Rolling Our Iron Condor In KO To Extend Trading Timeline

Download The "Ultimate" Options Strategy Guide


Iron condor: Today, we’re going to be going over all of the trades that we made for Wednesday, October 22nd. I can’t believe it’s already getting closer to the end of October. It just seems like this month has flown by. And as always, if you guys have comments or questions about these trades or any of the trades that we have, please ask them right below in the comment section.

That’s what we are here for, is to help answer questions and comments and things like that. We had one opening trade, one closing trade, and then a colossal adjustment. Not big at size wise, it just looks big because we have a couple of different orders here for adjustments to our current KO which is Coca-Cola earnings trade.

Coca-Cola has gone against us and what we’re doing now is making an adjustment to that trade to extend the trading timeline, basically push the trade to November and narrow down our strikes. I want to go over this one first and let’s go over the actual trades that we’ve made and then we’ll go into the analysis on the trade tab, so you guys can see visually what we’re trying to do here with this adjustment.

Related "Iron Condor" Resources:

iron condor

As we look at Coca-Cola, it made a bigger move than expected outside of the one standard deviation move lower after earnings. That's what we’re defending, is a move lower from Coca-Cola. And the first thing we did is we decided to go ahead and buy back or close out of our weekly 42/41 put spread for less than the max loss.

With this Coca-Cola debit spread, we went ahead and bought back our put side which is the 42/41 put spread, and we bought that back for less than the max loss because we don’t want to incur that max loss. That max loss would’ve taken into about $1, so we saved a little bit of money just by buying it back now.

And we’re going to have to buy it back anyway because we don’t want to be assigned the stock. Now on the call side for the weeklies, so for this weekly contract, we left that call side alone to hopefully expire profitably and out of the money. That was the 44/45 call spread above the stock. Now that the stocks move lower, there’s no need to buy that back. We’d be buying it back, and it would cost us more in commission than it’s worth.

We’re going to go ahead and just leave that one on that is a weekly contract. It does leave a little bit of margin exposure for the weeklies, but I don’t think it's going to be an issue at all, and I don’t see Coca-Cola getting back up to that level anytime in the next two days to make that obviously a risky trade. We’re going to leave that one on. We’re going to suck out as much of the premium as we can from that. Those will expire worthless.

Start The FREE Course on “Earnings Trades” Today: When companies announce earnings each quarter we get a one-time volatility crush. And while most traders try to profit from a big move in either direction, you'll learn why selling options short-term is the best way to go. Click here to view all 10 lessons ?

Now, what we did is we rolled everything to November. Now that we’ve closed out of the put spread that was in the money, we went ahead and resold that put spread out in November. Notice that we did not change the strike prices. And this is one of the things I teach all the time in adjustment webinars, are you don't modify the strike prices, you do the same strike prices, but now we took in an even bigger credit.

Now, we took in a $.65 credit, covers some of the rolls. We’d like to see it include a little bit more than that, but we also went ahead and sold that call spread closer in towards the money. We’ve pulled down our request side, so we’ve sold a call spread that’s closer to the stocks, so we have adjusted that side of the trade. But on the put side, the side where the stock has moved against us to the lower side, we did not adjust those strikes, we left those the same.

And because they are in the money, we went ahead and got pretty aggressive with our call spread here, the 42/43 call spread. We sold that call spread for about $.16, plus we’ve sold the November put spread for $.65. That leaves us basically with a 41/42/43 butterfly for November because we are short options at 42 and we’re long options at 41 and 43. That’s the logistics of what we did.

When we go here to the chart, this is what the payoff diagram looks like. Now it’s confusing just for a second but forget this chart right here, look past it. What I want to show you guys is this is basically what our payoff diagram don't use, exact figures for profit and loss, all that stuff, but it was the 45/44 iron condor. It was the 42/45 on the topside and the 42/41 on the bottom side. This is our original iron condor.

Now, Coca-Cola is trading right here, so you can see that it's tested us to the bottom side of this graph. Now logistically, what we did has we kept this side the same. We didn't do anything with this side except for moving it out to the next contract month. This side stays the same as far as the strike prices that we were in. We moved them from the October weeklies out to the November monthlies and kept the same strike price.

Now, what we did on the topside of our trade has we actually moved this side closer to the market because there’s no use in rolling this position all the way out to November to keep it all the way up here. Now, we have new information; we know that the stock is trading lower, so we went ahead and rolled and tightened up this side of the trade. Now, what that creates is it creates this… And let me just take off these October weeklies.

