How to Repair an Iron Condor if Your Stock Moves Against You

Mark Wolfinger fields an advanced question from a TradeKing trader

On a recent All-Star post TK client buynhold lobbed up an interesting question: "I don't know if you're taking requests, but I would love a discussion about repairing an iron condor (or even just the affected spread of an IC), when the underlying moves too much for comfort."

All-Stars definitely takes requests, Buynhold. In fact, that's my #1 source of blog material - answering real-world traders' questions. 

This is the topic of a very lengthy discussion - more like a book chapter. Yet, here are some of my basic thoughts and I hope you find them to be helpful. (Before you read any further, you'll need to be familiar with what an iron condor is. This trade consists of the following:

• Buy a put, strike A
• Sell a put, strike B
• Sell a call, strike C
• Buy a call, strike D

Generally, the stock will be between strike price B and strike price C when you put on the trade. You’re anticipating minimal movement on the stock within a specific time frame, and you'll reach your max potential profit if the underlying finishes between the middle two strike prices, B and C. Your max potential risk with an iron condor is limited to the net credit received when you initiate it. You should also realize that multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies.)

1)   It is not always best to REPAIR a position that has not been working as expected. Thus, the VERY FIRST decision must be: Do you take the loss and move on, or is this position sufficiently attractive at today’s price with today’s risk and reward potential?

2)   Not every position is worth saving. To succeed, you must have the mindset that tells you that taking losses is often the best (by far) solution.

3)   Be certain to establish a mental loss limit because your adjustment may not be successful.

4)   Repair number one: Reduce risk. That means making a trade that offsets part or all of your current delta risk. I also urge that you reduce negative gamma. (Learn more about these and other Greeks at OptionsPlaybook, Meet the Greeks.) A good way to do that is to buy a call (or buy a put) or do a long call spread (or long put spread). For brevity's sake and to stay on the topic of iron condors, I won't spell out the details for each of those trades. Just make sure you familiarize yourself with those trades' risk and reward profiles before trying any of them. 

Example: You are short the 950/960 call spread and this underlying has moved to 920, leaving you uncomfortable. Consider buying the 930/940 C spread or the 940/950 C spread. DO NOT buy a spread that is farther OTM than your short option.

5)   If your short option is already ITM, I believe you may have waited too long and I'd exit some or all of the trade. In my opinion, it is rather late in the game to be looking for a way to repair this trade.

6)   When you repair one side of the iron condor, do not forget to buy back that other side – if it is trading at a low price. Do not count on a couple of extra dimes to offset the loss.

7)    Do not allow a modest loss to become huge. Do not be stubborn. Your trade may eventually turn into a winner, but that does not suggest that you should hold onto it. Risk management is the most important aspect of trading.

Good trading to you.

Regards,

Mark Wolfinger
Partner, ExpiringMonthly.com and Founder, MDWOptions.com
TradeKing All-Star Commentator

Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs. 

Mark Wolfinger maintains a business relationship with TradeKing.