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How to Condorize a Credit Spread

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by Gavin in Blog
September 8, 2023 1 comment
how to condorize a credit spread

Today, we explore how to condorize a credit spread to reduce risk as a position moves against you.

It’s essential to have strategies up your sleeve for when a trade starts to feel the heat.

Transitioning a credit spread into an Iron Condor has two benefits:

  1. Reduced Delta risk
  2. Increases the premium received

Contents

Why Condorize a Credit Spread?

Credit spreads are popular strategies to generate income.

However, when the underlying asset doesn’t cooperate and heads toward your short strike, panic can set in.

This is where a transition to an iron condor can come to the rescue.

Step 1: Asses the Situation

Before taking any action, scrutinize your current credit spread position.

Are the market conditions still aligning with your initial thesis?

Has the stock’s trend changed?

Step 2: Identify Your Decision Point

Ideally, you would set a decision point before entering the trade.

One rule to keep in mind is to NEVER let the stock go past the short strike

So you decision point should be a few percent in front of the short strike.

If you decision points gets hit you have three choice:

  1. Adjust
  2. Close
  3. Hedge

Condorizing a credit spread would fall under the adjustment category.

Step 3: Place the Opposite Credit Spread

Assuming you started with a bull put spread, you would place a bear call spread in order to Condorize the position.

Let’s say the short strike of the bull put spread has reached 20. You might consider adding a bear call spread with the short strike of 20.

This will create a roughly neutral iron condor and temporarily remove the delta risk.

Let’s look at an example.

This bull put spread on NVDA started with the short strike at delta 15, but it has now reached 20.

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The market is looking a little weak, so let’s reduce our delta risk by adding a bear call spread at the 20 delta.

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By adding the bear call spread, we have increased the premium received by $140 (which also reduces the capital at risk).

We have also reduced the delta dollars from 2,093 to 517.

Step 4: Set New Decision Points

Now that we have an iron condor trade, we need new decision points on the upside and the downside.

In this case, that would be $455 and $505. We want to try and “stay on top of the hill”.

Step 5: Daily Monitoring

Further adjustments may be needed if our new decision points get hit.

You don’t have to watch the trade every minute of every day. If your price alerts don’t go off, you can leave the trade alone and let time decay do its thing.

Conclusion

When an options trade feels the heat, don’t succumb to panic.

Instead, leverage your knowledge and adaptability by condorizing the credit spread to reduce the risk.

This strategic pivot can help you salvage your position and keep your portfolio on the path to success.

Remember, transitions like these are where experienced options traders truly shine.

By expanding your repertoire of strategies and staying level-headed in the face of market pressure, you’ll be better equipped to navigate the often world iron condor trading.

We hope you enjoyed this article on how to condorize a credit spread.

If you have any questions, please send an email or leave a comment below.

Trade safe!

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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1 Comment
  1. Chris says:

    great stuff Gav

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Options Trading 101 - The Ultimate Beginners Guide To Options

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