Iron Condor Adjustments Tutorial | Options Trading Concepts

everyone welcome back to the show thanks for tuning in my name is Mike this is my whiteboard and today we're going to be talking about three iron Condor adjustments we've been talking about these adjustments for different strategies and I think it's super important to understand what we do when we're placing a trade what we're looking for for certain high Ivey trades certain low Ivey trades or maybe certain trades where we're looking at more of a neutral environment but what's even more important is understanding what we can do not necessarily what we should do but what we can do to improve our cost basis on different market moves and how those market moves affect these strategies so today we're going to be talking about three iron Condor adjustments and different things to think about when we're adjusting these iron condors so we're going to get right into it we're going to talk about the opening trade with an iron Condor which is basically the combination of an out of the money put spread that we're selling along with an out of the money call spread that we're selling so if you think about these strategies as more of combinations of other things it becomes a lot easier to really mentally understand how these spreads are going to be adjusting and how they're going to be battling each other in this case so if I'm selling it out of the money call spread which is a bearish assumption against and out of the money put spread which is a bullish assumption just like a strangle this is going to create a profit zone right in here so our max profit is going to be realized if this stock price trades anywhere between 75 and 85 at expiration but since we're collecting in credit if it exceeds these strikes here so if it exceeds 85 and if it goes below 75 we still can make a profit as long as it doesn't go more than a dollar below 75 and more than a dollar above 85 so in this particular example we're looking at selling an iron Condor for $1 credit you can see that this is a three dollar wide iron Condor or a three point wide iron Condor and that's just because my call spread is essentially the same with the same width as my put spread so we're looking at the 85 selling that call there and we're looking at buying the 88 call to create that call spread and we're looking at selling the 75-foot and purchasing the 70 to put to create that three point wide spread on each side which gives us that risk assessment of the three point wide iron Condor so with that and with that in mind we know that we collected a dollar here and if we're selling premium and this is a premium selling strategy we know that the most we can make is the credit received because the best case scenario is that the stock price is between these short strikes at expiration which would allow all of these options to expire worthless which is exactly what we want when we're selling premium and we would be able to keep that $1.00 credit as our profit so that brings us to our max profit of 100 dollars and if we're selling a three-point wide spread for $1 that must mean that our max loss is $200 all you need to do is take that width or if you have a non equidistant spread so maybe let's let's imagine that I sold a $5 wide call spread but a $3 wide put spread then my max loss in that scenario would be $400 because I can lose more on this $5 wide call spread then I could if I lost on the put side of that $3 wide so it's really important to realize that if you're not trading with equally distant equally distanced options here then you're going to have to take the larger of the two and assess your risk off that one but luckily this one is equidistant I've got the 85 and 88 giving me a three-point wide spread and the 75 and 72 which gives me a 3-point wide so regardless of where the stock price goes if it blows through the upside or the downside it's going to be the same risk profile so I'm still going to have that max loss of $200 and because I've collected $1 my break evens are actually a little bit better than these strikes so again since I collected $1.00 I can apply that to the downside as protection so my breakeven to the downside would be 74 and the same theory applies to the upside so since I collected I can just apply that to the upside for the short call which brings my breakeven to the upside 286 so we've laid out the iron Condor what to think about it how it's created but now what can we do when the trade goes against us so let's go to the next side and we'll look at what we might be able to do if the stock price goes up so if the stock price moves up there's a few things that we can do the best thing that we've shown that we can do is to move the untested side up or roll the untested side up you'll see our studies all the time for this on strangles the same thing applies to iron condors we're just dealing with defined risk so we'll be able to collect less of a credit than if we were dealing with naked options but at the end of the day it's going to benefit us for a few reasons so let's say that 20 days went by or 25 days went by and we're left with 20 days on this options expiration cycle so the stock price actually comes up to our long strike of our call to 88 so the stock price has moved significantly up about 10 percent so what can we do well one thing that we can do is create