Because short straddles have the same ATM put and call strike it's much harder to adjust these positions. Entering these trades will usually give you a very large credit which will naturally make your break-even points wide to begin with (and therefore room to wait it out during extended runs in the stock). Should you have to make an adjustment with this type of a strategy, you are ultimately going to create an inverted strangle position and it's important not to get too carried away with aggressive adjustments. Rather, you should focus on entering the trades at much higher levels of IV and managing your profits much quicker as implied volatility drops.
In today's video, I want to go over how you can make adjustments to iron condor positions. Unfortunately, even when we place neutral strategies in the market, stocks will sometimes move outside our high probability of success boundaries, and we’ll have an opportunity to lose some money.
This will inevitably happen with any system where you’re trading high probability trades. You can’t win every single trade. The first thing we have to recognize though is that when this happens, we are now playing defense and the number one goal is to reduce risk first.
Your goal when making an adjustment to an iron condor is “How can I reduce the amount of loss that I have should the stock remain outside of those boundaries?” But remember that you don't have to make adjustments to these trades to still make money.
This is so important. With iron condor trades, so long as you place them consistently and small amounts meaning small trade sizes, and you’re on the right side of implied volatility meaning you’re not trading these when implied volatility is low.
You’re trading these when implied volatility is high, you'll still be fine, and you’ll make money. Making an adjustment to an iron condor is not a requirement.
It does help long-term to make adjustments to iron condors and to make them in the fashion that we’re going to go over here in a couple of minutes, but you don't have to do it.
If you’re a little bit more passive, a little bit more conservative, this is not a requirement to be successful. It just means that you’re going to make a little bit more money than you would have if you didn't make adjustments.
The first thing that we’re going to do when an iron condor gets challenged… Let’s say that we get challenged to the topside, so the stock starts moving higher against our position. The first thing that we’re going to do is the challenged side; we do not touch.
In this case, the call spread that the stock market is moving towards, we leave alone. We don't roll up that side. We’ve gone over this in a bunch of other video tutorials.
But the reason that we don't do that is that we’re guaranteeing a loss if we roll up that side by closing out the trade when it’s already losing, plus we roll that side to another higher strike price.
Who’s to say that the market can’t continue to move higher and it creates this compounding effect where you just continue to lose money hand over fist. What we do is instead, we move the unchallenged or untested side closer to the new stock price and take in a big credit.
This also helps widen our breakeven points and reduce risk overall. Let’s look at an example here on our broker platform with Thinkorswim. You can see we’re currently looking at IWM which is the Russell ETF and it closed today at about 118.12, so just over 118.
A very typical iron condor trade that we would make is about 56 days out right now which is March and we’re selling the 106/105 put spread which has about a 15%, 16% probability of being in the money and we’re replicating that same probability on the topside of the market with a 125/126 call spread.
You can see we’re doing this very even and balanced as far as probabilities go. We want our probability of success to be about the same on each end, so we’re selling the options that are about the 15/16 Delta on either end.
For doing this, we take in a nice credit of about $30 on a one point wide iron condor. Our risk profile looks like this for IWM. You can see it's a very normal iron condor profile.
Let’s say that IWM which is currently trading right about here at 118 starts to challenge the topside of our trades, so it starts to move higher. You can see our breakeven point right now is right at about 125.30 or so.
If this stock starts to move higher than we get challenged on this end, and we potentially could lose about $70 on this trade just to make $30. What we want to do is we want to first reduce risk, and we’re going to do that by sliding up and rolling up this side of the trade.
We’re going to roll up this put spread to something a little bit closer to where the stock market is currently, we create a more narrow, taller iron condor that takes advantage of this.
What we’re going to do here is we’re just going to assume that the market has already moved higher and what we’re going to do is roll up to somewhere around maybe the 114/113 put spread below the market.
We’re going to go ahead and just roll up that side of the trade, and once we take off the position below the market that we originally had, so we’re just left with this other position here which is that vertical… Let me just recreate that vertical spread that we had sold above the market.
Now what we’re left with is we’re left with an iron condor that looks like this, much more narrow at the top, much more balanced, and that additional credit that we took in helps reduce the overall loss on the trade and moves our breakeven points out further.
You can see our original iron condor had a breakeven point that was much further away from where the stock is trading right now and what we’re going to do is we’re going to slide that put side in closer to the market and take in a very big credit which helps reduce our loss if we keep the width of the strikes and the number of contracts the same.
But also, it increases our chance of success because it widens the breakeven points by the credit that we received. By doing this type of adjustment, we’re sliding the unchallenged side higher or lower if the market is moving against you.
This creates a more taller, more narrow iron condor that both reduces overall risk because of the credit that you're taking in and widens your breakeven points to the side the market is challenging, and this increases your chance of success because if the market can them come back into those breakeven points, you have an opportunity to make some money.
As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below in the video lesson page. Until next time, happy trading!
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