Iron Condor Varieties

When we trade an iron condor, or any credit spread, we all understand that there is no guaranteed profit and that sometimes we must do something to fix a trade gone awry. We refer to that ‘doing something’ as making an adjustment to the position.

When we are faced with a situation that makes us uncomfortable – for any reason – we have alternatives. We can

  • Exit the trade.
  • Reduce position size by exiting a portion of the trade.
  • Hedge by adding a new position to the old
    • Buy a debit spread
    • Buy extra calls or puts (or both)
    • Add a calendar spread that profits near our ‘danger point’
    • Roll strikes farther OTM (preferably with the same expiration)
    • Add a kite spread (be careful with this strategy)
    • etc.

    The major point that I want to be certain that everyone understands is that there is no ‘best’ adjustment choice. The decision is often situational. And that should feel logical to you. We cannot use a favorite adjustment method when that method is not appropriate. Remember that when we adjust, we want to come out with a position that is worth owning.

    Different


    Different Iron Condors

    We can break iron condors into several categories. Although it may seem logical that the category is immaterial when it comes to managing risk, that is not true. Why? When we originate the trade, we have a game plan. That plan is very dependent on the trade.

    A. The ‘traditional’ iron condor

      With this position, the general plan [design the trade to suit your ideas] is to adjust when threatened. The threat can be emotional – never hold long enough to become frightened. It can be financial – when losses increase and additional losses become more likely. It can be logical – the position is not near enough to market neutral or fails to satisfy your needs in some other manner – so you do something to fix that problem.

      You may decide to adjust frequently – trying to keep deltas near zero.
      You may prefer to adjust occasionally by reducing risk in stages.
      You may not adjust and simply exit when you deem it appropriate.

      This is the most flexible type of iron condor. It suits your preferences, prejudices, and risk can be managed with different strategies.

    B. The CTM iron condor

      Consider this a trade with an already-paid-for roll down adjustment. We don’t know if whether puts or calls will cause the first problem, but we are ready.

      The larger the cash credit collected, the longer you can wait before adjusting. If a short option moves ITM, it is not a major problem. When we begin the trade with high delta (25 to 35, or more for some traders), we KNOW that at least one side will move ITM with almost every trade. If you get uncomfortable with shorts near or at the money, then there are ONLY two things you can do:

      • To reduce the chances of becoming uncomfortable, choose lower deltas for the shorts. This becomes the not-really-very-CTM-but-more-CTM-than-the standard iron condor.
      • Avoid trading CTM iron condors. There are other suitable trades.

    C. The very short-term iron condor

      This is almost a win or lose proposition. When trading 5-point iron condors or credit spreads, we can roll down one strike, perhaps two, but our reasonable choices are very limited.

      Two warnings:

      • Do not increase size and risk by selling more put spreads on a rally (or call spreads on a decline).
      • Do not roll out to another expiration date. If you have a loss, so be it. Do not take on additional risk by holding over the weekend.

      The type of adjustment we choose depends on market conditions (for example, adding a debit spread is not likely to do much good when the market has been volatile), how much time remains (roll downs are more effective when more time remains), implied volatility levels (if we add positive vega, we prefer that IV be low rather than high), etc.

      However, it also depends on the original trade and your trade plan. Devise a trade plan that gives you a good opportunity to earn a profit without taking one extra risk.

      The ‘expiration-week trader’ would probably do best seeking a quick (1-2 day) profit. The CTM trader should be comfortable being short options that are ITM by a couple of points (on a 10-point wide position) and will discover a new comfort zone boundary when trading CTM options.

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