Today we’re going to take a look at adjusting and rolling your option trade when it comes to trading an Iron Condor.
To get things started, I want to go over what in the world and what the heck does it mean when we’re talking about rolling or adjusting your Iron Condor.
The first thing you need to understand is what an iron Condor is before you get to the adjustment part.
Here’s our Iron Condor. This is what it’s going to look like on the profit and loss picture. It looks something like this.
And, of course, you do have your t plus zero line or curve that’s going to look like this. And your price might be somewhere over here.
Here’s your price, and with time, that line will continue to get closer and closer to expiration. That’s your Iron Condor. When the price gets even closer now, you may think this is already a little to the right.
But, when it starts testing and coming into this area (before that), you tweak and adjust. Or the same thing over here.
If it gets into that area or zone, that might be the adjustment point.
In an Iron Condor, it might be somewhere over here or somewhere over here.
When it gets very close and starts testing those outer ranges, you don’t want to do it too far. That’s because once it gets too far, you’re already too late for the adjustment.
But here is the whole point behind an adjustment. Let’s say your max loss you were looking for is maybe somewhere around $300. Well, if now your current loss is perhaps at around negative 170, well, what you could do is do an adjustment to hopefully not lose your full $300.
Or potentially wait to wait it out, so that way price has a chance to come back into the right spot. Or go back up into the right spot.
If we’re looking at rolling our Iron Condor position, here’s what we have. We technically have two verticals.
We have a vertical over here, and we’re going to do a vertical over here. This would be our call vertical.
What happens is if you’re looking to do an adjustment, well, if you have a price that’s coming too far to the downside, you get rid of the one side that’s giving you trouble.
And then you put on a new vertical. That vertical might go a little further out and then go this way.
If you had that same issue on the upside, in that case, let’s say the price is moving too far to the right or the upside.
Now I could move it out.
Some people say, why don’t you move the untested side. Why don’t you move the side that’s not being in trouble? That way, you could make more premium profit.
And you can do that, but you could get into the point where let’s say price goes in the other direction and now you have a problem of inversion.
That’s the case where all of a sudden, the side that’s healthy and safe turns out to be in trouble as well.
When you look at inversion, here’s really what you’re looking at.
If you have an Iron Condor, price moves up on you. Now you want to move this out.
Why don’t you get more premiums by moving this in as well?
What could happen is this snaps back. And all of a sudden, this line here becomes a problem. And that’s where you get that inversion effect or an inversion problem.
Let me show you on the trading panel and platform how this looks and how you would do the adjustments. That way, you can understand what’s going on and what’s happening.
You could be featured on the show – Ask questions by voice here!
Check out some of the Getting Started Pages here!
Check out reviews and recaps that we do when it comes to the swing charts and technical analysis charts – Membershipsare here!
Take a look at courses – Options Courses are here!
Let’s check out an Iron Condor and do a rolling adjustment. I put on an Iron Condor about 35 days out. And in this case, I’ll open up my strikes to about 50 strikes.
I’m going to place a position on let’s say at about 5% or 7% right here. And we’ll sell an Iron Condor. We’ll look at this Netflix Iron Condor.
And I’m going to do this October’s 2019. We’ll look at the probability of in the money about 7%, so about 350, 360. Let’s do a 10 point strike 350 and do the 360s.
And then the other one we’ll go to also on the put side about 7%-8%. So 230-240 let’s start there. And let’s see what it looks like.
We’ll go to the selling the 240 and buying the 230. And there is our Iron Condor. What you would do here is you would first put this order entry in. And let’s get filled here in this case.
Let’s get one contract filled. You might tinker with this. Go ahead, do a working order. You can see it’s working. I’ll cancel, replace that. And maybe I’ll bump it down a little bit, try and get filled, and there we go. We got filled.
Now what you’re waiting for is for this time decay and theta to kick in. But sometimes the price continues to shift either to the downside or to the upside.
I’ll give you a rolling example let’s say to the upside. Let’s say this stock continues to move higher way beyond what you think and believe. And in that case, you roll the position.
You have to get rid of the calls here. The simple way to do that is to select both of them, analyze the closing trade. Or, in other words, buy a vertical.
You buy the vertical, and now you’re left with the other side of the vertical. What do you do now?
Well, you move those strikes. Now you don’t have to move them. You cut your delta in half as kind of a typical approach. But you could just move them one or two strikes further down.
From 350 you could sell the 360 and the 370. And you sell the vertical there. I’ll sell the 360 and 370. And, of course, prices would be different because now you’re getting closer.
Here would be my new trade. Here’s the original. I buy that vertical, which would leave me with that. I’m taking off this vertical by buying it. And then I would add this vertical, which is further and wider out.
It’s wider so I’d get a little less credit but remember I’m doing this real-time. Prices would be fluctuating, and you’d be closer to that end.
I’m just showing you the theory and the concept. Here’s our big trade. Then I buy that one back and then add that one. Right now, I’m over here at the 360. But before without that adjustment, I’d be at the 350.
What’s the point of giving that extra ten points a room?
Well, the point is to give you a little bit of time and cushion to give prices a chance to go back in the other direction – to hopefully save that position.
And not get into so much trouble. As you see it moving and you could slide and shift that position a bit so that you don’t become in worse or bigger trouble. And that’s the whole point.
Eventually, if it does work out, then great. You’re able to save the position and turn it into a profitable position. But if it doesn’t work out, at least you’ve cut some of those losses to hedge to give you a little bit of cushion and room. And it is maybe allowing that theta to kick in a little faster.
And in that case, perhaps compensate a bit more because the theta can work a little longer. Anyways, that’s a basic rolling position. The way that I would execute this is I would just buy this vertical first.
Now I’m out of that position, and now I would sell this vertical, and I would do it pretty much very quickly.
That way, the price doesn’t get a huge chance to move on me. And then I’d be in a new position right there. The point is when that price is coming in there or getting close, and it’s testing that side, I went ahead and just shifted it a bit, hopefully still catching more credit, allowing that theta always to keep working even though I took a loss on it one side.
Because what you’re doing is you’re losing a bit on one of the sides. The right side, in this case, or the call side, would be at a loss. And then I would put on another one which hopefully with time would become more of a win — and helping me to compensate for some of the losses that I’ve had.
I hope this was helpful and insightful to you.
And if it was, be sure to check out some of the courses and membership areas that we have available.
