When the stock market is not bearish or bullish then iron condor’s strategy is used to profit from options during neutral environment. Iron condors are said to display high probabilities of success. High success probability means an expectation of low returns. Many beginners are finding with such trade-off.
Neutral strategy – How to respond?
In options trading, if underlying instrument price remains inside a particular range then there is hardly an issue but if it moves in either direction after you went into position then this neutral strategy hurts. At times, it depends on the timing and structure of the condor you made, which can allow you to ride such big movements and profit. These violent movements can have an adverse effect on your transaction making it urgent to determine whether to close and accept losses or make adjustments. It should be covered in your backup trade plan.
Hoping that price will change and your position will turn profitable is not the right action. With iron condor’s traders have lost more than they profited, so make sure to avoid small losses convert into massive ones.
Key features of iron condors
- The strategy involves selling a bear call option and selling bull put option spread.
- It has limited profit potential [premium collected on bear call and bull put].
- Possible losses are very high than probable profits.
- High success probabilities, which can get offset by the risk of losing more than what can be earned, so adjustment is crucial for losing trades.
- Consistent winning is also not possible all the time even with adjustments there is some percentage of losing trades.
- Consider not to invite big losses that can make you lose gains from prior trades.
Ways to adjust iron condors to offset some losses
If trades turn against you in iron condor strategy then make adjustments and take actions. First understand when to adjust, Iron condors get established for credit versus debit. First things are to decide maximum loss. The golden thumb rule is maximum loss must never be more than half of overall credit.
When you are 1/3rd of max loss then make the first adjustment. Make another adjustment, when you are down 2/3rd of max loss. Exit when you are down 3/3rd of max loss.
- Patiently wait for underlying asset to reverse its direction and move back losses into a comfy level. One thing to remember is the stress you will undergo remaining in this position and the fact that adjustment will be hard as trade approaches expiry date.
- Roll down to low strikes. It allows you to move away from the market and get more option premium because of further volatility spike.
- Roll down and out. Due to increased expiry time, you get more premium. You have a position open for an extra month, which you may not be interested in because time decay can reduce your benefits.
- Roll bull put and bear call to offset losses from initial bull put loss.
- Hedge your position is also an option that works.
- Cut your losses by walking away and return back fresh.
Make sure not to allow a single loss to take away everything you have or are about to win. Follow 1/3rd rule, while trying to adjust, so as to limit losses.