The Iron Condor Trade Plan

Michael has been posting his iron condor trades in the forum. He includes his planned adjustments, if and when the become necessary. This is a fine idea and today’s post provides some discussion.

The trade plan

Having a trade plan makes a lot of sense. At a minimum the plan must include the target profit and a solid estimate of the maximum loss that the trader is willing to take for the given trade.

These numbers are not set in stone and some flexibility is allowed. However, seeing those numbers every time that you look at the plan is an excellent reminder of why you own the position.

    –Without a profit target, it is tempting to hold ‘just a little longer’ day after day.

    — Without some loss limit, it is possible for losses to increase gradually, moving well beyond the limits of a sound risk-management plan.


This represents the current position and current trade plan for Michael’s August iron condor:

RUT Aug13 925/930 1030/1035 Iron-Condor

    Aug13 925/930 put-spread RUT @ 1018.05
    bid/ask/midpoint 0.05/0.65/0.35

    Aug13 1030/1035 call-spread
    bid/ask/midpoint 1.60/3.00/2.30
    (1030C delta: 0.42)

==== Planned Adjustments ====
Call-condor adjustment: Roll short spread down by 30 points:
bid/ask/midpoint 0.20/2.30/1.25

The 1.25 midpoint is just today’s quote for the planned roll.

I’m expecting that if RUT continues to move higher than this will drive IV lower and push up the cost to adjust. So as IV falls the cost to roll-down decreases. And as time to expiry decreases then the cost to roll-down increases.

I will watch carefully today as the delta of the short call is high.

My comments

— Excellent idea to have a specific adjustment trade in mind. Just be aware that the details of the plan must change with the passage of time. At some point in time, the roll-down will be too expensive, and no longer viable.

— If possible, it is also a good idea to mention a flexible adjustment point. Perhaps a specific delta for the threatened short option (1030C in this example); or perhaps a specific value for the threatened spread (1030/1035C in this example).

The continuation

Trade adjusted Jul 10, 2013.

Bought the RUT Aug 1030/1035/1070/1075
bid/ask/midpoint 1.35/2.00/1.675
Paid $1.85, call-condor.

This creates the new position of Aug13 925/930 1070/1075 Iron condor.

This locks in a loss of 0.45

My comments

— We never like locking in a loss, but sometimes it is necessary. It is wonderful to trade by managing our profit/loss potential, but managing risk must have the top priority.

–Your plan was to roll down to the Aug 1060/1065C spread and you elected to roll down to the Aug 1070/175C spread. In theory, there is nothing wrong with that plan. However, there are a couple of points worth mentioning. I hope that this simple discussion will provide additional insights into how trade decisions are made.

    — With the market essentially unchanged when the trade was made (it is useful to know the underlying price at the time of the trade. It is probably something you will want to know when looking back to re-examine your decisions)

    — Yesterday the midpoint was 1.25. Today it was 1.675. That 42 cents is a huge difference. In effect, it means that you paid $0.42 for the 1060/1065//1070/1075 call condor.

    — Yes, IV could have changed since yesterday, making the roll-downs more costly. Yes, you probably feel safer being short the 1070C instead of the 1060C. But-there has to be limit as to how much we pay for any trade (including an adjustment). At some price it is better to avoid the trade, perhaps electing to shut down the trade and take the loss. Paying an extra 42 cents for the extra 10-points is a poor trade decision. Do you know how much it would have cost to stay with yesterday’s plan?

    — One point is worth special emphasis. We adjust positions to reduce imminent risk, and your trade accomplished that primary objective. However, by investing $185 per spread into the position, the ultimate possible loss is now $185 more than it was. That’s expensive when rolling a five-point spread. agree that making this (or a similar) trade in a virtual account is a good move because it offers an opportunity to gain more experience with trade adjustments. However, do you believe it was worth $185 to make this trade? Would it have been better to exit the whole iron condor at a cost of roughly $275. In other words, would you be better off locking in an additional loss of $90 and being out of this trade, or do you believe that you did well to place more money at risk with a chance to earn money into the future. Weighing those numbers is always difficult. But it is a smart way of thinking.

