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How To Adjust the Iron Condor
KerryW.Given,Ph.D.(Dr.Duke)ParkwoodCapital,LLC
©2011ParkwoodCapital,LLC.AllRightsReserved.
2©2011ParkwoodCapital,LLC.AllRightsReserved.
Disclosures and Disclaimers
BuyingandsellingstocksandopAonsinvolvesrisksandmaynotbesuitableforallinvestors.PriortobuyingorsellinganopAon,
theinvestormustreceiveacopyofthebooklet,CharacterisAcsandRisksofStandardizedOpAons,fromyourbrokerorfromThe
OpAonsClearingCorporaAon,1NorthWackerDrive,Suite500,Chicago,IL60606.
TheinformaAoninthispresentaAonispresentedforeducaAonalpurposesonly.ItshouldnotbeconstruedasarecommendaAon
orsolicitaAontobuyorsellopAons.ManyexamplesofopAonstradesarepresentedinthispresentaAonasillustraAonsofthe
principlesbeingtaughtinthiscourse.TheseexamplesarenotrecommendaAonsorsolicitaAonstobuyorsellanystockoropAon.
TosimplifythecalculaAons,commissioncostshavenotbeenincludedintheexamplesinthispresentaAon.Commissioncostswill
affecttheoutcomeofanystockoropAonstradeandmustbeconsideredpriortoenteringthetransacAon.
NorepresentaAonisbeingmadethatanyaccountwillorislikelytoachieveprofitsorlossessimilartothosediscussedinthis
presentaAon.ThepastperformanceofanytradingsystemormethodologyisnotnecessarilyindicaAveoffutureresults.
©2011ParkwoodCapital,LLC.AllRightsReserved.
Agenda
• BuildingtheIronCondorSpread
• PuttheProbabiliAesOnYourSide
• TheProfitEngineoftheIronCondor
• RiskManagementfortheIronCondorSpread
• Back‐tesAngtheAdjustments
• DevelopingaTradingPlan
• VerAcalspreads:thebuildingblocksofmorecomplexopAonsstrategies
• CreatedbybuyingoneopAonandsellinganotheropAonatalowerorhigherstrikeprice
• Creditvs.debitspreads
• Buildtheironcondorwith:
• Abearcallspreadplacedabovethestockprice,and
• Abullputspreadplacedunderthestockprice
©2011ParkwoodCapital,LLC.AllRightsReserved.
Building the Iron Condor
©2011ParkwoodCapital,LLC.AllRightsReserved.
Building the Iron Condor
• PCLNat$458on3/16/11• Notestrongsupportandresistancelevelsat$443and$475,respecAvely• EstablishtheApr430/440putspreadforacreditof$2.55• EstablishtheApr475/485callspreadforacreditof$3.35• Maximumprofit=$590/contract;maximumloss=$410
• CondorSpread(debit)vs.theIronCondorSpread(credit)
• Lookforchannelingstocksascandidates.
• Tradethebroadindexeseverymonth.
• Strikepriceplacement–nearorfar?
• TimetoexpiraAon?
• ArespreadsestablishedsimultaneouslyorbyleggingintotheposiAon?
• OpportunisAcmodelvs.Insurancemodel
©2011ParkwoodCapital,LLC.AllRightsReserved.
Many Different Condors Are Possible
• Twobroadcondorstrategiesarecommon:
1. TheOpportunisAcModel‐Lookforachannelingpaferninastockorindex.
2. TheInsuranceModel‐Tradeeverymonthtogenerateincome.
• WithineachofthesestrategiesareseveralpossiblevariaAons:
Strikepriceplacement–nearorfar?
TimetoexpiraAon?
ArespreadsestablishedsimultaneouslyorbyleggingintotheposiAon?
7©2010ParkwoodCapital,LLC.AllRightsReserved.
The Most Common Condor Strategies
Asiso?enthecaseinopAonstrading,thereisn’ta“beststrategy”.EachvariaAonhasitstrade‐offs.Findwhatsuitsyourstyle,risktolerance,andAmeavailabletomanagetheposiAon.
