Module 6 – Adjustments

Welcome to Module 6 of the Options Trading IQ Iron Condor Course.

Perhaps the most important aspect to have a full understanding of when it comes to trading iron condors is how to handle trades that move against you.

There are many ways to adjust iron condors and each trader has his own preferred methods.

Some of the choices include:

DO NOTHING – Yes, this is an option, but as I said earlier, you need to be careful not to let a small loss turn into a big one.

If you think the move is overdone, you might stick with the position and wait for the market to bounce back in the other direction.

However, this is a very risky choice as losses can quickly balloon if the stock continues in the same direction.

This can result in a few sleepless nights for the remainder of the trade.

Thankfully, since our max risk in an Iron Condor is defined, if the position is not too large doing nothing can sometimes be justified.

ROLL DOWN (UP) TO LOWER (HIGHER) STRIKES – This is probably the most common and easy to understand adjustment method.

If a stock is moving towards your put spread, you simply close your open put spread and then re-establish the position at lower strike prices.

This resets the position and neutralizes the delta, reducing the risk of the position.

ROLL DOWN (UP) AND OUT – In addition to rolling your strikes down (up), you can also roll out to the next month’s expiry.

This allows you to get even further away from the market and pick up extra premium due to the increased time to expiry all while neutralizing delta exposure.

The downside to this is that you now have the position open for an extra month, and you may not want the exposure to be open for that long.

When trading Iron Condors, you do not want to go too far out in time as the time decay benefits are reduced.

ROLL BOTH THE PUT SPREAD AND THE CALL SPREAD – Assuming the stock is moving down towards your put spread, you can roll both the put and call spread down to generate more premium to cover the costs of the roll.

The risk with this is that you roll the calls down, only for the underlying to shoot back up.

Now you have losses on BOTH sides of the Condor.

DELTA HEDGE – You can also hedge your position by either buying the underlying OR buying some out-of-the-money options.

The easiest way to do this is by delta hedging with stock. Assume your delta on the Put Spread is around 0.15.

You could sell 7 shares to hedge half of your current delta (or whatever ratio you decide is appropriate).

The risk with this is that if the underlying rises, you end up giving up some of your profits on the Iron Condor, but that’s the price you pay for having some protection.

The other issue is that the delta will change over time, so you may need to buy or sell more of the underlying to adjust your hedge, which could further erode your profits while incurring transaction costs.

If you chose to hedge with options, you could look at buying some options further out of the money than your Condor strikes.

Again, use delta as a guide here.

TAKE LOSSES – The final choice is to simply cut your losses, walk away and wait for another opportunity.

As with doing nothing, this is also a decision that you can make, remember that cash is a position!

Sometimes it can be better to just close things out, clear your head and come back with a fresh look at things. In this case, you could choose to close both sides of the Condor, or just the losing side.

There are many ways to adjust iron condors, but these are the most common and easy to understand methods.

In Module 7 of the course, we will look at a sample Iron Condor trading plan.