Although I'm working hard toward diversifying my active options trades, I'm still basically an iron condor trader. If that's true, why would I be working so hard toward familiarizing myself with the ins and outs of other types of complex options trades?

First, market conditions change. I've been writing for Option Investor for many, many years. When I first began writing, we compared the benefits of trading index options versus options on individual equities by pointing out that the indices rarely gapped at the open.

Daily Chart of the NDX, Snapped on 9/30/2010:

Conditions have changed. Indices gap at the open quite frequently over the last few months. Of course, the NDX has always been a bit "jumpier" than some other indices, but we can all remember some recent mornings when the lower-beta SPX gapped at the open, too.

Price action may not be the only market condition to change.

Daily Chart of the VIX, Snapped on September 30, 2010:

The VIX was dropping toward potential support when this chart was snapped and subsequently dropped further. Volatility as measured by the VIX is obviously well below the summer's high. If the implied volatilities of options are dropping along with volatility measures such as the VIX or RVX, it may be difficult to collect enough premium to justify the risks of an iron condor or even a butterfly. When volatilities have swung way above the norms and may be topping, calendars and long option trades could be hurt by a volatility crush if implied volatilities of options plummet.

Even if a trader has a preferred trade, that trader may want to shift the balance of trades when conditions such as these change. If volatilities look extremely low or if the VIX or other volatility indices approach strong support, option traders may worry that the volatilities may bounce higher again. Such an action usually happens only when prices drop quickly. Both a rapid price movement and a quick rise in volatilities can hurt some trades, and option traders may find that the climate just isn't right for the trade that's been their mainstay.

Those who began trading options in late 1999 and the first few months of 2000 or even some periods in 2007 and 2009 can remember times when bulls needed only one equity-related option trade in their repertoire: long calls. During some of those periods, traders didn't need to have the technical analysis skills to pick good entries. Unless they'd bought long calls too close to expiration, they didn't need to know too much about stops, either, or good trade management. Holding on to long calls through thick and thin usually proved beneficial in the end. Those equity calls would eventually plump up in value again, even if a pullback had to be endured along the way. Those times disappeared in March, 2000, and they have disappeared at other times, too. The options traders who had no other trades in their repertoires suffered, and so did their accounts.

In addition, traders might find themselves faced with a situation in which the option trader might start out with one strategy but employ a different one in an adjustment.

For example, consider the case of a 6-contract IBM OCT 125/130/130/135 iron butterfly established on Friday, September 17, with IBM just inching above $130. The credit taken in, after commissions, would be $1,929.00, and the expiration breakevens would theoretically have been $126.86 on the downside and $133.16 on the upside if commissions had been $1.50 per option contract. If the trader intended to adjust when the expiration breakevens had been hit, as some traders elect to do with butterflies of any type, including iron butterflies, that point would have been hit a week later, during the day on Friday, September 24.

The call strikes that comprised the original iron butterfly would have been as follows: -6 IBM OCT 130 calls and +6 IBM OCT 135 calls. This trade could have been adjusting by buying an all-call butterfly as follows: +6 IBM OCT 130 calls, -12 IBM OCT 135 calls, and +6 IBM OCT 140 calls. Doing the math, this would have resulted in -6 IBM OCT 135 calls and +6 IBM OCT 140 calls. In addition, the trader would still have the put spread at the 130 and 125 strikes. The trader who had chosen the iron form of the butterfly now has a new trade, with the call strikes widened. This is now an iron condor trade. It's not that much different than the iron butterfly as the strikes haven't been widened a whole lot yet.

However, what if the trader took a look at the VIX chart I showed earlier and decided that volatilities were more likely to bounce from the trendline being approached than drop too much further? Bouncing volatilities are no better for the iron condor than they were for the iron butterfly. Both are negative vega trades. What if the trader who held that iron butterfly on that adjustment day wanted to incorporate that volatility viewpoint? A long call option position would have improved both the delta and the vega of the position. If chosen wisely, it would have flattened out the "today" line in those charts analyzing a position's profit and loss. It would have allowed at least a little time to see if IBM was going to retreat.

Perhaps some traders might test more complex adjustments on a position risk analysis chart. They might reason that it would be a good idea to roll out some of those October long calls to November ones, turning some of those OCT/NOV call pairs into a diagonal. Or would it be better to take off the whole iron butterfly trade and replace it with a calendar? Or would a double calendar be better? At what strikes? Some of these ideas might prove workable when thrown up on a risk analysis chart and some not, but the trader needs some working knowledge of the pros and cons of each position before attempting this kind of trial-and-error process. If the trader has no experience with anything other than rolling out the spreads on iron butterflies, then adjustment choices might prove limited.

Perhaps the trader isn't certain which direction volatilities and price are going to head, but that trader feels certain that they're about to head somewhere. Could some sort of double diagonal trade that flattened out both delta and vega risks be constructed by artful adjustments of the original trade? What would be the pros and cons of such a trade?

Obviously, the permutations are many. Some might prove to be brilliant adjustments; others, unworkable and dangerous. Traders who have only one trade in their repertoires don't have the tools to investigate those many permutations and consider their pros and cons. A trader who has been trading 6-contract SPX iron butterflies month after month and adjusting them by rolling out contracts as in the first example knows the pros and cons of such a trade. That trader may not have any idea of the ins and outs of trading a 6-contract SPX double calendar, however. How late in the cycle can such trades be entered? What is a dangerous delta level for a 6-contract double calendar trade? How soon will theta start building up and will it counteract the effects of falling volatilities, if the volatilities should fall? If someone provides a grim assessment of the economy and SPX prices drop several percentage points in a few days, will implied volatilities pop in the back-month option, too, which would help the calendars, or do such short-term moves tend to pop the volatilities in the sold front-month options only, which would hurt the calendars?

It's dangerous for traders to employ adjustments that might be great adjustments if they don't know how the resultant trade would behave. That limits traders in the adjustments that they can employ. It's happened to me, not because I've never traded those other strategies but because I've never traded them in equivalent sizes to my iron condor trades. I'm not quite up to the level at which I'd feel comfortable with 25 or more contracts of SPX calendars, double calendars, or even butterflies and straddles or strangles.

So, I'm still working at the craft. I'm still working my way toward the point at which I have no qualms about adjusting a 25-or-more contract trade by adding diagonals, butterflies or calendars at expiration breakevens, depending on my view of prices and volatilities, or making other such adjustments.

Those of our subscribers who have only one strategy up their sleeves perhaps might also give some consideration to back testing unfamiliar strategies, paper trading them, or live trading them in small lots. Doing so will come in handy when market conditions change again, as they will, or when familiar trades need less familiar adjustments.