Iron Condor Adjustments Visualized (Reduce Risk & Neutralize Delta)

in this video we're going to look at a couple different short iron condor positions in Apple and I'm going to visually simulate these trades using the option net Explorer options analysis software so that we can actually visualize the trades performance over time and more importantly I'm going to discuss a very simple iron Condor adjustment strategy and the pros and cons of using this adjustment strategy but let's go ahead and jump into these examples so I can demonstrate this adjustment strategy to you using historical trade examples in Apple ok in this first example I'm looking at Apple and we're gonna create a short iron Condor starting on April 22nd which is a Monday and we're looking at the year 2019 so to kick this off I'm going to go to the 25 day expiration cycle just because there's quite a bit more strike prices available than the 60 day cycle on this current day and to start this iron Condor position I'm going to use Delta of each option to choose the strike prices so what I mean by that is I'm going to look at the strike prices look at the deltas to choose my short strikes to start this trade so I'm gonna go ahead and sell the 25 Delta call option and the 25 Delta put option and if we look at the Delta column right here we can see that the closest option to the 25 Delta is the 215 call option so to start this iron Condor I'm going to model selling one of the 215 calls and then I want to make a 10 point wide iron Condor meaning both spreads have a strike width of $10 so that means I'm going to go to the 225 call model purchasing one of those calls and on the right hand side here we can see that I have a short call spread in the model trade window so now I have to repeat the process on the put side so we can see that 195 foot is the 25 Delta put option so I'm gonna model selling one of these puts and then I'm going to go 10 points lower to the 185 foot and purchase one of those puts so now I have an iron Condor position completely modeled but I have not executed the trade yet this is just showing me what the model positions are so we can see that the iron Condor has just about more than 300 dollars in maximum profit potential and the maximum loss potential on both sides is a a bit less than $700 so this is typical of an iron condor you're pretty much always going to have more lost potential than profit potential and that's because you have a very high probability of making money because the iron Condor in this case is going to make money as long as Apple is between 195 or actually between 190 180 and to 1820 those are going to be the break-even prices approximately for this position so as long as apples in between these two breakeven prices as time passes we can see that this position is expected to make money so we have three curves here this first green one which the center is right around zero this is called the t plus zero line and that is essentially the profit and loss of this iron Condor at various Apple stock prices today so this means if Apple moves down or up in a significant manner today this iron Condor is expected to lose money because it is going to take on a Delta position and if the stock price continues to move against either side of the iron Condor it is going to start losing money this middle line is actually the t plus eight line and that means today plus eight days essentially so if Apple is at these stock prices and eight days this is the expected profit and loss of this iron Condor position assuming no change in implied volatility and finally this line up here is the t plus sixteen line which is essentially 16 days from now if Apple is at these prices this is the expected profit or loss of this iron Condor so this is a way we can actually visualize time decay which is the decay of an option positions extrinsic value as time passes and for an iron Condor if the stock price is in between both of the spreads at expiration which is this solid green line here then we are going to make the maximum profit potential because if Apple is at 205 dollars at expiration then the 195 185 puts bread will be worthless and the 215 225 call spread will also be worthless and therefore we will keep the maximum profit potential from selling this trade so I'm going to go ahead and commit the trade so that we can see its formitz going forward and to do that I'm just going to click Save and that essentially just entered this trade for the mid-price at that current moment so to actually go ahead and see the performance in the future I'm going to click the de plus button and this is going to take me multiple trading days into the future as I continue to click forwards so the adjustment I want to look at now is if either of the short strikes are hit by the stock price meaning if the stock price falls below 195 or if the stock price exceeds 215 I'm going to move the opposing spread and create a Iron Butterfly position so if the stock price falls below 195 I'm going to close the 215 225 call spread and roll it down to the 195 205 call spread to create a butterfly position and that is going to collect more credit and will reduce the loss potential on this position but at the same time it's going to decrease the range of profitability since I'll be taking this wide iron Condor and turning it into a narrow butterfly but this adjustment is more of a defensive mechanism and when you make this adjustment you're not actually hoping the trade turns out to be a winner you're essentially calling it quits and reducing your maximum loss potential on the position so let's continue to go forwards and see what happens with this iron Condor position so we had a huge move up in the stock price Apple went up $14 and now is almost at the short call strike of this position so because of that huge increase in the stock price I'm assuming implied volatility also decreased