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Iron Condor Adjustments

Last week in our Jan 12 Option Trading Lab we had on an iron condor trade where we were able to use one of our more favorite iron condor adjustments – one which we haven’t really talked much about in the past – but which we’re including as part of our online training materials that you can learn more about by joining our free iron condor / 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 guaranteed profit in the trade – so that no matter what happens going forward there is no way the trade can lose. There is no longer any risk in the trade. In addition, it can also allow for further upside profit potential, creating an iron condor / credit spread position that contains the best of both worlds: a guaranteed profit no matter what happens – ideally at your initial profit target (like in the case study example below) – along with the chance to make even more profits without being exposed to any more risk.

Iron Condor Adjustments – Example

Below is a risk graph of this iron condor position after our adjustment was applied…

At his point in the trade, we have a profit of $551.00 (which was our profit target when we first put the trade on) 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 we will walk away with. No matter what happens here going forward – at the bare minimum we will walk away with a trading profit of $551.00. We are guaranteed that amount.

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 – we could finish off this trade with a final profit of up to almost $1,000.00 – very near twice (double) the initial profit level target we had set when we first put on this iron condor trade.

And once again, we have the opportunity to cash in this ‘double’ without exposing ourselves to any further risk. We have this opportunity while still being guaranteed our initial sought after profit target of $551.

Iron Condor Adjustments – Win – Win…Win

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 us with further profit potential.

Finally – this is one of the 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 adjustments along with our other iron condor / credit spread / option income trading ‘tricks’ is 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 exactly how this iron condor adjustment works and how you can use it yourself – as well as a host of other great iron condor / credit spread / option trading adjustments  - join our free iron condor / option income trading newsletter by clicking here

Funny video on the perils of trading iron condors without knowing how to properly manage and adjust…

When I first began trading the Iron Condor, my game plan was to leave the trade on all the way to the bitter end.

After I placed the trade, I would just leave it be until expiration day where the options would expire worthless and disappear into option heaven.

I just assumed this was the most effective way to play the trade – especially since it allowed me to save money from my broker by not paying to close the trade.

But I’ve changed my game plan since then.

After spending far too many nights worrying and not being able to fall asleep – along with a lot of expiration day close calls – painful ulcers – and a near hernia or two – I’ve altered the way I manage my iron condor trades.

Now – as soon as I place the trade, I set a contingent order with my broker to buy back the call spread – as well as the put spread – once I’ve made the majority of the profit in each spread.

Here’s an example: Let’s say I sold an iron condor on the index XYZ for a total of one dollar – or around fifty cents each side.

After I place the trade, I would set up two contingent orders with my broker. One would be to buy back the upper half spread of the iron condor for ten cents – and the other to buy back the lower half spread of the condor for five or ten cents.

Now perhaps some of you out there might be scratching your head wondering why I’d do something this. I know when I first started trading these – if someone told me this was their game plan, I’d be scratching my head. Seems like a futile and even sort of dumb thing to do.

Personally I don’t think so.

Sure I might make less than if I tried to milk them all the way through to the very end.

But then again, not necessarily.

Let’s take a second look at the amount of money we are talking about here. Ten cents per side – or twenty cents total. Okay – sure – it’s nothing to sneeze at – but when you step back, get a broader look, and start to take a few other things into consideration – it can actually start to look quite miniscule.

What’s more important (at least for me) – is that by closing my iron condor trade early, I have LOCKED IN FOREVER the majority of the gains on that side of the trade. And no matter what happens going forward – those gains that I’ve just banked CAN’T be taken away from me.

AND – I’ve reduced my risk.

AND – I’ve created the potential to make even MORE money on the trade than was originally possible when I first initiated the trade – WITHOUT increasing my original risk.

Let me explain:

I’ve found that many times during a trade, the premiums in options can drain quite rapidly. In fact, its possible for a spread to drain the majority of its premium in a matter of days.

Going back to our example – let’s pretend that I put an iron condor on about 40 days until expiration. For the trade I receive around a 1.00 credit. Fifty cents for each credit spread on either end of the position.

Then, as soon as I put the trade on, our underlying starts to move down and continues doing so for a couple trading sessions.

On the fifth day (just 4 days after I put the trade on), I look at my position and see that I can now buy back the vertical spread on the call side of my iron condor for just .10.

If I do nothing, I am choosing to risk that CALL spread margin for the next 36 DAYS for a measly $10.00 of remaining profit (per spread).

On the other hand, if I buy it back for.10, I lock in the bulk of the profit for the CALL side – making that ROI in just 4 days.

Another thing to consider, is if the stock or index we are using abruptly changes direction and heads back up (which of course DOES happen all the time) we really have nothing to be alarmed about since we’ve removed those upper options and eliminated all upside risk.

In fact, if XYZ bounces back up high enough, I could RESELL the same CALL spread that I originally sold – for the same original credit – or maybe even more – increasing my total ROI for the same amount of RISK that I began with.

And even if I don’t resell any spreads – but just buy them back at.10 to close out the entire trade – it reduces my risk, frees up my capital sooner, increases my ROI over number of days, and gets me out of the trade MUCH more quickly than if I were to try and hold on all the way until expiration.

See, I really love the idea of being able to tad a ‘trading vacation’ – or what I mean by that is a ‘break’ away from trading – of having to one way or another ‘engaged’ in the stock market every day. I love being able to be in a trade for a week or so – and then take a week or so off – away from my trading computer screen. I love being able to get out and do other things without having that little worrisome ‘trading nag’ in the back of my head – always wondering what’s going on in the stock market and wondering if my position is doing okay.

And being able to temporarily take some time to ‘get away’ from the game – from the iron condor and ‘option trading’ and ‘vega’ and ‘adjustments’ and ‘theta decay’ – to be able to go out and do other things during market hours without always feeling the need to check quotes on my phone to see what the market is doing – and just having the opportunity to fall into bed at night and sleep like a baby without a care or worry about whether or not there will be a huge gap tomorrow morning at the open…

That’s priceless.

Or at the very least they are WITHOUT A DOUBT worth every penny of the ridiculously small .20 cents or so of potential profit left on the table in exchange for getting out of my monthly iron condor trade early – at what is STILL an incredible monthly return.

To learn how to properly place, manage, and ADJUST iron condor trades, click here

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.

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

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.