I have three choices, I emailed my option trading pals on the afternoon of September 15, a Tuesday afternoon. An adjustment point was quickly being approached on the bear call spread portion of a 25-contract RUT OCT iron condor I had sold a couple of weeks earlier. For newbies: iron condors are sold for a credit when opened.

I'd already bought-to-close the bull put portion, locking in my profit on that portion. Since the market craziness began a couple of years ago, my trading plan calls for me to do that as soon as a spread narrows to $0.20. I'd had no such luck with the bear call portion, the credit spread I'd created by selling the OCT 640 call and buying an OCT 650 call. That climb that Tuesday was about to make a choice necessary in the management of the 25-lot RUT OCT 640/650 bear call spread that was still in play.

I tend to adjust when the absolute value of the delta of the sold call in a bear call spread is between 22-25 or 0.22-0.25 on some quoting services. By the time the delta of the sold call had reached 20, I had already set up and saved an order to buy back that sold credit spread. The saved order was ready if needed, so I wouldn't have to make up the order with shaky fingers. The next task was to evaluate what I would do next if my adjustment point was reached and I elected to buy-to-close those sold spreads.

I actually had four choices, but I had immediately discarded one as not meeting my trading criteria and personality. I could have just let the trade run. The RUT had been on a tear, as had most equities, and certainly looked ready for a pullback. High probability iron condors are set up so that the probability that the sold option will be in the money at expiration is rather low. In fact, with the RUT just peeking over 600 that Tuesday, and the sold call at 640, the RUT was no where near violating the sold strike. If the delta did reach 22, as it was to do late that afternoon, that delta still suggested that, theoretically, there was still only about a 22 percent chance of the RUT being above 640 at October's expiration. The chance of the RUT moving across that 640 level sometime between September 15 and October's expiration--the "touch" probability as one of the higher-ups on the ThinkorSwim trading platform calls it--was somewhat higher than 22 percent. However, that 22 delta suggested that even if the RUT were to climb that far, chances were that it would pull back sometime before expiration.

On this theory, some iron condor traders elect to just let the sold strike be tested. I know a great iron condor trader who makes more money than I do who employs this tactic. More often than not, that test results in the needed pullback, so that iron condor trader adjusts far fewer times than I do. However, when that iron condor trader takes a loss, less frequently than I do, the loss is bigger than it would have been if the trade had been adjusted. As those of you who have been following my articles for years already know, I just don't have the right personality to handle those less frequent but far more expensive losses. I would lose confidence in myself as a trader. For me, preservation of capital is the number one priority. An iron condor trader who elects to let the trade run faces a loss that might be nine times as much as the original credit brought in.

If I immediately discarded the "just let it run" choice, what were my other three choices that I mentioned to my trading pals? The first was to take off the spread that was in trouble, according to my personal guidelines for when a spread is in trouble, take the loss and consider that loss just one of those things bound to happen from time to time. At the time the delta did hit the 22 level, the debit to close the 25 contracts of the spread was $4825.20. I'd originally collected $2751.70 credit for the iron condor plus insurance (extra long puts), and I'd spent some money to close out the bull put portion. After those actions, I had $2,322.68 of that original credit left. If I decided just to take off the in-trouble spread and leave it at that, I'd have a $2,502.52 loss for the month in that iron condor. That's a little less than my original cash flow for the trade, the credit I took in. In his webinars for the CBOE, former market maker Dan Sheridan sometimes suggests a loss at 1.0-1.5 times the original cash flow as an acceptable maximum loss. I've heard other benchmarks used, based on the expected final earnings or a percentage of the buying-power effect of the iron condor, the amount your brokerage withholds while the trade is in effect. Each trader needs to establish a maximum acceptable loss that's appropriate for that trader but the idea with most iron condor traders is not to let a loss get too big. Losses can be far greater than the premium taken in so they must be controlled unless an iron condor trader has elected to let the trade run and let happen what would happen.

My second choice, after closing out the in-trouble spread, was to roll up into another spread of the same size, with the same parameters under which I'd set up my original bear call credit spread. That would mean I'd be searching for a 25-contract position with the delta on the sold strike around 8-10. This action would replace part, but not all, of the loss from closing out the in-trouble spread. For example, using mid-prices to make calculations, I might have been able to sell the RUT OCT 660 (delta 9.5) for 1.70 and buy the RUT OCT 670 for 1.05. Adding in my brokerage's commissions and fees, and deducting $0.10 off that mid-price level to be conservative about where I'd be able to place the trade, one trade calculator tabulates a $1,375.00 credit I'd take in. Deducting that credit from the $2,502.52 loss I had after closing the in-trouble trade, my loss would be reduced to $1,127.52.