      –Lose $90 right now, or

      –Own the position, risking another $315 (worst case scenario) with an opportunity to earn most of the current value of the iron condor that you own.

      — This is often a difficult decision

The lesson

Michael and other traders,

I am not criticizing this trade or any part of it. I hope that by raising some questions and making comments you will come to recognize even more points worthy of consideration when trading iron condors.

Trade management can remain very simple, or by adding some complexity to the decision process, you will make more efficient (profitable) decisions.

Thanks for sharing the trade.

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Learning to Trade

We all learn to trade by gathering information. The source may be a specific book, a series of lessons, perhaps personal lessons from a friend or professional teacher. One obvious point — often neglected — is that our initial education is biased by the perspective of the information source.

For example, when working with students on their option-trading education, I emphasize that the idea of buying calls and/or puts in an attempt to capitalize from a correct market prediction is a poor strategy. I believe the chances of finding success are almost non existent — at least for the novice. Others preach that buying options is the simplest and most natural way to ‘play the options game.’

Your First Introduction

For the majority of people who are first getting involved in the investment world, the most common practice is to buy stocks. Depending on the source of your lessons, the new investor could come to believe any of the following:

    — Buy mutual funds and let the professionals make all trading decisions in an effort to earn market-beating returns

    — Buy index funds or exchange-traded funds (ETFs) with very low fees and accept average market returns

    — Do your own research and buy shares of individual stocks

      — Blue chips
      — Small growth companies
      — Penny stocks

    — Diversification is (or is not) important

    — Buy carefully and plan to hold for years/decades. Sell only when the stock no longer fits your criteria for stock ownership

    — Add to positions when the stock price dips. This is dollar cost averaging

    — Only add to positions when the stock price rises. This means adding to profitable trades, but never to losing trades

    — Buy for the very short term and never hold positions overnight

    — Buy with a short-term price target in mind and sell when the target is reached

    — Always use stop-loss orders to prevent the painful loss

    — Always grab a quick profit. Or the opposite, let profits run and be very slow to sell winners.

These represent just a handful of the possibilities. It is essentially impossible for the true novice to know how good or bad the received advice is. When we trust our source, we adopt habits that may last a lifetime, even though those habits may be completely unsuitable for us.

The point of this post is to be certain that anyone who learns to trade/invest has to recognize that there are many different approaches and that each of us cannot possibly be successful using each of them. It takes time for us to find our individual comfort zones. For me, I want to help the novice trader learn by adopting ideas that require fewer trades, fewer decisions, and a longer holding period. Not because this is the only successful approach; not because I am biased towards these methods; but because the newer investor/trader has to get acclimated to the idea of investing money into the stock/option/commodity markets and cannot be expected to make the many decisions required of a trader, especially a short-term trader. It makes sense to me for the novice to begin as a passive investor (index funds), and gradually, when it feels correct to this trader, to learn to trade individual stocks. Many investors never get to that point because they remain satisfied with matching the market averages, recognizing the difficulty in beating them. That is a wise decision for the vast majority.

For those moving into the options game, I prefer to see them begin with covered call writing . Not because it is the best strategy, Not because it is ‘safe’. But because it allows time for the new options trader to own positions that work slowly, giving that investor the time to see the effect of time on a position; to see the effect of rising and falling prices on a position. In short, time to watch and understand his/her first option strategy.

Once that is behind the new trade, other less risky strategies can be learned and adopted. Not everyone feels that way and some option teachers jump right into trade ideas that could confuse the newbie. We all teach differently and I want each of you to recognize that conflicting ideas are part of the game and that it behooves each of us to try to discover our individual comfort zones. Sure, ask your source for guidance, but recognize that the answers may be biased towards that teachers individual pet beliefs.

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The Fine Points

We can look at the iron condor strategy in very simple terms: We sell some premium and hope the options expire worthless.

Better yet, we can use our intelligence when trading iron condors and manage risk, as necessary. With this approach, we never shut our eyes and hope for the best. Instead, we plan ahead and establish a target profit.