• Lookforstocksorindexesyouexpecttotradewithinachannelforthenext30days
• CalculateonestandarddeviaAon(σ)fortheunderlyingstockorindexwiththecurrentIVandthenumber
ofdaystoexpiraAon.Lookatthestockorindex’spricechart;hasitmoved>1σinthepastseveralweeks?
• Acondorwithahighprobabilityofsuccess(>85%)willhaveshortstrikeprices≥1σfromthecurrentprice
• LookforlevelsofsupportandresistancetoposiAonyourshortstrikes
• Somesokwarecanscreenforchannelingstocks
• ThisisadirecAonaltrade,basedonyoursidewayspredicAon
8©2010ParkwoodCapital,LLC.AllRightsReserved.
The Opportunistic Model
• Usethebroadindexes,e.g.,SPX,RUT,NDX,etc.
• DevelopandconsistentlyapplyaprobabilisAcmodeltoselectstrikeprices
• ConsistentlyuseasimilarAmetoexpiraAon
• Sefleonanadjustmentmethodology,includingtriggercriteria
• Thisisanon‐direcAonaltrade;youarereacAngtowhatthemarketgivesyou
9©2010ParkwoodCapital,LLC.AllRightsReserved.
The Insurance Model
©2011ParkwoodCapital,LLC.AllRightsReserved.
Put the Probabilities On Your Side
StandardDeviaAon(σ)
• GaussiandistribuAons
• Blueshadedarea=84%probabilityofsuccessforacreditspreadoneσOTM
• DisAnguishprobabilityofclosingvs.probabilityoftouching
11©2010ParkwoodCapital,LLC.AllRightsReserved.
The Profit Engine of the Iron Condor
60 45 30 15 0
DaystoExpiraAon
TimeValue($)
• AconAngencystoplossorder
• Adjustmenttechnique
• Anadjustmenttrigger
• AAmestop
• Aprofitstop
©2011ParkwoodCapital,LLC.AllRightsReserved.
Risk Management for the Iron Condor
• HerearesomeguidelinesforselecAngtheconAngencyordertriggerprice:
• WatchthedeltaoftheshortopAon;whenitreaches35,Ishouldbeoutofthetrade.
• Forexample,on12/15/09withtheRUTat$606,Iestablishanironcondorwiththe510/520putsandthe680/690
calls;the$580puthasdelta=33,soIsetmyconAngencyordertotriggeratavalueof$26(606–580=26)abovemy
shortputstrikeprice.SomyconAngencystoplossorderwouldtriggerifthepriceofRUTdropsbelow$546(520+26).
• JudgmentCall:
Settriggerfartherdown=greaterriskofloss
Settriggercloser=greaterriskofbeingwhipsawedoutofthetrade
©2011ParkwoodCapital,LLC.AllRightsReserved.
Risk Management For The Iron Condor Contingency Order Triggers
1. The200%Rule:a) Monitorthedebitrequiredtocloseyourspreads;whenthedebittocloseis≥200%oftheoriginalcredit,
closeallofthespreadsonthatside
2. ClosingSpreads:a) IfthedeltaofeithershortopAon≥18,closeonethirdofthespreadsonthatsideb) IfthedeltaofeithershortopAonhits30,closetheremainingspreadsonthatside
3. TheBuyBack:a) IfthedeltaofeithershortopAon≥18,buybacksomeoftheshortopAonsb) IfthedeltaoftheshortopAonreturnsto15,sellopAonstorecreatethespreadsc) IfthedeltaofeithershortopAonhits30,closethespreadsonthatsideandselltheextralongopAon(s)
4. TheLongHedge:a) IfthedeltaofeithershortopAon≥18,buylongopAonsattheshortstrikeinthenextmonthb) IfthedeltaoftheshortopAonreturnsto15,sellthelongopAon(s)c) IfthedeltaofeithershortopAonhits30,closethespreadsonthatsideandsellthelongopAon(s)
5. RollingSpreads:a) Whenyoucloseallofthespreadsonaside,youmaychoosetorollupordowntoconAnuethetrade
©2011ParkwoodCapital,LLC.AllRightsReserved.
