In today’s post, we’re going to take a look at an Iron Condor adjustment. And we’re going to look at that when it comes to rolling an Iron Condor.
Before we get there, you have to understand why are you adjusting and what’s the point of adjusting. We’re going to cover that first, and then the second I’m going to show you on-screen on the trading platform about how to do the adjustments.
Iron Condor Adjustment (Rolling)
A lot of people want to do the adjustment, but they don’t know and understand why.
I’m going to draw an Iron Condor here. And we’re going to draw balanced Iron Condor. I’m going to draw two different colors.
Here on the right, I have a green. On the left, I have a blue, and if you’re blue-green colorblind, I genuinely apologize. Just pretend it’s left and right.
If we look at the left side, you’re selling the puts. And here you’re selling the calls. With the calls, if you’re a seller, it’s going on the downside. Now you have this curvature of this line. As it expires, you’re making money, so it continues to go higher and higher.
When we look at an adjustment, you have to have a plan in mind.
What’s your plan?
Let’s say you plan to make $250 on this trade. The most you want to probably lose because you want probabilities to work in your favor is, let’s say maybe $400. That’s your max loss.
You would probably do the adjustment maybe as this one side starts getting tested somewhere over in these areas. Depending on if you have the right side or the left side getting in trouble. It’s probably going to happen when you’re down when you’re a little bit at a loss.
Maybe down about a $100, $300, perhaps the full $400, but somewhere in this range, you’ll probably want to do the adjustment or somewhere in this range.
With the Iron Condor, you probably want to do the adjustment on the downside a little sooner because of the volatilities. That’s because this is a negative or a short Vega. You want to be a little more proactive because you’ll lose volatility very quickly as it starts going against you.
In either case, this is where you want to adjust. And you want to adjust so that way you don’t hit that max loss as quick. And it gives you time for the theta to continue to work in your favor. You’re trying to hold your position. Basically, this is the long and the short of it.
Take a look at Thinkorswim platform
When you do this on-screen, Let me show you how it looks on screen. If we go here on the trading panel (thinkorswim), I’m going to set up an iron Condor on Netflix here, and you’re probably reading this further out in time.
Look at it in terms of theory and concepts, not exactly as this trade. But here I’ll set up a 10-point wide Iron Condor. And let me look at the probabilities where we are. I’ll go out maybe to the 280. And we’re 56 days out. You could do it a shorter timeframe if you want. 280 is probably where I’ll do the selling.
Buy the 270 for protection. There we go. Make sure we’re today; make sure volatility is there. And it’s probably going to give me some wacky and weird prices. That’s simply because I’m doing this at 5:30 in the morning.
I’ll move this side a little bit more – let’s say 410 and maybe 400. So you can see I’m not quite in the middle. And you could tweak this. Let’s say you want to be a little more tweaked. You want to go a little more in the middle where the Iron Condor is a little bit more balanced.
You could play with it. Let’s say I have something like this. Here’s my Iron Condor trade and position.
What is rolling mean?
Depending on which side we’re tested on.
If we get tested on this side, we take off this vertical, and we put on a new vertical further out.
If we were getting tested here and our problem areas on the side, we take off this vertical.
And we put a new vertical out here further out.
All that does is maybe we lose on this side, but we win on this one.
That’s the whole point.
It gives you time to have a winning situation. The other side continues to win more and more. Some people what they like to do is move also the untested side. Let’s say the put side or this left side is getting in trouble. Well, you could shift this, but you could also shift this one inward to make a little more money.
But what I found is if a stock is going down, it’s going this way on you sometimes people move that call side. And all of a sudden, the stock whips back up, and now you’re inverted where you adjusted a side that was safe. And now you have problems with it.
Often what could be another approach is to make the adjustment here (left). But you could put on a small or tiny little position here still further (right). It requires a little more capital, but that’s another approach that you could do.
Here’s our Spread on the Screen
With time here’s our days that are moving, and this let’s say it continues to move upon us. And it moves up on us pretty quick.
Now we’re down about $101. What do we do?
Well, we could take this 400 and 410 that we have (there are two verticals) and we buy those back. We’ll take a little bit of a loss on those. This is how you would do it.
400 and 410 – we’ll buy a vertical. And now you’d be left with a spread like this.
Now your left side or the put side would be making money. But you could wait a day or two if you want. But normally I would say put it on right away – make the adjustment.
Then I’ll analyze the opposite trade. Then we’ll sell another vertical now or a new vertical a little further out. You could make these ten points further out.
Here’s our initial price.
Our initial price where we’re right at the edge or break-even. Right before that peak. I’m going to say it is about $398. That’s our price right there at the call it’s $400.
Once that’s getting closer and closer, you’re going to have a problem. What you can do is buy it back. You take a little bit of a hit on it. Because you’re still going to have time premium in it, but you move it out, so now you can get that spread to go out to about 420.
You’re not going to get as much for it, and even then, these prices wouldn’t be exactly right now. Because we’re not in the trade that the stock isn’t moving, and remember as that price gets closer to it, it’s going to be worth a little different.
The whole point is that why don’t I take a hit, maybe on this one right here.
I take a hit, and I buy this back. I lose once I close this out because of these 400 and 410 problem. I sell a little more premium, so maybe I don’t lose a full dollar on the trade right depending on what you’re putting the trade on.
But you’re looking to make a little bit more money back from the difference of these or the difference of what you’re selling here initially.
That’s because you’re selling this vertical.
You’re buying it back, and then what you’re going to do again is sell another vertical that’s just further out. It’s a basic money management concept.
I have this much coming in from the put side. I have this much coming in from the call side. But that one is not doing so well. So let me at least get rid of it and see if I can make some money on these other calls.
Or these other calls to compensate for the total trade. And that’s ultimately what you’re doing. You’re just widening from right here. Here was your point. You’re widening from right here.
And you’re extending this trade all the way to here, giving you a little more time and room for the trade to work. Because eventually, as stock is still stretch to the upside anyways, you’ll probably get a pullback soon. You’re giving yourself a little time for that pullback to happen.
That way, you become a little more balanced and back into a safer range or region.
That’s the basic concept of rolling an Iron Condor or rolling the trade or rolling an adjustment.
Maybe you have 2 or 3 contracts
If you had let’s say two or three contracts, you could stagger these. You could do only one or two. And I could do the same thing further out even let’s say a 425 and 435.
You’re staggering a couple of trades in between. And you could go even a little further, let’s say 435 and maybe 445. You could do like the one here one there. And now you get to see exactly what I was looking at.
Basically, you’d have this staggering effect where your spreads are at different points.
But it’s still an Iron Condor on the surface and baseline. You’re just staggering positions where now you have another even wider one. It depends on how the market is moving and how much risk you want to put on. But really, that’s the rolling concept.
And the whole point and the reason why you would do this is to let me save myself a little bit. To give me a little bit more time.
That allows the theta to work and the stocks to maybe pull back a bit. That way, I can be more in the sweet spot to collect that theta premium.
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