Although still not fun to collect, the loss would be a much smaller loss than I'd have if I didn't replace the credit spread, and I'd still have the same trade parameters upon which I originally set up a trade. The deltas and contract size would the same. The risk would be the same as I'd originally thought acceptable with the possible exception of greater time risk, from being in the trade longer.

One point should be addressed here. I could have further ameliorated the loss and perhaps made it up completely by placing a bear put credit spread at the same time. I have done that in the past, but my analysis of the shape of the run-up, the volume patterns and various other technicals led me to believe that tactic would be risky after such a strong run-up. What if the markets reversed and reversed strongly? I didn't consider that choice at the time. I have sometimes rolled the opposite side when one side gets into trouble, but when I do, I never put on the full size. I tend to put on about 10 contracts if I originally had 25 in that underlying, for example. If markets have moved so quickly either up or down to have endangered one side of the iron condor, then I'm going to be worrying about the risk of reversal.

My third choice was to roll into more contracts and/or to do them at a higher delta level, with the number of contracts and the delta level chosen so that the credit I took in was the same as the debit I'd paid for closing out the in-trouble trade. This would preserve all my original credit and all the possible gains for the trade. However, this tactic would increase my risk on two levels: the number of contracts would be greater and the delta of the sold strike, an estimation of how likely it was that the RUT would be above that strike at OCT expiration, would be higher than in my original trade. The delta would of course be lower than 22 but higher than the 9-10.

My current plan when putting on my trades is to keep enough cash in my trading account to allow me to roll into a higher number of contracts. Before the market debacle in 2007, I routinely traded about 120 contracts of iron condors, spread among four underlyings, each month rather than the 75 to 90 contracts, spread among three underlyings, that I do now. That means that I do have a comfort level with more contracts, so I feel comfortable in many instances about rolling into more contracts. Not all people do, and one's comfort level should be of primary concern. Someone who is freaking out when looking at the little intraday variations in profit/loss figures on a larger number of contracts is more likely to act impulsively out of fear or freeze when action is needed.

Rolling up into more contracts isn't a tactic that should be employed by the ultra conservative. Someone who is going to employ that tactic needs to consider another reality. If this spread with a now-larger contract size gets into trouble in turn, more money will be needed to close out the trade and that extra money must be available in the account. Even if the trade is profitable, eventually narrowing to a level at which the trader wants to close it out and lock in profit, closing the position and locking in that profit costs a lot more, including increased commissions and fees. I have heard of traders who are unable to close a credit spread because they didn't leave enough free cash in their account to pay the debit, although I haven't personally talked to anyone who had that experience. More money will be tied up and possibly tied up for longer, too, perhaps contributing to some opportunities lost if other trades are missed.

Another danger concerns the higher absolute value of the delta on the sold strike, if a higher-delta strike is employed in the new credit spread. Once the absolute value of the delta in the sold strike is near 15, that absolute value can rapidly approach 22, sometimes over the course of a single day. To the hapless trader watching moves against a sold credit spread, it sometimes seems as if with each point move the underlying makes toward the sold strike, the absolute value of the delta moves up another point, too. That's an exaggeration, of course, but not as much of one as it might seem. However, with these cautions in mind, if I or someone else elected to roll up into more contracts with the absolute value of the delta of the sold strike at a higher value, how many contracts would be needed, with what delta for the sold strike?

Anyone who remembers anything about high-school algebra will recognize two variables there, so there's not a single answer. It depends. For example, if the choice was made to roll up the spread by 10 points, this time selling the RUT OCT 650 and buying the OCT 660, the delta of the newly sold RUT OCT 650 would have been about 15. That still shows only a 15 percent probability that the RUT would be above that strike at expiration, but as my broker might phrase it, that turns me into a 15-delta trader when I'm ordinarily a 10-delta one.

Moreover, totally replacing the debit I'd paid to exit the in-trouble credit spread would require a lot of contracts. How many? Let's figure it out. Remember that closing that 25-contract spread required a $4,825.20 debit. At the time, the RUT 650/660 spread could have been sold for $1.15 per contract. To figure out how many contracts would be required to make up that $4,825.20 debit, I'd have to perform this calculation: 4,825.20/($1.15 per contract x 100 multiplier) = 41.96 contracts or 42 contracts. Actually, since that computation doesn't include commissions, I probably would have needed to have sold 43 contracts to totally make up the difference.

