If you’re reading this article right now, chances are that you’ve got an Iron Condor that is in trouble and is losing money.
It could be that one side of your Iron Condor just got tested.
Or it could be that one side of your Iron Condor is now deep-in-the-money (past the long strike on one side).
Or it could just be that your Iron Condor isn’t breached but is still showing a loss, and you’re wondering why.
So what do you do in each of these scenarios?
And exactly how do you manage your Iron Condor in these situations and turn it around to become a winner?
How To Manage Iron Condors
When you’re trading Iron Condors, there are only two situations you will face:
- The market is within the short strikes of the Iron Condor.
- The market has breached one side of the Iron Condor.
So to illustrate how to manage your trade, I will use an actual trade that I did on the SPY Index ETF.
For this trade, I entered into a skewed Iron Condor.
That means the width of the wings is not the same on both sides.
On the Call side, I have the 424/436 Short Call Spread (aka Bear Call Spread) with a $12 width.
And on the Put side, I have the 345/371 Short Put Spread (aka Bull Put Spread) with a $26 width.
The reason I did a skewed Iron Condor as opposed to a fixed-width Iron Condor (i.e. $10 or $20 wide on both sides) was that I wanted to play into the skew of the SPY Index ETF.
Since the SPY Index ETF has a Put skew, that would mean that the market perceived the risk to the downside.
So I chose the 16 deltas short strike and 5 deltas long strike on both sides.
This resulted in the irregular width on both sides of the Iron Condor.
Now, the first thing to do when you put on an Iron Condor trade (regardless if it’s fixed-width or irregular-width), is to identify the breakeven points on both sides.
And the quick way to identify the breakeven points is by looking at the risk profile:
As you can see in the risk profile above, the breakeven on the Put side is $367.74.
And the breakeven on the Call side is $427.21.
That means to say, if SPY stays within these two breakeven points at expiration, my trade will be profitable.
So if I were to mark the breakeven points on the chart, it would look like this:
Now that I know my breakeven points, I can easily take a look at the chart to see if there’s any need for me to adjust my Iron Condor.
The next step is to plan out all possible scenarios that can happen.
Then based on the scenarios, we map out a plan of action for each of them.
This way we will never be caught by surprise because we already know what is the worst that can happen.
So when trading the Iron Condor, there are really only two scenarios that can happen:
- Either the market stays within our breakeven points.
- Or the market goes past our breakeven points on either side.
Let’s plan our action steps for each of the scenarios.
Scenario 1: The market stays inside of our breakeven points.
If the market is still inside of our breakeven points, then we simply do nothing.
That’s because the trade is still working in our favor.
As long as the market stays inside both our breakeven points at expiration, the Iron Condor will be profitable.
Although you may see it as a negative P&L on your trading platform, there’s nothing to panic about.
This is normal and you need time for the Iron Condor trade to work out.
That’s because, over time, Theta decay will work in your favor.
If you take a look at this risk profile again, you will notice that there are two lines.
The green line and the purple line.
The green line is your P&L at expiration.
The purple line is your P&L on the current day.
Over time, the purple line will start moving toward the green line.
And by expiration, it will become the same as the green line.
That’s the effect of Theta decay.
So, if the market suddenly dropped to $380 today, your P&L will show a loss.
But that’s only temporary.
As time passes, and if the market stays at $380, your P&L will start increasing to the point it will become a profit by expiration.
So as long as the market stays within your breakeven points, there’s no need to do anything.
The trade is still working fine.
Now, what happens if the market goes past our breakeven points?
Then we may need to adjust it.
Scenario 2: The market goes outside of our breakeven points.
So what do we do if the market goes outside of our breakeven points?
At this point, either our Short Put or Short Call would be In-The-Money (ITM).
First of all, there’s no need to panic.
That’s because we already know our maximum loss upon entry.
And that maximum loss should be a number that you’re already accepted that you could possibly lose.
That’s why capital allocation is very important.
Many new traders only look at how much profit can be made.
And they ignore the risk that they have to take to make that profit.
So when their trade goes wrong, they panic because they can’t accept the possibility of a maximum loss.
And it’s very likely that their position size is too big for their trading account.
Hence, the first line of defense in an Iron Condor trade gone wrong (or any Option trade that goes wrong) is that your maximum loss is small enough for your account to handle.