Risk Management For The Iron Condor Adjustment Techniques
©2011ParkwoodCapital,LLC.AllRightsReserved.
• The200%Rule:• Simpleandeasytouse.
• AveryconservaAveadjustment;raretolosemuchmoneywiththisadjustment.
• Downsideisbeingfrequentlystoppedoutoftrades.
• TheClosingSpreadsAdjustment:• Reducesone’spotenAalloss.
• Strongdeltaimpact.
• Minimalthetadamage.
• TheBuyBackAdjustment:• FlafenstheR/Rcurve(bigadvantage).
• RequireslesscapitalthantheLongHedge.
• Smallerdeltaimpact.
• Worstthetadamage.
• TheLongHedgeAdjustment:• FlafenstheR/Rcurvebest.
• Strongdeltaimpact.
• Moderatethetadamage.
• Increasesthecapitalatrisk.
Risk Management For The Iron Condor Adjustment Techniques
©2011ParkwoodCapital,LLC.AllRightsReserved.
• WhenmakingadjustmentstoyourcondorposiAon,trytoreducedeltawithoutreducingthetatoomuch.
• IftheproposedadjustmentcausesthetatogonegaAve,thenclosetheposiAon.
• IfusingtheBuyBackorLongHedgeadjustments,watchtheneartermrisk/rewardcurve;wewanttoflafen
theslopesothataddiAonalmovementoftheindexagainstusdoesnothurtustoomuch.
• Whenyouradjustmenthasplayedoutandyouclosethespreadsonthatside,youmayrollthosespreadsupor
downtoconAnuethetrade.
• Youmayalsowanttoconsiderrollingthespreadsonthe“good”side.Butthisisincreasingyourrisk.
• Sometradersincreasethenumberofcontractswhentheyrollthespreadstorecoverthelossofclosing;
butbewareofthistacAc–youareincreasingthecapitalatrisk.
Thekeytosuccessintradingtheironcondorismanagingyourrisk.
Ifyouarecarefultominimizeyourlosses,yourgainswillcome.
Risk Management For The Iron Condor Adjustment Techniques
• DeltameasurestheriskofyourposiAontoapricemove,e.g.,ifmyposiAondelta=‐$125andtheindexincreasesby
$12tomorrow,myposiAonwilllose$1,500.
• Therefore,keepdeltasmall;Iwatchthetheta/deltaraAomorethantheabsolutevalueofdelta.
• YouradjustmentcriteriawillfuncAontokeepyouwithinsomedeltalimits,orcoulduseposiAondeltaasour
adjustmenttrigger.
• TheposiAvethetavaluemeasuresthebeneficialeffectofAmedecayonourposiAon.
• Becarefulthatyouradjustmentsdonotremovetoomuchtheta.
• IfthetaevergoesnegaAve,closethetrade.
• WatchtheraAoofthetatodelta.RaAos>2:1aregood(thehigher,thebefer).
• Whenthetheta/deltaraAoisapproximately1:1,thisisdangerousground.Mayhavetocloseorrollspreadssoon.
©2011ParkwoodCapital,LLC.AllRightsReserved.
Risk Management For The Iron Condor Using the Greeks
• 2/5/10:MarRUT510/520and650/660ironcondorwithcredit=$2,800on20contracts
• Adjustmenttrigger:whenthedeltaofeithershortopAon>16
• 2/12/10:deltaofthe650call=17;closingspreads,buybackandlonghedgeadjustmentstriggered
• 2/16/10:200%ruletriggered
• 3/1/10:allcallspreadsclosed;putsallowedtoexpireworthless.
• Alladjustmentsheldlossto≤onemonth’sgains
©2011ParkwoodCapital,LLC.AllRightsReserved.