an iron fly so if we move the puts spread which was originally down here we close out of that position and we adjust the strikes to sell a put on the 85 strike and purchase the 82 what we can do is create an iron fly and we're going to collect more credit so what does this do in terms of our max profit max loss and breakeven well if I collect a 40 cent credit for rolling up these put strikes here that's going to make me in a much better position than if I were to have done nothing so if the stock price actually ends up at 85 now which is exactly where we would want it to realize max profit if it expired exactly at 85 point zero zero all of these options would expire worthless because an option is in the money if it's in the money by one penny so if it's actually at 85 point zero zero these strikes all of them would expire worthless the puts would expire worthless and the calls would expire worthless which would give us our max profit of one hundred and forty dollars now you have to remember that I sold the original spread for $1 so if I'm able to adjust these put strikes and move it up here to the 85 strike to create an iron fly which is basically just a defined risk straddle I'm just selling a put and selling a call and I have defined risk wings on either side that are three points away from those that strike if I'm able to do that for 40 cent credit I just add that 40 cent credit onto my original sale of the spread so for that reason if I'm able to reap my max profit it would be 140 dollars now since I've collected a dollar 40 now as opposed to just a dollar that's going to adjust my max loss so my max loss moves from $200 down to 160 because I'm collecting an additional 40 cents and with that set you guessed it my breakeven is going to change as well so my new breakeven is going to be adjusted here so my breakeven is going to be giving an extra 40 cents to the upside so it's going to be 86 42 the upside and since I collected a dollar 40 to the downside my new breakeven is going to be 80 360 on the downside so this would actually be 83 60 not 70 360 I apologize for that typo but it's going to be adjusted because of the fact that if my stock price does move past my long put strike I would be at my max loss of a dollar 60 so since we're moving these strikes up it's going to be adjusted and we're going to have to make that adjustment ourselves so one comment I have here is that if we do this of course it's going to be harder to profit because I'm moving my range from a 10 point wide range as we had originally down to a pretty slim range of right around two dollars and 80 cents because I know that if I'm selling this spread at 85 and I've got a dollar 40 to the upside before I break even and a dollar 40 to the downside before I break even I know that my range of profitability is two dollars and 80 cents so of course it's going to be harder to profit my max profit is only going to be realized if the stock price is right on these shorts rights strikes at expiration but at the end of the day I did lower my max loss by doing this I collected 40% more premium by collecting another 40 cents on my original dollar which allows me to realize a lower max loss if the stock price continues to move up or if it stays right here so all in all it's going to be harder to profit but it is going to lower my max loss and reduce my cost basis overall which is really what we're concerned with when we're dealing with trades that are going against us now let's go to the next item we'll talk about what would happen if the stock moved down so one thing I want you to consider is implied volatility so you saw that when the stock moved up I went ahead and created an iron fly right away the reasoning for that is because normally when we see a stock rise you'll probably see implied volatility go down on the flip side if we see a stock going down we normally will see implied volatility rise so what is implied volatility let's quickly review implied volatility is just a reflection of the option price action so if implied volatility is going up that means that option prices are going up not only with at the money options but they're also inflating across the spectrum of the option chain so if implied volatility is increasing especially in the outer options that are far out of the money I'm probably going to be able to get a little bit better premium in those far out of the money options so for this reason if I can assume that when the stock price goes down I'm going to be able to collect some premium by not creating that iron fly then what can I do well maybe instead of creating the iron instead of creating that iron fly where I would be moving this call spread all the way down to 75 I would be able to just move it down a few points and still collect a fair credit so if I'm able to move my call spread down to let's say 80 and 83 where I'm still creating a nice wide range for me to be profitable while collecting a little bit less credit but since I've got 35 days left in this in this option cycle I am able to do so I might consider doing that as opposed to creating that iron fly right away so here if I've got a dollar that I originally collected and I sold this additional spread for 30 cents or I move my spread down for 30 cents my New Mexico Fateh is a dollar 30 unlike my previous example where my max profit is only