Many of you may already know that I tend to start my iron condors early, sixty to seventy days before expiration. Doing so exposes the trade to more time risk but allows me to swing the sold calls and puts farther away from the then-current price.

If you've been reading these articles for a while, you know that I always immediately add put protection. I'm fairly generous with that protection, too, spending about 10-15 percent of the original credit I took in. Most of my iron condors are in the SPX these days, and spending 10-15 percent of the original credit places my extra put well below the sold credit spread. You wouldn't think that extra put that far out of the money would offer much help. However, it does perform well in its intended purpose. That intended purpose is to steady losses long enough for me to take other steps to hedge the trade if needed.

Other steps were needed for the September iron condor.

By Wednesday, August 3, my trade was theoretically down by 6.11 percent of the maximum margin in the trade at any one time during the trade, $18,040. Let me tell you a little story about that loss, to remind you that we're all human. I set GTC (good till cancelled) orders to buy back all my sold spreads when they narrow to $0.20. Premarket, early that week, I was placing such an order on a call spread I had sold the last trading session. While doing so, I fat-fingered my limit order and placed it for $2.00 rather than $0.20. It filled the moment the market opened, for the asking price of $1.70. Of course, that was far more than the credit I had received for those particular eight contracts. I realized a loss of $720 dollars on that fat-finger trade. For that reason, much of that theoretical 6.11 percent loss showing up Wednesday, August 3 was due to that early week error. Check your trade orders rigorously. Our platforms give us several opportunities to notice we've input the wrong order. Use them.

Even though that trade was burdened with that unintended loss, I'd been able to maneuver my trade so that it still had some potential for eventual profit. I knew I could add other credit spreads as I thought appropriate with a trade that still had 45 days to expiration. What I also knew, however, was that market conditions were not to my liking. Iron condors are designed to function well in markets that tend to behave as they behave about 90 percent of the time. This wasn't one of those periods. At that point, I determined that I didn't want the trade to experience wild swings in profit and loss. I wanted to stabilize it.

I typically do so by buying in one of the sold puts, flattening the delta risk. In this case, however, I took a slightly different tactic. Instead of buying in one of my sold September puts, I bought the same strike August one. Why did I do that? Up until that time, we'd been having a lot of violent gyrations, with strong down days alternating with strong up ones. When we got a strong downdraft, volatility was popping in the nearest-term options but not expanding as much in further-out options. I therefore thought I would get more bang for my buck with an August option if a quick downdraft popped the volatilities higher. For newbies, the effect of higher volatilities on a long put purchase is to increase the price of the put.

Buying that AUG option at the 1150 strike reduced the profit available but gave me a flat "today" line, the light blue line in the graph below. That line shows how potential profit and losses will theoretically change with price movement over a short time period. The dark blue line shows how the iron condor would perform at expiration. The arrow points to the then-current SPX price, which was below the horizontal black line, the zero line of profit and loss.

Before I go further, I must explain the hand-drawn chart. I use a proprietary charting program that is not available to the general public. I can't show it at this time, but I've done my best to fairly represent the shape of the graph.

Risk Profile of My Live Iron Condor on August 3:

The horizontal red line is the maximum preset loss I was willing to sustain in this trade. That was $1,984.00. The violent market moves and my own fat-finger trade has pushed the theoretical profit/loss into negative territory, but the box-like shape of the darker blue expiration graph showed that there was still profit potential in the trade.

For those of you accustomed to looking at the Greeks of the trade, this tactic flattened my position delta to 3.71, a flat delta indeed for a trade that had a maximum margin at any one time of $18,040. Margin--and therefore--risk in the trade had been lowered by my hedging actions and also by other adjustments I had made during the course of the trade, buying in some sold spreads and collecting profit in them when their price narrowed to $0.20, for example. Gamma measured a modest -0.22, and vega was also a modest -23.34. The position sported a negative theta, never something that an iron condor trader likes to see, but I viewed this tactic as temporary necessity. When I thought markets had stabilized, I could sell additional credit spreads to give me positive theta and also plump up the profit available.

My hedging endeavors had lowered the available profit to $934.51, driving it below my original profit target of $1,263.00. However, the most important take-away of that chart is that, over a short time period, my "today" profit-and-loss line theoretically wouldn't hit my maximum loss no matter which direction the market went. Of course, volatility and the crazy price jumps we sometimes see with far out-of-the-money and out-in-time SPX options could make the prices temporarily look as if they were dipping further, but the Greeks also supported the view that prices changes, even rather big ones, weren't going to put the trade into much trouble over a short time period. Notice how the "today" line curves up on both sides? Although there are no numbers here, my chart of course includes them, and that chart suggested that if the SPX dropped far enough, below about 1104 in this example, the position would move into profit territory. Thereafter, profit would theoretically escalate quickly.

