Iron Condor Adjustments

everyone Kirk here again at option alpha and in today's video we are going to talk about iron Condor adjustments which undoubtedly is one of the most requested topics and something that a lot of people ask about something a lot of people still don't understand even a lot of our protein members even though we've covered it a bunch of different times a bunch of different ways but I figured I'd do this kind of whiteboard video today here inside of Facebook so if you're joining us again my name is Kirk I'm the founder and head trainer over at option alpha and today's gonna be talking about again like I said all about iron Condor adjustments right so as always as we're going through here let me know what questions you guys have if you have questions pop them in there so that we know what questions you have as we go through I'll make sure that I try to jump in here in the comments and get some of those as much as I possibly can as we kind of cover this but let me just kind of go through the basics of how it kind of works so you guys understand the whole thought process and for those of you who are new to trading just a quick recap on what an iron Condor is if you've got a stock that's trading in a range or whatever the case is what you would do with an iron Condor is you would sell a call at a higher strike price so if the stock is trading at $50 you might sell a call option it's a $55 and then you would buy a call option at a higher price say $60 right that's your call spread side of the trade and down below the market you might sell a put option at say $45 and then you would buy a put option at $40 and again that's your put spread side of the trade right so all you're hoping to do is if the stock closes anywhere in this range that's when you profit somewhere between about 55 and 45 right not including any premium that you take in right for a break-even switch we'll talk about here in a little bit but that's the general consensus right so the issue with this is what do you do if the stock that was trading at $50 now starts trading higher right and goes your call spread side or start trading lower and goes through your put spread side right so what do you do how do you end up adjusting this type of position it's very much and very similar to how we think about adjusting strangles because we've done the other Facebook live on that as well but I'll kind of run through the thought process and why we do this way with a graph so you can see so this is a payoff diagram of what an iron butterfly I'm sorry iron Condor looks like right so you probably have some sort of stock line here right and this is our profit window right this is where we could potentially make money so if the stock is trading up again $50 we might sell the 55 calls here by the 60 calls here sell the 45 puts here and buy the 40 puts here okay that's like your Jase basic general diagram right so you're hoping that the stock trades somewhere in this range and if it trades down in this range here right or down here that's when you end up loosing money right so we don't want the stock trading down there so the whole premise behind doing a cover or a iron condors that we want the stock to trade in between here but we've got these breakeven points that are on these like X's I'm drawn right here and I really wish I should get a different pen but that way you can see them in different colors but they are with their right so that's our breakeven points now if the stock is starting to challenge us towards the top side of our payoff diagram right so it's starting to challenge our call spread side remember these are calls that we traded these 55 calls and a 60 calls if it's starting to challenge us by moving higher the first thing we want to do is leave the existing call spread side intact okay so you do not touch this side of the trade instead where you're gonna do is you're gonna take the put spread side of the trade and you're going to roll that side higher okay does that make sense so you roll and many people call it different things call it moving the unchallenged side higher the untested side higher whatever the case is all you want to do is you don't want to basically dig yourself a deeper hole by moving the call spread side higher this happened just the other day to a member who I did a coaching session on like emergency coaching session because they did this where they move the call spread side higher right and you the calls higher right so maybe you close out of the 55 s and 60s and then sell the 65 s and by the 70s right you just basically roll the call spread side higher well what's to stop the market from continuing to move even higher against you so you basically just dig yourself a hole and a deeper hole and a deeper hole hoping that the markets can turn around but we all know that there's a lot of times where the markets just arrangement you know they're just are they're trending and they just move in one direction for a while so again what you want to do is you don't want to touch this side right so we've that side alone it's gonna go bad it's gonna go bad right you don't want to dig yourself a little bit deeper you want to move your put spread side closer to where the calls are so let me just redraw this here for a second and let me know just generally if you guys have any questions about this right now jump back in here in a second okay so we're getting a lot of people on here which is good so let me just redraw this payoff diagram I won't draw it you know to scale like I did before right so again here's your kind of middle line your profit loss this is making money right and down below you're losing money so if the stock moves higher what we want to do is we want to close out of this side right this put spread side here and we want to move it closer now when you do that when you roll it closer remember this put spread side now because the stock is rallying away from it is probably going to be worth less money so conceivably you're gonna close this thing let's say you sold it originally let's say your original sell was for I don't know a dollar of premium so hundred bucks and now you could close it and you could buy it back for let's say I don't know 20 cents right like cuz then remember the market moved higher so let me just scooch this down so you can see it remember the market moves higher see you can now close this thing for less money right so now you take in technically a paper profit here now I don't count that as really a profit because it's just part of an adjustment to a trade but you took in a paper profit of say $80 right but now what you can do is you can sell something closer and when you sell something closer right to where the stock is trading now remember our stock was trading at say $50 let's say we sell the 50 strike puts and buy the 45 strike puts now right so now we're selling the 50 strike butch which are right at the money and selling the I'm sorry yeah and the 45s right so by doing this let's say we take in an additional