Back-Testing Adjustment Techniques
Date Adjustment NewDelta
%Change NewTheta
%Change NetG/L
2/12/10 ClosingSpreads
‐$54 ‐44% +$78 ‐26% ‐$2,080
2/12/10 BuyBack ‐$62 ‐35% +$76 ‐28% ‐$2,750
2/12/10 LongHedge ‐$45 ‐53% +$77 ‐27% ‐$2,220
2/16/10 200%Rule n/a n/a ‐$700
• 7/8/09:AugRUT390/400and550/560ironcondorwithcredit=$2,960on20contracts
• Adjustmenttrigger:whenthedeltaofeithershortopAon>16
• 7/15/09:deltaofthe550call=22;closingspreads,buybackandlonghedgeadjustmentstriggered
• 7/15/09:200%ruletriggered
• 7/23/09:allcallspreadsclosed;putsallowedtoexpireworthless.
• Alladjustmentsheldlossto≤onemonth’sgains(onaverage)
©2011ParkwoodCapital,LLC.AllRightsReserved.
Back-Testing Adjustment Techniques
Date Adjustment NewDelta
%Change NewTheta
%Change NetG/L
7/15/09 ClosingSpreads
‐$71 ‐39% +$64 ‐26% ‐$3,400
7/15/09 BuyBack ‐$72 ‐38% +$53 ‐39% ‐$3,270
7/15/09 LongHedge ‐$56 ‐52% +$57 ‐34% ‐$2,750
7/15/09 200%Rule n/a n/a ‐$560
• 9/2/08:OctRUT660/670and810/820ironcondorwithcredit=$5,200on20contracts
• Adjustmenttrigger:whenthedeltaofeithershortopAon>16
• 9/4/08:deltaofthe550call=22;closingspreads,buybackandlonghedgeadjustmentstriggered
• 9/15/08:200%ruletriggered
• 9/15/08:allputspreadsclosed;callsallowedtoexpireworthless.
• Alladjustmentsheldlossto≤onemonth’sgains
©2011ParkwoodCapital,LLC.AllRightsReserved.
Back-Testing Adjustment Techniques
Date Adjustment NewDelta
%Change NewTheta
%Change NetG/L
9/4/08 ClosingSpreads
+$9 ‐75% +$75 ‐18% ‐$1,301
9/4/08 BuyBack ‐$10 ‐128% +$39 ‐58% +$580
9/4/08 LongHedge ‐$20 ‐156% +$48 ‐48% +$920
9/15/08 200%Rule n/a n/a ‐$1,000
• The200%ruleissimpleandusuallygetsyououtofthetradeearlyforaminimumloss.
• TheLongHedgedecreasesdeltathemostwithlessthetadamage.
• TheBuyBackcausesthemostthetadamage.
• TheBuyBackandLongHedgeadjustmentsallowyoutosalvageatrade.
• TheLongHedgerequiresmorecapitaltobeputatrisk.
©2011ParkwoodCapital,LLC.AllRightsReserved.
Back-Testing Adjustment Techniques
AlloftheseadjustmentsaccomplishthekeyobjecAve:minimizethelossesinthe“bad”
monthssoyoucanbeprofitableinthelongterm.
1. Developandfollowaconsistenttradeentryprocess.
2. ImmediatelyakerestablishingtheposiAon,enterthestoplossorderwiththebroker.
3. Writedownthekeypointsofyourtradingplan:
Whatisthestoplosspricetrigger?
Iwilladjustatwhatpoint?Whatisthespecificmeasure?
WhatadjustmentwillIuse?
IsthereaAmestop?
IsthereaprofitlevelatwhichIwillclosetheposiAon?
IfIclosethespreadsononeside:
a) WillIrollthosespreadsupordown?
b) WillIincreasethenumberofcontractstocoverthedebit?
c) WillIrollthe“good”spreadsatthesameAme?
©2011ParkwoodCapital,LLC.AllRightsReserved.
Develop the Iron Condor Trading Plan
• Theironcondor:
IsanexcellentincomegeneraAngtradingstrategy
Doesn’trequireyoutopredictwherethemarketisgoing
Butriskmanagementiscrucialforlongtermsuccess
©2011ParkwoodCapital,LLC.AllRightsReserved.
Summary
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