realized if the stock price stays right on those short strikes at expiration I still have some room here so now my max profit can actually be realized if the stock price is anywhere between 75 and 80 at expiration because that would allow these options to expire worthless which is exactly what we want since I'm only collecting 30 cents my max loss doesn't go down as much as if I were to be collecting 40 cents like in the previous example but since I still have this nice wide range of profitability maybe this would be a better option than creating that iron fly on this example so what happens if we get blown out I think this is the question that a lot of people answer a lot of people ask on the support channels what happens if my trade gets blown out well number one it's okay if that happens because of the fact that we're dealing with defined risk so we should be knowing what our max loss is going into the trade but is there a way that we can adjust it so let's go to the next slide and we'll talk about that so if a stock price blows through our strikes is it worth it to maybe roll down to those same strikes well what I want you to realize is that as we talked about that implied volatility factor sure if the stock price blows through our strikes especially to the downside we might see and we should see an implied volatility increase normally we would see that but if the stock price is is way far away let's say our stock price is all the way down to maybe 60 or 65 if I look to roll these strikes down to 80 and 83 and I can only do it for a 10 cent credit what I want to do that well for me personally I probably wouldn't unless I'm collecting about 30 cents that's probably my personal threshold for iron condors between 25 and 30 cents because we have to consider some things so if we've got the great doe Commission structure where I'm selling options or any Commission any basically trade that I'm making is a dollar fifty when we're looking at options if I move this spread down not only do I have to close that original call spread for three dollars it's just a dollar fifty for each leg but now I have to open a new one so if I can only do that for ten cents of credit I've already pretty much wiped out all that credit in commissions it costs and if for some reason I need to close this later on in the trade then that's another $3 so I collected ten cents but if I have to close this spread open this one and then close this one later that's nine cents of commissions so I would have wiped out all of the credit that I would have received originally so for me it's always important to realize our Commission cost when we're placing the trade so for me personally I probably wouldn't move these strikes down to this level or even this level down here unless I'm getting around 25 or 30 cents because at that point it would be worth it even if I'm rolling down that position and then I have to close those legs again I would still be profiting about ten or fifteen cents with commissions included so for this case if I'm looking at rolling it down to these strikes and I'm only getting a ten cent credit I probably wouldn't make an adjustment there's not enough credit for me to be realizing this and making it worthwhile so let's go and wrap all these up with some takeaways for you the very first takeaway is that we seldom have to accept max loss so if we looked at all of these examples if I could roll down that last example for ten cents and really my main goal was to reduce my max loss and not think about the future or the Commission's then sure I could totally do that but in the other two examples we reduced our max loss and we collected an additional credit without accepting that max loss so we're looking at defined risk or even undefined risk there's many many ways we can make adjustments to collect additional credit that reduces max loss that we originally thought we had on the trade secondly think about the Ivy factor and credit potential so normally when a stock price moves down we would expect to see implied volatility go up so that might give us an opportunity to keep our profit range a little bit wider while creating and collecting a fair credit like you saw in the second example and lastly we don't adjust further than the iron fly so when we're looking at adjusting iron condors we're not going to overlap those short strikes we're going to keep them at the same strike at the very most in terms of adjustments because of the fact that if we overlap those strikes we're now dealing with somewhat of an inverted iron Condor where we're going to have to buy back those short strikes if the stock price is within that range at expiration which is just going to cost us more commissions and we're not going to be able to realize that full credit potential so we don't normally adjust further than the iron fly with iron condors so thanks for tuning in my name is Mike if you've got any questions or feedback at all should be an email at one of these emails here or you can follow me at doe trader Mike stay tuned though we've got Jim Schultz coming up next hey everyone thanks for watching our video if you liked this video give it a thumbs up or share with a friend click below to watch more videos 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Id: Uv1VcRMnKWo

Length: 17min 15sec (1035 seconds)

Published: Wed Apr 13 2016