Best Practices

Adjusting Iron Condors

| Dec 6, 2016
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    Best Practices

    Adjusting Iron Condors

    Dec 6, 2016

    When we sell premium using an undefined risk strategy such as a short Strangle we take defensive measures should the market test one of our short strikes, beginning with rolling the untested side down (or up) to the new 30 Delta strike. We generally do not do the same for a defined risk trade in which our risk is known at order entry, such as a Vertical Credit Spread. An Iron Condor though might be different. Although the risk is defined at order entry it behaves a lot like a Strangle. Is there a situation where adjusting one of the spreads of the Iron Condor would increase our Probability Of Profit (POP)?

    A P/L graph compared an initial tight Iron Condor ($3-$8) to one after rolling the Put Spread up. The graph showed why we don’t like to adjust Iron Condors with tight spreads ($3-$8 wide) because of the small credit received (especially after commissions) and a reduced profit zone. A second P/L graph compared an initial wide Iron Condor ($10+ wide) to one in which the Put side was rolled up. It was worth adjusting the Iron Condor in this instance.

    So now that we know it makes sense to make an adjustment on a wide Iron Condor we need to know if we make the same adjustment that we would for a short Strangle and roll just the short strike or do we entire Put or Call Vertical Spread? We could convert it into an Iron Fly by rolling the short strike and leaving the long strike untouched. Our best choice though in general is to roll the spread. A table of when to manage an adjusted Iron Condor was displayed. The table included the initial credit received, additional credit from rolling the tested side, total credit and the point to manage winners in this trade. The table showed that since this roll was a defensive measure, we manage the adjusted trade for 50% of the initial credit not the larger adjusted credit.

    For more information on Iron Condors see:

    Watch this segment of Best Practices with Tom Sosnoff and Tony Battista for the important takeaways and a better understanding how we should adjust and manage short Iron Condors that test a short strike.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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