Why Adjusting Iron Condors Can Be Dangerous

One of the most frequently asked questions we get is:

When do you adjust [tag]iron condor[/tag]s?

This also gets parsed as: “What do you do when a trade starts going against you,” “How do you know when to [tag]exit[/tag] or [tag]adjust[/tag] a trade,” etc. The best and most honest answer will always be: it depends. There’s simply no one cookie-cutter solution to [tag]trading[/tag] and managing positions, even ones as stable as iron condors, which is why we have a whole range of criteria we use to assess our trades. Besides all of the technical criteria we consider, there are some very simple things to keep in mind when you’re wondering whether it’s time to “adjust” a position:

  1. Exit on time: If you’ve read our Iron Condor Trading Rules, you’ll know that we always exit positions before expiration – usually 4-10 days out – in order to avoid negative gamma risk. If one of your short strikes has been violated or is threatened (meaning that the underlying equity price is higher than your short call or lower than your short put), it’s often better to get out with a small profit/loss than to wait around and risk incurring a maximal loss.
  2. Don’t adjust, add: If a position has 3-5 weeks of time left before expiration and the underlying stock or index has moved significantly since your initial iron condor was entered, it’s always better to add another position to your portfolio that takes account of the changed environment, rather than try to “fix” your initial trade. As noted in our next point, there are often good odds that a trade that looks busted will actually recover; but even more importantly, adding position inventory allows you to smooth out your aggregate risk profile. We will discuss this question of addition vs. adjustment in some future posts.
  3. It’s okay to touch: the probability that an underlying will “touch” one of your short strikes during the life of a trade is always higher than the probability that your short options will expire in the money. In plain English, that means that for every one time that an underlying moves beyond one of your short strikes and stays in the money (forcing you to give up profits or even taking a losing trade), there will be many, many times when the underlying touches or crosses your short strike and then reverses back into your desired range. The point here is that an itchy trigger finger can be more costly than you might think.

SPY August 2007 Fed Meeting Now, the action during and after the Fed meeting yesterday presented an ideal opportunity for overtrading. As you can see, there was a huge spike down on higher volume, followed by an even bigger intraday rally. Given the recent increase in negative sentiment, the rise in volatility, and the broader economic factors that are now on everyone’s minds, it was probably difficult for many traders to sit through the sudden selloff yesterday; options expiration looming in the distance probably only compounded the fear for some. Obviously, neither the selloff nor the rally were to be believed yesterday afternoon, as we ended up (at least in [tag]SPY[/tag]) more or less where we were before the Fed meeting.

The point here is that overtrading is just as much a threat when it comes to iron condors as it is in any other area of trading. Calm and rational decisions always win out over emotional and panic-driven ones.

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  1. Trading, Overtrading, and Waiting | Condor Options: Iron Condor Trading Newsletter Says:

    [...] overtrading is a constant temptation. Even though we’ve warned before about the dangers of adjusting iron condors, people constantly ask about this aspect of the strategy. And again, for the record: adjusting [...]

  2. Trading, Overtrading, And Waiting - Zecco.com Says:

    [...] overtrading is a constant temptation. Even though we’ve warned before about the dangers of adjusting iron condors, people constantly ask about this aspect of the strategy. And again, for the record: adjusting [...]

  3. 8 Hedging Ideas for Iron Condors, Part 1 | Condor Options: Iron Condor Trading Newsletter Says:

    [...] we’ve said elsewhere, there’s no rule that says it’s a disaster if the underlying touches our short strike – in fact, the probability of the underlying touching a short strike will always be higher than the [...]

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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