Is your trade high maintenance? That depends on what you mean by high maintenance.

High maintenance could mean that the trade locks up much of your trading capital. It could mean that it's a pure directional trade, small or large, that must be ringed by OCO orders or watched like a hawk in the current volatile times.

What about the more complex trades? High maintenance could mean that your trade requires frequent adjustments while a low-maintenance complex trade might require fewer adjustments. Let's imagine a trader who usually enters her iron condors or butterflies about 45 days before expiration and wants to be out of her trade within about 28 days.

Forty-Five Days before November Expiration, Time Rolled Forward to Show a Standard Deviation 28 Days into the Future:

In this graph by OptionNet Explorer, it appears that our hypothetical trader would be happy to see price stay right where it was at the trade's initiation for those 28 days she intends to be in the trade. She would also be happy with implied volatilities staying the same, too. Decay would have worked on the trade. The bell shape of the "today" line would have reached almost up to the trade's maximum profit at expiration.

The dark blue column encompasses the distance the RUT could move in the time period being examined (28 days in this case) and still be within a single standard deviation of the RUT's price at the trade's entry. Active traders consider a movement one standard deviation either side of the current price to constitute noise or an anticipated amount of movement for the underlying for that time period. For more in-depth discussion of a standard deviation as it relates to trading, you can check this article from the archives.

I haven't displayed a standard deviation for the entire period until expiration, but expiration breakevens for an iron condor set up using these approximate deltas are typically outside a standard-deviation move to either side of the underlying's price at trade entry. When this theoretical trade is initiated, it looks as if it would be a low-maintenance trade, one in which you would expect, over an extended number of trades, for the trade to end up in the profit zone the majority of the time.

However, is this trade so low-maintenance? Twenty-eight days into the trade, the "today" line turns red within a standard deviation for a 28-day period. That "today" profit-and-loss line is set to turn red when the loss reaches 15 percent of the maximum margin in the trade. That means that the loss level that some iron condor traders would set for their stop levels might be touched with just the normal noisy movement over that number of days. Is the trade truly as low-maintenance as the expiration graph would lend you to believe?

What about a butterfly? Because of the way the butterfly is constructed, the expiration breakevens are usually inside a single standard deviation move at expiration. For that reason, traders of complex positions recognize that the butterfly is typically going to require more adjustments over a month's time than would an iron condor. For that reason, the butterfly trade might be considered higher maintenance than the iron condor. Let's dig down deeper, however. As is true of the iron condor trader, butterfly traders might not want or expect to hold onto their trades to expiration. Let's go back to our hypothetical trader who likes to exit her trades within 28 days.

Hypothetical Butterfly Trade, Looking Forward 28 Days from Inception of Trade:

If the RUT price and the options' implied volatilities had stayed the same this 28 days, the hypothetical trader would be happy with this trade. In fact, this trader would be much happier in that case than the iron condor trader, with much bigger gains on a similar margin requirement. However, the expiration breakevens are well inside the dark column that encompasses a standard-deviation range to either side of the current price over our theoretical 28-day period. Also, the today line turns red well inside a standard-deviation move for this time period. That happens at about 1999 on the upside. On the iron condor, a 15-percent loss on margin was not encountered until the RUT had moved up to about 2017.

The butterfly would be likely to need more adjustments and need them sooner than an iron condor set up as the first trade was constructed. This type of butterfly, at least, is not the type of trade a trader would expect to set and never touch again. Perhaps it should be considered higher maintenance than the iron condor?

Again, that depends on your perspective. It's not as easy to adjust an iron condor and still maintain profit potential as it is with the butterfly. Because the premium collected for an iron condor is lower than the profit potential for the butterfly, even though our particular butterfly is also an iron version, the cost of the adjustments quickly eat away at the potential profit available with the iron condor. Adjustments on a butterfly also subtract from its profit potential, but there's more profit potential to absorb those costs.

What does all this boil down to? What constitutes a high-maintenance trade? We get back to what we always get back to: the personality of the trader, the size of the trader's account, and the ability/willingness/eagerness of the trader to spend time in front of the trading screen. I've traded many types of trades. Once upon a time, I loved the over-and-done nature of pure directional day trades as well as the thrill of the trade. When life changed, those trades became too high-maintenance for my life circumstances. I couldn't always keep eyeballs on the trading screen, and medical drama with a grandchild soaked up all the stamina I had for drama of any kind. Some traders, however, feel that a short burst of intense focus on their trades constitutes a lower-maintenance type of trade than one that's carried for days or weeks.

Some traders like the iron condor's wide expiration breakevens and the statistical edge that iron condors have over some other types of trades. If traders are experienced iron condor traders, they recognize that a going-wrong iron condor can go really wrong, really fast, so they test various adjustment and setup methods to ameliorate those concerns. I used to do that, but I grew to feel that the gains were not enough to balance the risks. With my personality, age, and investment goals, the iron condor transitioned into a higher-maintenance trade for me. I didn't want any nights spent worrying about my trade. I didn't want any Sunday afternoons with cold dread growing in the pit of my stomach as I thought about what might happen on Monday morning. Other traders feel comfortable with the risks, knowing that the trade is less likely to need adjustment. Perhaps they have discovered ways to make those adjustments less painful. Perhaps they set up the iron condor trade differently than the standard method, for example, with fewer call credit spreads than put credit spreads. Perhaps they start with an Armageddon put or go the other direction and start with a call debit spread or two in front of their call credit spreads. Perhaps they start adjusting earlier rather than later, as I used to do toward the end of the time I traded iron condors.

For me, the butterfly's more frequent but less painful adjustments made that trade a lower-maintenance trade. For you, the answer might be different. You might be trading a monthly calendar, for example, each and every month, or you might set up diagonals that allow you to construct them according to the price and volatility risks you see developing. Few of us ever find a consistent set-and-leave-it options trade that's profitable with all market conditions, so most of us have to think about adjustments. There are many ways to think about whether a trade is high maintenance.

Linda Piazza