Adjusting Iron Condors Based on the Current Bias

Josip Causic

This article shall look at adjusting an Iron Condor based on a changing bias. A live trade example will be utilized showing how the trade evolved from a simple Iron Condor that was supposed to stay in a range to a more complex “Condor within the Condor” type of trade.

Starting point:

Thursday morning 7/19/2012, the RUT was trading at $803 in what appeared to be a channel so the following strike prices were sold: the 825 call on the upside, and the 780 put on the downside. More “breathing room” was given to the upside (825c-803=22points) than to the downside (803-780p=23) due to the possibility of RUT lifting up to but not above the 825 level. Figure 1 lists the I.C. trade.

Thursday AM, 7/19/2012
BTO + July wk D 830c @ 0.78
STO + July wk D 825c @ 1.30
The RUT $803
STO + July wk D 780p @ 2.17
BTO + July wk D 775p @ 1.69

Figure 1: Initial Iron Condor on Thursday AM, 7/19/2012

When the math is done, taking into account all four legs, one dollar was taken in while the risk was four dollars.  The rate of return, for the week this trade would be on would be 25%; overall this was a very good outlook. Nonetheless, keep in mind that the trade would have to stay within the 825 and 780 range; and it did for the first two days. By Monday’s open, it was clear that the lower leg, namely the 780 put could get threatened. It is at that point that a decision had to be made that was either responsive or reactive.

The choice was made to place another Iron Condor but with different strike prices.  The right portion of Figure 2 below lists the additional I.C.

Thursday AM, 7/19/2012 Monday 7/23/2012
BTO + July wk D 830c @ 0.78 BTO + July wk D  810c @ 0.20
STO + July wk D 825c @ 1.30 STO + July wk D 805c @ 0.40
The RUT $803 The RUT $779
STO + July wk D 780p @ 2.17 STO + July wk D 770p @ 3.95
BTO + July wk D 775p @ 1.69 BTO + July wk D 765p @ 2.90

Figure 2: Initial Iron Condor from Thursday (left) & the new Iron Condor from Monday (right)

At this point, the outlook of the trade has changed from price staying in-between 825 & 780, to a different level. On the top side, to be profitable on both IC’s the RUT cannot go above 805. On the downside, the 780 put leg is still the main focus of the trade. By the end of day Monday, the market had started to lift, and the combined Iron Condor looked good – for that day.

Tuesday was another down day, and the situation of having a brand new car crashed twice occurred. The first “car fixing” had just been done, and not long after the same car (trade) required more attention. The main question becomes how much “good” money still needs to be thrown at the bad car. If it is virtually none or very little then the possibility of a fix could be entertained.

After doing an additional assessment of the situation, not only looking at RUT but also at all of the majors (Dow, S & P, and NASDAQ) the decision was made to roll the Bull Put part of the trade down. The reason was that all the majors were approaching their respective demand zones (support). The rolling down of the 780/775 put spread to the already existing one 770/765 put is displayed in the figure below.

Figure 3: Condor Roll RUT

Notice that the Bear Call side short leg, the 825 call, is no longer open; it had been closed for a nickel. The same working order, buy to close for a nickel, was placed on the 805 call but had not yet been filled. Also observe on the put side that there are two sets of orders. The one closer to the option chain is what is already in existence, and the one closer to the margin is the ROLL. To help the reading audience, I have also taken a snap shot of the Order Confirmation Dialog.

Figure 4: Order Confirmation Dialog Box

Basically, three 780/775 put spreads, part of the initial Iron Condor, were being rolled down to the 770/765 strikes. The math outcome of this follows. The 830c/825c/780p/775p were sold for 1.00 and now that dollar was given back through the debit that was being paid out as the aggregate cost of the new rolled down trade. In terms of the margin, nothing has changed because the position is still open

The next figure, below, shows the new Bull Put Spread of six contracts at 770/765. Notice that RUT at $768 which makes the 770 put in-the-money by two points. None the less, it is very likely that between Tuesday and Friday’s open the RUT could move two points. The question is: which direction.

Figure 5: RUT condor

In conclusion, this article was aimed at demonstrating a second fix of a broken trade and the thinking that went behind it. Although many traders simply choose to close a losing trade, it is wise to scrutinize an existing trade rather than jumping to a conclusion too eagerly. Ultimately the decisions and responsibility for any actions taken rest upon the trader (him or herself). Don’t rush, take time to evaluates all the pros and cons, and always look for a better way. Good luck and green trading.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.