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Saturday, January 15, 2011

Different ways to adjust an Iron Condor

This is a follow up on the Iron Condor played on the SPX index and initiated here. As you know the market has been steadily going up in the last weeks, which have resulted in my upper break even point being threatened. That's fine...

I knew it would be threatened as initially the range was rather small, just to take advantage of some good volatility skews thus obtaining a nice risk/reward picture. So, now it is time to adjust. How can I adjust an Iron Condor?

Well, there are two basic ways. One of them I have already explained in the past here and here. Basically what we do is if the Calls side of the Iron Condor is being threatened, we just close it (by buying back the lower strike price call and selling the upper strike call) and reopen the Calls side by using other call options more out of the money.

The other way is today's experiment. In this case I am going to just open another Iron Condor on top of the existing one (this play was actually made yesterday Friday).

So, for you to get the picture:

This way, I get a wider profitability range, and there is a special area in the middle of that range where the profit is much higher. That is my idea, I increase my range but I think there is a chance that the market will retrace in the short term thus I can capitalize on that retracement by catching it with this profitability curve. Without further ado here is the adjustment made yesterday:

BUY 1 SPX FEB 1260 PUT @13.30 (-$1330)
SELL 1 SPX FEB 1265 PUT @14.90 (+$1490)
SELL 1 SPX FEB 1320 CALL @7.40 (+$740)
BUY 1 SPX FEB 1325 CALL @5.80 (-$580)

And now, this is the new position holding two Iron Condors at the same time on SPX:
(Click on Image to enlarge)
PROFITABLE RANGE: 1238.78 To 1321.22
MAXIMUM PROFIT: $620 if SPX is between 1265 and 1305 By February 18.
OTHER PROFIT: $120 if SPX doesn't remain inside the range mentioned above but still inside the profitability range.

Related Articles:
How to adjust or roll a Credit Spread
How to adjust a Double Calendar Spread 
Adjusting an Iron Condor 
Repair a Call Option by Rolling to a Debit Call Spread

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