and that's why we have a profit on this position so right now this position is up $25 but we can see that if Apple were to move down we are expected to make even more money so I'll continue clicking forward Apple has now retraced back to 210 dollars and now the trade is up a hundred and fifty six dollars or 23% of the six hundred and eighty eight dollar margin requirement and maximum loss of the position so I'll continue clicking forward and let's see what happens here so Apple is continuing to fall now and okay so right here on Friday May 10th we can see that Apple has just closed as of this time period at 193 dollars and 89 cents so this is below the 195 short foot strike and this is causing me to want to adjust this position so what I'm gonna do is I'm gonna close the call spread and then roll the whole call spread down to the 195 strike price meaning I'm selling the 195 call and purchasing the 205 call so I'm just taking this call spread and I'm moving it to the left now what that's gonna do is it's going to it's going to increase my credit received because if I purchase this call spread for a very cheap price since it's so far away from the stock price and then sell this call spread for a higher price that whole transaction is going to happen and I'm going to collect additional option premium from that trade and collecting additional option premium while keeping the strike price with the same is going to reduce my maximum loss potential on the trade so to model what I'm actually talking about I go to the 215 call option and model +1 so that is going that's going to model buying one of these call options aka closing this short 215 call and we can see what that does to our modeled position so because I have not yet closed or modeled closing the 225 long call we can see I essentially have an iron Condor with a lottery ticket to the upside meaning if something crazy happened and Apple went up 30 or 40 dollars in a couple days then I would have significant profit potential on the upside so looking at this 225 call price right here we can see that it's only trading for 3 cents so in reality I actually would not close this 225 call because it's already worthless and if it's already worthless there's really no need for me to sell it and collect $3 because I'm selling it for $3 and it has the potential to be worth significant amounts of money in the future if Apple were to have some crazy stock increase now I know it's not likely but still it doesn't make sense to close this to 25 long call for only 3 cents so in practice I would actually keep this here so I'm just going to close the 215 call and I'm going to sell the 195 call because that's the short strike of my put spread I'm short the put spread with a short strike of 195 and I'm along the 185 foot so I want to sell a 10 point wide call spread starting at the 195 short call so I'm going to model selling one of the 195 calls and then I'm going to purchase one of the 205 calls since that would give me a 10 point wide call spread starting at the short strike of 195 so now we have kind of a mess here so this blue line initially was the initial iron Condor position and these lines right here are the theoretical piano lines for this iron Condor position now this new butterfly looking position is actually the iron Condor that was initially traded plus my model trades as of today so we can see that the new model position has a butterfly profile but it also has unlimited profit potential to the upside because I'm not closing this 225 call on the upside first of all I noted that when I do this adjustment I'm going to collect more premium and that is going to reduce my maximum loss potential on both sides so as we can see the original iron Condor had a maximum loss potential of around 680 dollars but for this current model trade I'm going to collect additional option premium and that is going to bring my maximum loss potential to less than $400 on both sides now because the original iron Condor had a maximum loss potential of around $700 and the new position that I've modeled has a maximum loss potential less than 400 dollars I'm assuming that this roll is collecting about 270 to 300 dollars in additional option premium so to commit this model trade and actually make this trade adjustment I'm going to click commit trade and this is going to bring up a price here and this says that I'm doing this roll a 2.97 cent credit so I'll be collecting another two hundred and ninety-seven dollars an option premium for this adjustment and that means my maximum loss on the initial iron Condor is going to decrease by 297 dollars as we can see by this model chart right here another important thing before I do this model trade is we can see these theoretical P&L lines for the initial iron Condor these are the steeper lines right here so as of this moment we can see that this position has a strong negative Delta position because if Apple continues to go down then this iron Condor is expected to lose money at a rapid rate and if the apple stock price increases then this iron Condor position is expected to make money at a rapid rate if we look at the theoretical P&L lines underneath the butterfly profile which are these lines right here we can see that they are much smoother and actually by doing this adjustment I am creating a more delta-neutral position as indicated by this green line right here so we can see at this point of this line it is very very flat and that is suggesting to me that this position has no Delta position and in other words if Apple moves a small amount around this current stock price after I do this model trade then my position is not expected to make or lose a lot of money whereas if I did nothing and held the original iron Condor this position has a strong positive Delta position and that means that the iron Condor is going to lose money if Apple continues to decrease and is