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.

Sample

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

09-July
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:
1030/1035/1060/1065
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.

One Response to “The Iron Condor Trade Plan”


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