Iron Condor Options Strategy Management | Adjustments | Nifty Live Example | Reducing Positions

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Iron Condor Options Strategy: Management by reducing the number of positions

In this video we would be learning about a management technique for a losing Iron Condor options trade. Before getting to the management technique let’s have a quick recap of what we have learnt so far.

The Iron Condor is a combination of two vertical spreads - a bull put spread and a bear call spread.

It is formed by a simultaneous purchase of an OTM bull put spread, and sale of an OTM bear call spread, where all options have the same expiry.

A bull put spread is built by selling a put option and then buying a lower strike put option, whereas, a bear call spread is built by selling a call option and then buying a higher strike call option.

Iron Condor is a risk-defined strategy unlike the short strangle. But a good trader would always want to cut the loss on a losing trade with a technique that would not add more risk than that is already existing and exit the trade when a certain percentage of the profit target, usually about 80-85%, has been met.

In this video we would be learning a technique where we enter the trade with 2-3 positions but reduce the number of positions if the trade moves against us.

The maximum profit at expiry for an Iron Condor trade is the credit received while the maximum loss at expiry is the difference between the width of the spread and credit received.

Rules:

Now let's get to the rules. Tested side is the losing side, that is, the side where the strike price of the short option is close to the spot price and has a good chance of being ITM by expiry. The other side is the non-losing side or untested side.

Let’s say we enter the trade with 3 positions on the two spreads. We would be closing the first position on the tested side as soon as the loss reaches 1/3rd of the maximum loss we would experience at expiry and the second position as soon as the loss reaches half the maximum loss and if the spot price continues to move towards the strike price and breaches it we would then close the spread on the untested side and move it closer to the tested side.

We suggest you to use only monthly options for this technique as you would have enough time to make any adjustments if required.

To understand things better let’s look at an example.

With Nifty at 9200 let’s say we entered the following trade -

Buy 3 8400 Put @ 84
Sell 3 8600 Put @ 100
Sell 3 9800 Call @ 170
Buy 3 10000 Call @ 111.5

All options have the same 28 May expiry.

The maximum profit that can be attained at expiry = [(100 + 170) - (84 + 111.5)] x 75 x 3 = ₹16762.5
The maximum loss at expiry = [200 - 74.5] x 75 x 3 = ₹28237.5

Now since we entered the trade with 3 lots, we would cut the first position on the tested side when the loss reaches about ₹10000 and the second position when the loss reaches about ₹20000 and the third adjustment of moving the untested side closer to the tested side should be done when Nifty breaches either 9800 or 8600.

Let us look at a visual example now. Here we are assuming a max profit of about 5000 and a maximum loss of about 18000 so as soon as we reach a loss of about 6000 we reduce the lot size to 2. This reduces the risk on the tested side as can be seen from the risk graph.

In the same way as soon as we reach a loss of about 12000 we reduce the lot size to 1. This further reduces the risk on the tested side.

A similar adjustment is possible on the put side too had Nifty moved lower. Now if Nifty gets closer to one of the strike prices where we sold options - that is 9800 or 8600 we would close the untested side and open a new spread close to the tested side and collect more premium there by reducing risk further.

Please be mindful that such trades require huge margins and might not be suitable for all traders. Also the risk reward ratio on the sample trade is not too favorable. This is just to show you how risk can be managed.