And what it creates now is it creates this November contract that looks like this, a very nice evenly balanced butterfly spread for November. Remember, we were short the 240 on both sides, we’re short the 42 contracts, both calls, and puts, and we’re long the 41 puts and long the 43 puts. That gives us a nice little profit window here should Coca-Cola at some point between now and expiration move back up into that range.

Now, the whole reason that we did this is that we did all of these trade adjustments for almost the same credit that we took in on the original trade. We did everything for around a $.21 credit when you add up all the credits and debits. What that means is that for the same amount of capital, we have now extended the timeline of our trade, so we have an opportunity now to possibly make some money whereas if we just closed it out and said, “So what? It’s a losing trade.”

We would've lost a little over $100. We lost some pretty good money on this trade, why not extend the trading timeline by rolling this out to November? It ends up being the same credit, and now we do have a smaller window of opportunity. That’s true. We have a smaller area in which we can make money, but let's give us a shot here. Let’s not just cut and drag tail and run with our tail between our legs and say, “We made a losing trade.”

Let’s try to do something to manage this trade and possibly turn it into a winner. That's exactly what we did by rolling it out to November. You just have to think through the process a little bit. It's not that complicated. You just have to think about what you’re doing about the pricing and strategically what you’re trying to do. Hopefully, this video was helpful just to talk in depth about how we make these adjustments around earnings.

Alright, the one trade that we got into today is a Lowe’s (LOW is the ticker symbol for Lowe’s) November 52.5/50 credit put spread. Now, when I sent out the alert… And now, hopefully, you guys have seen in some of the alerts, we added a new section where I can just type in a couple of remarks as the signal goes out. And one of the things that I said with Lowe’s is that it basically is going to act as a hedge against our short Home Depot spread.

If you look at the charts here, we are short a Home Depot credit spread above the market. We’re short a Home Depot spread above the market which means that it's running against that spread and creating some risk. Instead of going back to Home Depot, we decided to do something a little bit different. We want to spread our risk out across virtually the same type of industry. Lowe’s and Home Depot are practically the same and trade very, very similar to one another.

What we decided to do was go out to Lowe’s because it had just a little bit better implied volatility, so a little bit higher implied volatility, and go ahead and do a put spread below the market. You could effectively say we've got an iron condor around home building. We’ve got the call side with Home Depot and the put side with Lowe’s. Now, it is its own individual trade and we’ll manage them individually naturally, but this is a really cool way to hedge and adjust positions when you don't really like the volatility or maybe there’s volatility that’s a little bit better in one stock over another.

In this case, Lowe’s had a little bit better volatility than Home Depot and since they’re so closely related and move so much together, I felt like we could do the trade in Lowe’s and it basically acts as an adjustment in Home Depot. That’s exactly what we did. We sold the 52.5/50 put spread and took in about $.45 in premium.

The other trade that we closed out of today or the only trade we closed out of today is our VXX position. This position, I wish we would've doubled down on even more. But as the market was rallying, we continued to sell a lot of VIX. We still have some short VIX positions in VIX which we’re still holding for a little bit, try to take a little bit more money out of it. But we’ve made some good money in the VIX this year, and this is no exception.

We knew that the VXX would continue to go down if volatility is crushed. And we bought back today our 45/47 call spread for about a $.10 debit, took in about $80 in profit, made well over our 75% of max gain here. And you can see here with VXX (let me type in the right ticker symbol) that this thing was all the way up at 44 and has since come down in the last four days down to around 32 or so, so a huge, huge drop in VXX and probably still has a lot of premium left in it, so if it gets back up to around 38 or so, we'll probably reload this trade and go all over it again.

I think that this thing remains high and this is only a duration trade. If you can stay short the VIX for a long time, and if you can keep your position size small enough and just roll those contracts or add to them, this has always been a really, really good trading vehicle being short volatility in these crazy times like this been very, very profitable for us, so we’ll continue to do it.

As always, I hope you guys enjoy these videos. That's it for tonight. Hopefully, the adjustment stuff with Coca-Cola was insightful. Let me know. Add some comments. Let me know if this stuff is helping, if it’s hurting, if you want to see something different. I go off of your guy’s feedback on what to do with these videos just to help you guys learn and understand how to make adjustments and how to make these trades. As always, if you guys have any comments or questions, please add them below. And happy trading!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.