Options trading high probability condors adjustment
In the next video in this series we will cover how to make adjustments, exiting early and expiration issues. An iron condor can be designed to accommodate your risk tolerance and account objectives but those adjustments will always have a trade off. As with most option selling strategies this means there is an exchange of a higher probability of a successful outcome and lower premiums or higher risk and larger premiums.
This obviously reduces the premium paid and should not be taken to extremes. As with trading any option or stock strategy, the answer probably depends on your personal risk tolerance.
Getting to know what kind of risk you can tolerate within a trade like this requires some experimentation and paper trading.
We have spent a fair amount of time talking about the trade off between probability and premiums so that you will understand the importance of appropriate expectations. Managing risk is a function of position size as well as the choice of strike prices.
Getting into a position that is too large for your peace of mind can be a disaster. Position sizing for an iron condor is relatively simple because the maximum loss is known in advance. You can consistently size your iron condor trades by allocating a consistent percentage of the portfolio available for these strategies per trade. Being consistent in your position sizing is important and varies based on what strategy you are using and you personal preference.
A bad trade can be emotionally trying but you can minimize those issues by understanding the risk in the trade and staying with small position sizes.
You can learn more about position sizes here. Iron condors are a relatively straight forward in the pre-trade analysis and order entry process. It is a high cost strategy to trade so most options-centered brokers have made it easy for traders to execute easily. The difficulty of an iron condor is in the trade management and adjustment process.
Effectively managing an iron condor trade when the market is moving is ambiguous and subject to your own personal risk tolerance. That means that if you set each trade and left them alone through expiration you would probably be right much more often than you are wrong, however, when you are wrong the losers are much bigger than the winners. However, there are a few concepts that you should keep in mind as you evaluate an adjustment when the trade moves against you.
It is far more likely that at some point during the trade, prices will touch or pass one of the short strikes temporarily before expiration than that prices will actually expire beyond those strikes.
These fakeouts or whipsaws will make an iron condor trader very nervous and can motivate over trading behavior. There is nothing wrong with exiting a losing iron condor and reentering with more time before expiration; or with a tighter spread between the short strikes; or with a larger trade size in order to offset losses but those actions should be carefully evaluated.
In fact most experienced iron condor traders will recommend that a new trade should only be entered if it looks like a good opportunity on its own. Only enter a new spread if you would have wanted to trade that new spread anyway. Many option sellers already have a predetermined maximum loss that they are willing to endure. If losses are mounting, know when you want to get out and be ready to take action.
This account volatility can be difficult to come back from. There is a lot of variability in option pricing so it can be very difficult if not impossible to transpose rules that work today into the future. For example, in option premiums are high so the spread widths can be very wide. That was not the same in when premiums were lower.
This means that your analysis has to be flexible in order to make sure you are accounting for current prices. There are legitimate sources for help with these kinds of strategies and they are typically registered as actual investment advisors and will not make these too-good-to-be-true promises.
If you need help to get started, check them out and follow their picks for a while as you get the hang of this option selling strategy. The materials presented are being provided to you for educational purposes only. The content was created and is being presented by employees or representatives of Learning Markets, LLC.
The information presented or discussed is not a recommendation or an offer of, or solicitation of an offer by Learning Markets or its affiliates to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy.
You are fully responsible for your investment decisions. Alternatively you may decide to adjust when the delta of your short option reaches You would adjust a second time when delta moved to 35 and yet again when delta is This reduces delta, gamma and vega risk.
It pays to buy options that are closer to the money than your shorts. This can be expensive. Roll all or a portion to further OTM strike prices in the same month. Roll all or a portion to a more distant expiration month , being careful to choose a position you want to own, rather than choosing based only on the price of the options. If the underlying puts are threatened with moving into the money, sell more calls spreads.
If the calls are threatened, sell more put spreads. This is a very poor choice. It provides little protection and, if the market reverses direction may place your account in financial jeopardy.