Win-Win Spread Adjustments
Last week in our paper trading options lab we had an iron condor position on where we were able to use an adjustment technique that we haven’t seen anyone use or talk about - but which we’ll be including as part of our online training materials that you can learn more about by joining our free option income newsletter by clicking here.
This is a great adjustment that can be used both with iron condors and credit spread trades. As you will see below, what it can accomplish is that it can ‘lock in’ a profit in the trade – so that no matter what happens going forward there is no way the trade can lose. In addition, it can also allow for further upside profit potential, creating an iron condor or credit spread position that contains the best of both worlds: a locked in profit no matter what happens – ideally at your initial profit target – along with the chance to make even more profits.
Example of Trade
Below is a risk graph of our options position after our adjustment was applied…
At this point in the trade, we have a profit of $551.00 locked in. As you can see by the hard red horizontal lines in the risk graph (shooting off to the left and the right) regardless what transpires in the market going forward – this is our ‘worst case scenario’ – or our ‘maximum loss’ – or I should actually say our ‘minimum profit – that this position will end with. No matter what happens here going forward – at the bare minimum this position will finish with a trading profit of $551.00.
And on the upside – if you take a look at that thin red ‘hard line’ triangle towards the center of the risk graph – the tip of that triangle represents our maximum potential profit in this trade.
If the RUT (which is the underlying we are using in this particular example) finishes trading at expiration day anywhere between the 770 and 780 trading levels – this position could finish with a final profit of up to almost $1,000.00 – very near twice (double) the initial profit target we had when the iron condor trade was first put on.
And once again, we have the opportunity to cash in this ‘double’ without exposing ourselves to any further risk. We have this opportunity knowing that our worst case scenario is finishing with at least our profit target of $551.
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This gives us the ‘best of both worlds’. We’re able to ‘have our cake and eat it too’.
Furthermore, if you take a look at the ‘bowed’ white line (our current profit and loss line in the trade) that white line will continue bending and bowing upwards towards the top of the tee-pee profit tent – allowing us the ability to potentially ‘grab’ a better profit than our minimum $551 from today until expiration day – EVEN if the underlying is trading OUTSIDE the 770 – 780 max profit potential ‘triangle’ area. For example, if we wanted to take the trade off right now – we could do so for a final profit of around $600. And each day we get closer to expiration day, the white ‘bending’ current profit line will continue to rise upwards – providing the position with further profit potential.
Finally – this is one of our iron condor adjustments that we could simply just walk away from at this point without ever needing to worry – or look at – again. Since this trade is on a ‘cash settled’ index (RUT) – we don’t need to be concerned with having any ‘in the money’ options suddenly put to us or suddenly winding up short a position. This makes this set up a true ‘set it and forget it’ adjustment. We can walk away and never look at it again. Come expiration day everything will be settled out cash.
These types of iron condor ‘tricks’ is just one of the reasons why we love trading these types of option positions so much and why we find this type of trading so enjoyable and fun.
For more info on how you can learn more about how this iron condor adjustment works – as well as a host of other great option trading tips, tools, strategies and adjustments - join our free option income trading newsletter by clicking here