going to make a lot of money if Apple rallies from this position so I'm going to commit the trade and I'm going to just lock it in right at the mid price and hit save so now we can see I have this modeled trade position of the original iron Condor and then I rolled down the call spread to create a butterfly position around the 195 strike price now I'm going to click forward and see what happens with this trade so Apple has continued to fall now it's at 188 but this position overall is only down $16 it probably would have been much worse if I did not do this trade and I was continuing to hold the original iron condor position so Apple has rallied now and it's at 190 29 now the position is up 115 dollars which is a small profit and it probably would have been a pretty decent loss if I had not done the call spread adjustment which was rolling down the call spread to create a butterfly out of this position so we only have two days left until expiration so any stock price movement is going to lead to significant changes in the positions profitability and that's essentially gamma risk if you've heard of gamma risk gamma risk is the increased sensitivity of an option position as it approaches expiration so since these options only have two days left they are going to fluctuate very very significantly relative to a small change in the stock price so I'm going to go ahead and go one more day forward and now we have one day left until expiration and this trade is up 213 dollars if I did not make that rolling adjustment I'm assuming this trade would have essentially been a break-even or a small loss because I did not collect the additional option premium thereby pushing my break-even prices further to the downside and also giving me some more profit potential in the middle of this trade so if I go one day forward we can essentially see what happens at expiration and at expiration Apple was at 180 960 and we can see that that is a small profit based on this graph let's look at another Apple iron Condor trade example but in this example we're gonna look at something where the stock price increases and we actually roll up the short put spread to collect more credit just like we did before but this is an upside adjustment as opposed to adjusting when the stock price is falling I'm going to setup the iron Condor the same exact way as before so right now I'm on January 8th 2020 at 8:30 in the morning and I'm going to look at selling the 25 Delta call option which is going to beat the 320 call so I'm gonna model selling one of those calls and then again I'm going to create a $10 wide I earn Condor two means I'm going to go to the 330 call and purchase that call I'm gonna go down to the put side again sell the 25 Delta put and then purchase the put option 10 points below that so instance I sold the 280 put I'm gonna go to the 270 put model that and then I'm going to commit the trade and we can see that we're entering for a credit of $3.59 which is the mid price at this moment I can actually just put this down a couple ticks just to assume that we're getting more of a real life fill which in most cases is going to be selling for a bit less than the mid price I'll just do three cents less than the mid price we've locked in a trade cost of three dollars and 55 cents essentially I'm going to go ahead and continue going forward and let's see what happens with this particular trade example right out of the gates we can see that Apple has already increased and is right around three hundred and fifteen dollars so I've sold the three twenty three thirty call spread and I've sold the two 8270 call spread and my upper breakeven is three twenty three fifty five essentially and my lower breakeven is 276 fifty right now the trade is down a little bit of money since we've experienced a pretty sizable increase in a short period of time I'm going to go ahead and continue clicking forward and let's see what happens so what I'm looking for is a close beyond the three fifteen or the three twenty short strike of this call spread so as soon as that happens I will adjust this spread now we can see that Apple is at three twenty one sixty seven and because of that I'm going to roll up the put spread and create a butterfly position just like we did before on the put side we can see that the 270 put in this instance is sixty seven cents so before I know that I did not sell the long option in the rolling adjustment but because this put option still has about $70 a value left in real life I probably would close this position so I'm going to go ahead and close this entire spread so a model buying one of the short puts and selling the put that I purchased and that will effectively close the put spread so we can see that this green mottled position is essentially having just just the short call spread and closing the short foot spread but we know that I want to create a butterfly position and since my short strike for the call spread is 320 I'm going to sell the 320 foot and then go to 10 points below that which is 310 and I'm going to purchase the 310 foot now we can see that this is the original iron Condor position with this solid blue line here and we can see that the Delta is actually heavily negative in the iron Condor position as well because if the stock price decreases the iron Condor is supposed to make back a lot of money but if Apple continues increasing the position is expected to lose a lot more money whereas if we look at the butterfly curves we can see that the butterfly theoretical PNL curves are much flatter at this current stock price and that means by doing this adjustment I will adjust my Delta position to effectively zero which means my adjustment will make the position delta-neutral yet again which is a good thing if you are a market neutral trader and you don't like having directionality in your positions more importantly we can see that the iron Condor