gives you a new iron condor that is once again market neutral. When 'rolling' to the new iron condor, you should, of course, choose strike prices and expiration months that are appropriate for you and your comfort zone.

SUMMARY

When a position moves to the stage that your risk is too large for the potential reward, or your reward is too small for the potential risk, it's time to adjust the position. On this page I suggested some possible trades for those adjustments. But please remember that there is no 'best' answer. Your risk reward profile and your comfort zone will let you know which trade is best for you. And if you are uncertain, that's okay. As you gain experience, you'll find the answers. Please be careful not to hold positions that you deem too risky. Sure, they will turn profitable part of the time if left unadjusted, but can you afford the risk?


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