Iron Condor Adjustments

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The iron condor has two faces.

Usually, when a new option trader is first introduced to this strategy, the iron condor appears to be an amazing and almost magical trade. A trade that puts the odds unfairly in the TRADERS favor, that requires just five to ten minutes per month to manage, and that practically GUARANTEES a consistent and steady return of somewhere in the area of ten percent a month.

And what usually happens is that the new option trader immediately goes ga-ga eyed – falling head over heels in love with the strategy. And who can blame them? They believe that they’ve just discovered the holy grail of trading. A strategy that’s too good to be true.

And that’s the problem.

It IS too good to be true.

Well – entirely true anyway.

You see, the iron condor CAN be an amazing trade. And it CAN be somewhat magical. And it CAN require a very short amount of time every month to manage. And it CAN generate some truly outstanding consistent monthly returns.

The iron condor CAN do and be ALL these things – IF and only IF – the one trading it knows what he or she is doing.

See what the majority of option traders ARE NOT told when they are first introduced to the iron condor strategy – is that the iron condor has two faces.

The first is the one glorious face described above. It’s the face the iron condor wears most often.

However, the other is downright scary. And fortunately, it doesn’t show itself too often – but when it does – it’s certainly a memorable experience – and if the trader who is facing it isn’t properly prepared – it has the power to completely wipe out and destroy all the profits that the iron condors ‘good side’ can provide.

And then some.

See, the iron condor strategy is a high probability trade. There is a high probability that it will win month after month after month. But – in return – it comes with an absolutely terrible risk to reward ratio – and if this risk in the trade is not correctly managed – all of the gains that the iron condor can generate over the majority of calm and normal months can be completely obliterated from the one or two volatile, wild, crazy ‘problem’ months that inevitably occur through out the course of a normal trading year.

So – the key to winning consistently with this strategy is to first understand that the iron condor does have a dark side that will inevitably rear it’s ugly head and try to destroy all the gains you’ve accumulated throughout the year. However, as long as you are equipped with the proper tools, tricks, and know-how to correctly fight off and manage these occassional crazy fits and tantrums – the iron condor trade actually CAN live up to be all that it’s painted to be.

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The iron condor option strategy is a favorite trade among option traders both new to options as well as those who have been around the block and playing this game for awhile.

The iron condor is constructed from two credit spreads on the same underlying: a bull put spread and a bear call spread. The purpose of the trade is to try and take advantage of the fact that many underlyings stay contained within a range on their chart much of the time. By selling short term credit spreads on either side of where the underlying is currently trading at, the iron condor seller hopes to ‘cash in on both ends’ – and the majority of the time can do so as long as the underlying DOES stay range bound.

This trade is a probability trade – where the mathmatical odds say that the correctly chosen underlying should not penetrate the properly calculated range most of the time. Using a few tricks, iron condor traders can create trades where they have an 80% or better chance of winning any given month – meaning that if this same trade were to be put on ten months in a row, mathmatically it should win eight of those ten months.

So far sounds good, right?

Well hold your horses right there, my homey…

The problem is that while these trades offer a great probability of success – on the flip side they offer a horrible risk to reward. The same 80% iron condor mentioned above usually comes with a 9 to 1 risk to reward – meaning that the trader is risking 9 dollars to gain just 1. And once you do the math you can see that this creates a huge potential problem: if a trader were to win 8 months in a row and then hit his max loss in month 9 – this would immediately wipe out all of the previous 8 months of profit – and then some.

WHICH IS WHY…

Understanding how to properly manage and adjust these trades are SO critical.

To learn how to properly place, manage, and ADJUST iron condor trades, join our free iron condor trading newsletter by clicking here

This site is focused on iron condor adjustments and the various ways to hedge, protect, and adjust iron condors.