positions maximum loss was just about 650 dollars by doing this adjustment and rolling up the short put spread to create a butterfly we can see that the maximum loss potential falls below $300 so by doing this I am reducing my loss potential by a significant margin but the downside is that my lower breakeven price or my profitability range in general is going from this big wide range to this much more narrow range but the good thing is that I'm reducing my maximum loss potential theoretically if Apple were to continue increasing I could lose 650 dollars with the iron Condor if I didn't make any adjustment but with this butterfly adjustment if Apple were to continue increasing and was above 330 at expiration this butterfly would only lose about 280 dollars as opposed to 650 dollars so this is a great adjustment that you can make to reduce your loss potential and get very defensive with your position because the number one killer of option selling strategies is the big loss because most of the time when you're trading an iron condors you'll have very easy positions that remain within the tent so to speak of your iron condor and you'll realize very easy profits but the hard thing with options selling strategies is that you're lost potential is typically very significant and all it takes is one big loss to wipe out a handful of losing trades so by employing an adjustment strategy such as this one you can get more defensive and eliminate the potential for a huge loss or at least eliminate the potential for realizing the maximum loss of your initial iron condor position so I'm going to go ahead and commit this adjustment so that we can see what happens going forward so this price of three dollars and sixty-five cents of a credit means that I'm collecting an additional three hundred and sixty-five dollars in option premium for rolling up the put spread to create a butterfly now the additional premium received is why the maximum wasp potential goes from about six hundred and fifty dollars to less than three hundred dollars I'm going to hit save and execute that model trade so as you can see the trade is down money right now because I experienced a big increase in Apple stock price and I was shortened an iron condor and when that happens your position will get directional and you will typically have a loss so even with that adjustment my position is at a small loss of a hundred and thirty dollars but the good thing is my maximum loss potential is much less than before as we've already discussed and I've also read I've also eliminated my directionality in this position because my theoretical P&L curves are very flat let's continue going through time and see what happens with this trade so fortunately Apple is still staying within this butterfly's range of profitability and we can see that the extrinsic value is coming out of the options and I know that because the position is now in profitable territory and Apple stock price has not moved much so now we're at eight days until expiration as indicated by this 8 right here next to the expiration name so we're getting very close to expiration and as we can see these curves are getting very very steep now that is a representation of gamma risk which essentially means that as an option position approaches expiration especially if you have an at the money option position such as this one these steep curves mean that as the stock price changes the positions directionality meaning the Delta and also the profit and loss of the position are going to change significantly relative to a small change in Apple stock price so typically you do not want a volatile position but that's what's going to happen if you hold your trades very close to expiration as we are in this example so I've clicked forward to about three days to expiration now and we've just started a new trading week and Apple is currently at three hundred and seventy dollars three hundred and seventeen dollars and twenty cents and the position is up a hundred and seventy five dollars if I were in this position personally I would probably close this trade because as we can see here with a small change in Apple stock price the positions profitability will change and if Apple follows a few more dollars this position could go to negative profitability territory so that's something I don't want so personally I would probably close this trade depending on my exit triggers but let's continue going forward just to see what happens so now we have one day left to expiration and apples at 3:23 50 and the position is up just under $300 so I'll go one day forward and this is essentially the day of expiration Apple is at 317 now in the position is up $400 but as I said before on this particular trading day which is the final day before the options expire the position will be highly sensitive to changes in the stock price so in this example if Apple fell from 316 let's just say 317 down to 315 the profit goes from 450 to 200 and if Apple goes to 313 then now the position is essentially at breakeven so this position on expiration day will be hyper sensitive to changes in the stock price which is why you typically do not want to hold trades until expiration because a small change in the stock breaks against you could take this nice position which has a profit of 415 and it could turn it into a trade with absolutely no profitability whatsoever [Music] you [Music]

Channel: projectfinance

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Keywords: iron condor adjustments, iron condor options strategy, iron condor trade adjustment, iron condor trade example, optionnet explorer, projectoption, options trading example, options trading, finance, stock market, options trading strategies, short iron condor, rolling call spread, rolling put spread, rolling adjustment options

Id: 2EOf_X6POaA

Length: 25min 4sec (1504 seconds)

Published: Wed Feb 26 2020