Trading Iron Condors III. Rolling Down

It’s time to continue this series.

We talked about the idea that there are different ‘kinds’ of iron condor trades and that the same risk management technique cannot be used for each. This series began with a promise to describe specific risk management trades and the philosophy behind them. So let’s get back to that topic.

Rolling Down

Rolling down is an adjustment technique that can be used for any option position in which the trader has become uncomfortable holding the trade because the short position is too far out of the money for comfort.
Some traders use the term ‘roll down’ for calls because we roll to higher strike prices, and that is ‘down’ toward the bottom of the screen when we look at an options chain. Those traders refer to using puts as ‘rolling up’ because the options are rolled to lower strike prices – and those are higher when we see the option chain. I prefer the term ‘rolling down’ to encompass both trade ideas – but do not allow this minor nomenclature problem get in the way. Use any language that you believe accurately describes what you are trading.

I cannot define just how far OTM that is because it depends on many circumstances, including the comfort zone of the trader, the original credit collected for the iron condor, the original trade plan, etc.

To roll down:

  • Buy back the short spread that is causing the discomfort
  • Replace that spread by selling another
    • Same underlying asset
    • Same expiration
    • Same spread width – if you want to trade with no increase in margin
  • Pay a debit to make this adjustment

The trader now own a position that has less risk of imminent loss than the pre-adjusted position. I assume that you, the trader are comfortable holding this altered trade. If not, then making this adjustment was a mistake. It is better to exit than to adjust a trade into something you do not want to own.

Note: Risk has been reduced when we consider the chances of losing money over the near term. However, total risk has increased becasue we invested more cash into the position without reducing the number of spreads that we are short.

The video represents a discussion of how to ‘roll down.’

View Full Screen Video

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