    If certain unhappy events occur before we can close the position and collect that profit, we act:

    –We should set a maximum loss that we are willing to accept – and exit if that loss occurs.

    –We can establish a specific risk parameter, and when risk reaches that level, we adjust the position to reduce risk. Such parameters can be: delta of short option; a specific monetary loss (but one that is less than our maximum acceptable loss; it can be when the short options are a specific number of points OTM, etc.

Even better for traders who have the time and ability to adopt more sophisticated methods, we can think about ways to reduce risk while waiting for our profit target to be reached.

    –We can adjust in stages, reducing risk in increments, rather than all at once

    –We can recognize that all iron condors are not created equal, and that our method of managing our positions has to change when the basic structure of our trade changes.

      –The primary situation occurs in the example (when this post is continued). When trading close-to-the-money (CTM) iron condors, our thinking changes. Our plans change. This has to be well understood in order to successfully trade CTM iron condors (or credit spreads). I have discussed this repeatedly, so for today’s post, let me just reiterate: CTM iron condors (defined as positions that include the sale of options that are CTM, compared with your usual iron condor position) are very likely to require an adjustment. In fact, when we sell puts and calls with a 25-delta, the probability is essentially 100% that one of the options will be in the money before expiration arrives. When we choose higher delta options (such as 30-delta in the trade illustrated in part 2), the probability that one option will move into the money is closer yet to 100%.

      Therefore, this conclusion should be obvious to all CTM traders:

      When that inevitable adjustment is made, the cost must be small enough to leave a sufficient potential profit to justify the risk of making the trade.

      That boxed statement should be read multiple times every single day of your trading life — until such time as you fully understand and agree.

      This means that the trader cannot continue to think and plan trades as if CTM iron condors were nothing extraordinary. They are plenty extraordinary. They require a new mindset. The position is still an iron condor and we do not ignore everything we already know about iron condors. However, the approach taken to manage risk is different and that has to be understood before placing the trade.

    It is important to begin learning about options at the beginning. Jumping into more advanced strategies can be difficult (for some traders) because the trader has not gained experience managing many trades and coming to understand – from experience and taking lessons – how to handle a variety of trade decisions. It is not easy to recognize when something is truly different, or more complex, when the trader has not had to make many of those less complex decisions.

…to be continued


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Managing Risk for More than One Position

This trader is short two put spreads. One in YHOO (Jul 23/24) and the other in RUT (Jul 920/925). These positions began as iron condors and the calls were covered at a cheap price.

I’m not sure of what I should do. When adding these two positions together, the ‘portfolio’ is too delta long for my comfort zone.

=== RUT ===
I could offset the positive delta of the put-spread by shorting another call-spread. But that is somewhat inconsistent with my belief that I should initiate positions with at least two-months expiry. What would be more consistent is if I closed the put-spread and opened another Iron-Condor with a later expiry. The only thing is that in order to exit at break-even… This is somewhat expected as the volatility conditions for this trade were less than favorable.

Another option would be to roll-down the put-spread. This would reduce the amount of positive-delta, but still leave the portfolio with positive delta.

I guess I will be looking to exit the RUT put-spread today. [Note: Position was closed @ 1.20]

Be careful about measuring portfolio delta. One RUT deltas is much more significant than one YHOO.

    a) Delta is the change in value for an option when the underlying moves ONE POINT. One point for YHOO is a big move. One point for RUT is insignificant.

    b) The YHOO spread is only one point wide and the max price for the spread is $100

    c) The RUT spread is 5 points wide and the max loss is $500 (less credit collected)

    d) Delta is a good guide for for current (imminent risk), and the risk graph shows how bad things can get when such and such happens. But as to your comfort zone, the RUT position is far more ‘dangerous’ because more cash is at risk and RUT will move many more points than YHOO on almost every trading day.

    e) Also consider that RUT is 40 points OTM. I am not suggesting that this is ‘safe’ but the question is: how do you feel about it? If this makes you nervous, yes, do exit. Especially today with a small market bump and a small IV decrease (RVX is -.77 as I write this).