credit I don't know at this point maybe like a dollar 20 now right we take in an even bigger credit that additional credit just kind of helps pad your overall P&L for the trade so if you taken an additional credit by selling that of a dollar 20 that moves your break-even point out on this end and this is the key to this whole thing it moves your break-even point out on this end by a dollar 20 okay so now your breakeven goes on this side of the trade remember the call side you didn't touch but because you took in a dollar to run 20 credit on rolling up your put spread closing one and reopening the other because you took in a dollar 20 credit that dollar 20 credit moves your breakeven point out that much further on the call spread side so even though you didn't adjust the call side now you still have some extra wiggle room now look it's not a lot it might be dollar 20 might be 40 cents might be 50 cents but look it's better than nothing right and as the market continues to go higher that's all you do is you just continuously adjust the put spread side higher and higher and higher right now what we suggest is you generally although we do it sometimes you generally don't go what's called inverted and what I mean by going inverted is that you don't want to have your foot spread side be higher than your call spread you want to generally roll and adjust until you get into this type of payoff diagram which is an Iron Butterfly and at an Iron Butterfly your call and your put short strike are exactly the same so in our case we've been looking at this would mean at most rolling up so that you have the 55 short puts and the 50 long puts here right so maybe you roll once or twice however you get there and you have the 55 short calls and the 60 long calls okay so that's what we would suggest in most cases doing right now we can go inverted we talked about going in very in fact there's a couple links up above here that'll add to the video if we're doing a livestream we'll add it later on so you can see it to some of the training and free courses that we have that go through more examples ish and showcase studies so you just want to click on that link above but we do go inverted and there's some special circumstances that we'll cover in other live streams about like how you go inverted and the credits that you take in but the whole idea here is that if you can you want to just roll and adjust until you turn your iron condor into an iron butterfly which is the same short strikes okay so does that make sense so anybody who's on here right now I can't spell butterfly while I'm doing this because I'm thinking about too many different things anybody who's on here right now if you have any questions let me know I'll jump in the comments here for a second and get to those who say what is a good rule of thumb to determine whether it's worth it to roll up the untested side if we can only get an extra 15 cents is it worth it to do it I think it depends on the overall credit that you have right but you got to make that decision if it's worth it sometimes I will not roll and adjust for like 10 cents or 15 cents it's got to be you know a significant reduction in in the payoff right the reason that we do it I would say like if it's a lower width spread so like if it's three to five strikes wide maybe you could do something for like 40 you know cents at the minimum if it's you know five to ten dollars wide I mean you really want to take in like 80 cents to a dollar in premium if that kind of helps give you some maybe some like general guidelines but if you're getting close to expiration I mean every penny counts right if you can cut a loss from $300 because you're trading a cup a couple contracts and cut that loss down to you know $210 I mean that's a that's a huge reduction in just a loss that you were gonna take anyway right like that's what we're trying to do here so especially with these iron Condor adjustments the whole idea in doing this whole process is first number one is to reduce risk and I think that a lot of people get this really confused because they think adjustments are meant to be there to you know to kind of like pad your credit and credit is just a way to reduce risk so you want to reduce risk if right if the market continues to move the direction that you don't want it to go which is considerably higher considerably lower the second goal of doing this obviously is to increase the credit and potential profit if it moves back right so you want to increase your credit and your potential profit if the stock moves back lower right but a lot of people get this all mixed up and they do number two over number one they try to increase their credit because they want to make more money if the stock moves back but they don't really think about reducing risk that's what I think about I think about taking a 300 law $300 loser and cutting it down to a 2/10 and if I can do that 50 or 80 times a year like that's a lot of money back in my pocket right I'm a trade that just would have gone completely against me anyway right there's nothing you can do about it can't really how to force the situation in the market okay does that help out does this help out for those of you who've been watching live here so I appreciate you guys jumping in here middle of the day I know it's like my kids are sleeping right now so I always got to get these in middle of the day so let me know via hearts and likes have you guys enjoyed this so any questions on adjustments so we'll just put here just for a second adjustment hues any questions on adjustments that I can help answer right now you can either do one of two things you can ask it live right now if you're watching this video afterwards go ahead and add it in the comment section right below if you have any more questions afterwards then add click the link here there's a couple videos that we'll put in here and link up to that are like longer videos and more examples with our trading platform that you can see right in the comment section or the kind of like status update section here on Facebook so just click that link and let me know if you have any questions there so I think that pretty much wraps it up as always if you guys need anything let me know for sure really appreciate you guys jumping in again if you guys enjoyed this let me know by sharing it give me some hearts and likes that always helps out and I hope spread the word about what we're trying to do here at op shalva and until next time happy trading [Music] you [Music]

Channel: Option Alpha

Views: 36,224

Rating: 4.9307537 out of 5

Keywords: trading strategy, iron condor option strategy, Trade Adjustments, options trading for beginners, stock market, options, iron condor strategy, options trading, options trading strategies, stock trading, iron condor, trader, trading, iron condors for income, option trading for beginners, trading tutorial, investing, financial education, how to trade options

Id: Hiw9nNy6GAU

Length: 12min 50sec (770 seconds)

Published: Sun Nov 12 2017