John Jagerson

How to Save an Ailing Iron Condor

    Tweet This

Free Trading Guides

This article is brought to you by LearningMarkets.com.

Iron condors are relatively straightforward in the pre-trade analysis and order entry process. It is a high-cost strategy to trade, so most options-centered brokers have made it easy for traders to execute. (Learn 7 Reasons You Need a Broker Who Specializes in Options.)

The difficulty of an iron condor is in the trade management and adjustment process. Effectively managing an iron condor trade when the market is moving is ambiguous and subject to your own personal risk tolerance.

Iron condors are typically entered with a very high risk/reward ratio and a very high win/loss ratio. That means that if you set each trade and left them alone through expiration, you would probably be right much more often than you are wrong; however, when you are wrong, the losers are much bigger than the winners.

In the example that I used in the prior two articles, I had a risk/reward ratio of nearly 1:1. However the short strikes were very close together, and based on prior experience, I would expect to be wrong frequently.

You may choose to move the short strikes much further away from the current index price to increase the win/loss ratio, but remember that this will also increase your risk/reward ratio. When the short strikes are moved very far away from each other, the risk/reward ratio increases against the trader.

If you were to look at the iron condor orders currently working on the SPDR S&P 500 (SPY) for June expiration, there are more traders trading with risk/reward ratios in the 2:1 or 3:1 range than in the 1:1 region.

This tendency to take on more risk and less reward in order to increase the win/loss ratio is common; however, this kind of exposure makes adjustments to the trade very difficult.

5 Rules for Adjusting Iron Condor Trades

There are many rules of thumb for how and when to adjust an iron condor, but there isn't a "rule set" that can be reliably applied to all markets. However, there are a few concepts that you should keep in mind as you evaluate an adjustment when the trade moves against you.