That's a bunch. In various CBOE webinars and among the veterans of the Sheridan program, numbers from 1.5 times the original number of contracts up to two times the number are mentioned, with some vowing that they won't increase the size at all because of the extra risk.

If I'd wanted to sell the RUT 660/670 to keep the delta of the sold strike in the original 8-10 range but wanted to sell enough to make up the total $4,825.20 debit I'd spent to close out the in-trouble spread, the number of contracts needed would be huge. That number would be a scary $4,825.20/(0.55 per contract x 100 multiplier) = 87.73 contracts or about 89 once hefty commissions were figured in.

It should be clear by now that what I'd delineated as my clean three choices was actually more than three. If I wanted to make up most or all of the debit to close the in-trouble original spread, I'd have to balance how much of that debit I wanted to make up against the extra risk I felt comfortable taking. My preference would have been to sell no more than 37 contracts (just under 1.5 times the original number, 25) with the sold strike's delta at or below ten and make up all the debit I'd paid. That wasn't possible. I eventually elected to sell the RUT OCT 650/660. I sold 40, about 1.6 times the original number of spreads I'd had.

As mentioned earlier, I could have extended those choices by adding back another bull put credit spread, either a full 25 contracts to match my original condor size or in a smaller or greater number. Many iron condor traders do just that. However, with volatility levels extremely low, making spread premiums low, too, and with the RUT having been on an upward tear for so long that I was growing worried about what the reversal would look like when it occurred, I was a bit loathe to do that. A trader who felt more comfortable, but who hadn't yet closed out the original bull put spreads could have closed them and rolled up for a profit.

A RUT OCT 530/520 bull put credit spread probably would have brought in about $0.60 per contract, but that was far above the original RUT OCT 480/470 bull put credit spread I'd had, and that one had made me so nervous. At the time this article was being edited, the absolute value of the delta on the RUT OCT 530 put was only about 7, so that choice would perhaps have been acceptable, but it wasn't a risk I felt comfortable taking that Tuesday.

Which choice or choices are right and which wrong? Each has its unique pros and cons. If I'd had a major life event coming up, perhaps I would have elected to take the loss and go look for another trade when life evened out, writing the loss up to one of those things that happens to each of us traders from time to time. If I'd elected to roll up into the same number of contracts with the same parameters (delta of sold strike) under which I'd established the original trade, I'd have considerably lowered that loss but would have again had a trade that needed to be monitored and was, as all credit spreads are, subject to loss. Since my account size and trading plan allowed it, I could attempt to make up all the debit I'd paid to close that going-wrong position and retain the full earning potential of the original iron condor, but I'd have been taking on extra risk by selling more contracts at a higher delta in the sold strike.

I elected a path somewhere in the middle, not quite making up all the debit I'd paid to close the going-wrong original spread but still allowing for a profit for the month. What about you? What would you do? Knowing what you'll do before you ever get into the trade helps to control the inevitable emotions that come about when the adjustment must be made. I set a limit for how many extra contracts I would employ. I left plenty of cash for further adjustments if they were needed, and they were. The day before FOMC decision day, I delta hedged by buying November 630 calls, and those were expensive. However, if I hadn't left enough money in the account to do that, I would again have needed to make those same choices because that spread got into trouble again, at least momentarily, before the markets reversed. Having a delta hedge allowed me to stick it out. I eventually made a small amount on those delta-hedging extra longs when I closed them out, and, for now at least, the absolute value of the delta on those OCT spreads is well into the comfort zone. We'll see what happens next.

The fact that the RUT has not yet violated the original 640 sold strike in my original credit spread probably hasn't escaped attention. As this article is proofed, that spread, too, would have been okay. Am I sorry I made the choice I did? No way. Perhaps this month, it will turn out that I didn't need to adjust at all. However, not adjusting in a similar circumstance a few expiration cycles ago would have cost me something in the range of a $22,700 loss when the underlying kept going all the way through my credit spread, from sold strike to bought strike and beyond. This is the whole premise behind the choices I make: one that controls my losses but means that I adjust more often, sometimes perhaps when I ultimately wouldn't have needed to do so.

We options traders have choices, but to employ those choices we need a plan and we need freed-up cash to put our plan into effect. When you're planning trades, plan how you'll take profit and what you'll do if things go wrong. Adjust those plans according to what's going on in your life. Take on less risk when you can pay less attention to the markets or when you don't feel emotionally capable of managing risk without panicking. Make sure you leave cash to put your what-if plans into effect, if needed.