Yes, selling another call spread is a viable adjustment. It is one way to maintain delta neutrality. However, when a trader looks at the current market, it is very difficult to sell call spread now that the DJIA has declined by more than 500 points in the past two days. The ‘best’ time to sell that call spread is immediately after covering your previous short spread. But selling another call spread is not for everyone. This is a difficult decision and I cannot offer guidance. For my trading, I do occasionally sell another spread after covering, but most of the time I do as you did: nothing.

There is a world of difference between initiating positions and adjusting positions.

    –When initiating a new trade, you have the ability to wait until conditions suit your needs. There is no urgency. You can easily satisfy that need for a minimum of two months.

    –Adjusting requires a very different mindset. Your objective when adjusting is to reduce risk. NOW. It is not to make more money from the trade. It has nothing to do with future profits. It is only about one thing: recognizing that this trade has gone awry and you want to give yourself the best opportunity to stop the bleeding. Primary goal: make the position less risky, reducing the immediate cash at risk. Secondary goal: Create a position that you want to own (do not blindly adjust and hope for the best) and which gives you a good (this is where your judgement comes into play) chance to make money from THIS POINT. Do not worry about past losses. Do not trade to recover those losses. Trading to get back to even is a losing mindset. Traders make plenty of poor decisions trying to recover losses.

    — Closing the put spread and opening another iron condor is a good idea. But ONLY when

      –You do not allow the idea of ‘break even’ to be part of the decision. Please take my word for this. I know what it is like to roll the old position into a new one, choosing the new position based on its price (in other words, paying zero debit or collecting a cash credit for the roll), giving myself the chance to earn my original profit target – if only the new spread would expire worthless. When the market is trending this style of trading is financial suicide. Be willing to take the loss and independently find a suitable new position.

      — You want to exit the current position because it is not one you want to own

      –The new iron condor is one that fits your trading criteria. Far too often traders make this ‘roll’ just to do something. Do not fall into that trap

      –You understand that doing this is two separate decisions. Close when you believe that is best. Open a new trade when you find a good one. Do not feel you must open that new trade at the same time the old one is closed. Yes – I know the need to get a new position so you can recover losses. Nothing wrong with wanting that new trade. Just make it a good one and do not allow the thought of getting back your money be part of the decision process.

Yes, rolling down the put spread is viable, when two conditions are met.

    –The cash debit required is not more than you are willing to pay

    –The new position is one that you want to own.

The important point of this post is that one YHOO delta is not the same as one RUT delta.


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TTT updated

Track that Trade updated this morning.

Taking profits on June 5 trade; diagonal spread

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Personal Note to Members

To Options for Rookies Members,

It is with deep regret that I am forced to end this service.

Some of you have been members since the beginning (April 2011), while others joined more recently. To each of you, I offer a sincere thank you. And a special thank you to those who took the time to actively participate.

My goal is to leave each of you in a good place. Here is what I will do:

    –I will stop collecting membership fees after Jun 30, 2013

    –The service will continue FOR CURRENT MEMBERS ONLY at no additional cost through July and August 2013

    –After that, the content will remain available online through (at least) year-end 2013, longer, if possible. After that, the content will disappear from the blogosphere.

    ––During July and Aug 2013, I will write to each of you to answer final questions and tie up any loose ends.

    –I will write new blog posts, but only on topics that interest you, so please ask.

    –I will not conduct any more live meetings.

    –You can still find me online, publishing the: free blog, Options for Rookies. I have no idea how long I will continue to do that.

If you feel you were helped by this service, you can do something for me. Recommend my book to trading buddies. Better yet, give a copy as a present to people you know who trade or who are thinking about starting. I’ll honor the promise to sell the book to current members at $18 (USA only), $21 in Canada. Just send an e-mail request.


The updated version of The Rookies Guide to Options, 2nd edition is now available.

I’ve enjoyed educating and working with you and wish you well in your trading. Do stay in touch.

Fond regards,
Mark Wolfinger

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