What is considered “small enough”?
A rule of thumb is not to risk more than 5% – 7% of your capital on any one trade.
If you have a bigger trading account (6 figures and higher), then the risk per trade can be smaller at around 1% – 3%.
Now that the market is outside of your breakeven point on one side, whether there’s a need to adjust comes down to how much time there’s left to expiration.
More specifically, whether there are more than 21 DTE left or less than 21 DTE left.
Managing Iron Condor At 21 DTE
There are two main reasons why we want to use the 21 DTE as our market to decide whether we adjust our Iron Condor or not.
The first reason is that past the 21 DTE mark, the chances of being assigned on an ITM Put/Call become higher.
And what determines whether the Option is likely to be assigned comes down to how much extrinsic value is left.
The lesser the extrinsic value, the likelier it is to get assigned.
And at expiration, all extrinsic value of an Option becomes zero.
So when it reaches 21 DTE, there’s still a good amount of extrinsic value left in the Option.
If there’s less than 21 DTE, then the extrinsic value would be lesser and the chances of getting assigned would be higher.
The second reason for managing the Iron Condor at 21 DTE is that it has better results than holding it to expiration.
The table above shows a study by the folks at TastyTrade comparing holding the Iron Condor till expiration, versus closing it at 21 DTE.
As you can see, when you close your trade out at 21 DTE, you have a higher win rate and a higher daily P&L.
And the above graph shows the cumulative performance of the Iron Condor held to expiration versus closing it at 21 DTE.
Clearly, closing our trade at 21 DTE yields a better result than holding till expiration.
So with this information, how do we manage our Iron Condor pertaining to 21 DTE?
If there are more than 21 DTE left, we simply do nothing.
That’s because our trade is not in danger of getting assigned and there’s a chance the market may come back inside of our breakeven points.
So we just let the trade continue working.
But if there are less than 21 DTE left, there are four things we can do.
Method 1: Close out for a loss.
In trading Options, there will winners and losers.
There’s no way to avoid losers, and there’s no need to salvage every single trade that didn’t go our way.
The graph on the cumulative performance of the Iron Condor shows the results of closing your trades at 21 DTE.
And it still is profitable overall.
So it’s perfectly fine to close the trade out for a loss and then wait for an opportunity to enter into another trade again.
Method 2: Roll out the whole Iron Condor.
If you’re able to roll your Iron Condor out to a further DTE for a credit, then this will give you more time for the trade to work out.
Rolling simply means closing out your current position for a loss, and then opening a new position with a credit that covers that loss.
So for example, if you close out the entire Iron Condor for a $100 loss, then when you open the new Iron Condor, you will have to receive more than $100 in credit.
This will leave you with an overall net credit.
To roll an Iron Condor out in time, you will have to roll both sides separately.
That means you have to roll out either the Put or Call Spread out first.
Then you roll out the other one.
Usually, the untested side is the one that you’d be able to roll for a credit, and the side that got breached will be rolled for a debit.
Overall, the credit needs to be more than the debit for the roll to make sense.
Method 3: Roll out & in the untested side and roll out the tested side.
If Method 2 doesn’t give you a credit overall, then you might need to use this method.
This method is the same as Method 2, but this time you will need to roll in the untested side.
Rolling in means shifting the strikes closer to the current price.
Let’s say, for example, the market goes down to $355.
What you would do first is to roll out the Short Put Spread to the nearest 45 DTE cycle.
This would likely be for a debit.
Then you would roll the Short Call Spread out to the same expiration date as the Short Put Spread, and shift the strikes down.
In the chart above, you can see that the Short Call Spread has shifted down to nearer the Short Put Spread strikes.
When you do this, you would be able to collect a credit that is bigger than the debit you paid for rolling the Short Put Spread.
This way the Iron Condor roll would be a credit overall.
By adding credit to your Iron Condor trade, you reduce the maximum loss as well.
So for example, if your original trade was a $10 wide Iron Condor and you collected $3 for it, your maximum loss would be $7.
But if after rolling you collected $1.50 in premium, then your maximum loss would now only be $5.50 (which is $550 per Iron Condor).
Now your Iron Condor trade would have less risk and have a chance to work out as well.
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