What do we know about such sharp moves? We know that they tend to plump up volatilities. The charting system I use allows me to ratchet up the volatility and theorize how my trade would be impacted. Doing so drove that today line sharply higher. If the SPX did fall sharply, my position would have even more protection than it appeared to have above and would move into profit territory far sooner. How much sooner depended on how quickly the volatility expanded.

By the next day, my positive delta was a little larger, but only 7.69. Some changes had occurred. I had been able to close out some of my call spreads and collect profit on them, but I'd also sold back one of my puts, only to have to buy it back for a $60.00 loss. The decision to try selling it back was a reasonable one, given the chart setup at the time, but that decision didn't work out.

I made some other similar trial runs at trading in and out of the extra hedge through the rest of that week, but what if I hadn't? What if I'd trusted my own ability to set up a hedge the way I had, as well as trust the information the risk profile and Greeks were giving me? I thought it might be instructive to see what would have happened.

But first, let's talk about what actually happened. By Friday of that week, market conditions weren't any better. Moreover, I was going to be traveling the next Monday on country roads. I wouldn't always get good reception with my air card, and the day would be further interrupted by an appointment during which I couldn't monitor the trade at all. I had a decision to make. Did I leave the trade on and trust my efforts, knowing that I wouldn't be able to closely monitor the trade? Did I close it out, with one set of my sold put strikes being closely approached?

Some background should be noted before my eventual decision makes sense. For the last year, I've been experimenting with the way I trade iron condors, changing the way I traded them for the previous many years. I react sooner now than I did in the past, hedging sooner and more vigorously. I've come to the conclusion that I like flattening out the risk by buying in my sold strikes and thereby taking risk off the table. I like doing this even if this method means that over a year's time, I will possibly make less money. I don't like the huge seesawing action that iron condors can deliver to traders who don't closely manage the risk.

I finally decided that Friday, August 5 that the market environment wasn't the one in which to test my efforts when I wasn't going to be able to monitor the trade. In a normal market environment, I could have set contingent orders using a beta-weighting process to set up liquid SPY orders when I was traveling. When not traveling or when traveling in large cities that have constant data capabilities via my netbook and air card, I can deal with the adjustments required by wild market conditions. But could I deal with both adverse conditions at once? Since I was confronted with both adverse conditions, I elected to close the position at a loss.

We all know what happened on Monday, August 8. Now that the background is out of the way, we can examine how the trade would have fared that Monday. What would have happened if I'd left it open while the SPX barreled through my nine 1180/1170 credit spreads, six 1150/1140's and all the way to the sold strike in my four 1120/1110's?

Snapshot at the Close on 8/8/11:

The arrow again points to the then-current SPX price. Wildly increasing volatilities had plumped up the value of the puts, and I had more long puts than short ones by that time. That August 1150 had theoretically gained $5,785.00. That's "theoretically" because although I know the price at which I bought it, I can't verify that I could have sold it for the price shown on the screen on August 8 since I had already closed it out by that time.

My theoretical profit for the trade would have been above my original profit target. In fact, I haven't drawn these lines proportionately, as it's unlikely that you would guess from this drawing that my actual theoretical profit at the close on that day would have been $4,849.52.

Sometimes it's impossible to execute spread trades in a fast-moving market, and sometimes you won't be able to execute them anywhere near the mid-price or mark, with these theoretical results pegged to the mark. However, even if I could not have executed the closing trades at these amounts, I certainly could have profited and locked in more than my originally planned profit. You can bet I would have done so that day. Remember that I had hedged with an August 1150 option, in addition to my original extra insurance puts, believing that the AUG options would feel a sudden increase in volatility faster than others. In fact, the implied IV of the August 1150's was 56.64 that afternoon, while that of my sold September ones was 40.34. Moreover my theta was a hugely negative -498.68, the amount that my trade would theoretically decay overnight. I would have wanted to collect on that profit that day.

And that would have been a wise decision. When a trade has been in trouble suddenly delivers a profit, it's often the wisest decision to go ahead and lock in that profit. Let's look at a what-if outcome, though. On Thursday, August 18, 2011, I checked the theoretical value of this iron condor again, just as structured here with the August option, with no further adjustments. That trade would theoretically have shown a loss of $2,765.49, with that August 1150 theoretically priced at $10.35. Because of weird settlement issues with the Friday morning SPX settlement, I didn't attempt to price it Friday morning. Obviously, I wouldn't have let the loss grow that large anyway if I could help it, but this last examination was just for discussion purposes.

What am I left with, the coulda-woulda-shoulda's about the profit I could have made? No. Honestly. Relying on a new trading protocol is not the wisest choice in the market conditions we have now. Experimenting with a new trading protocol is definitely not the wisest thing to do when you can't monitor the trade. Put both together, and it's just a dumb thing to do. I would rather be able to trust myself to handle trading risk appropriately than luck out once with a wild profit and then lose it taking inappropriate risks at other times.

These market conditions have brutalized many a trader and many a trade. However, I came out of this experience gratified that my efforts to flatten risk allowed me to get out of the trade with a manageable risk. After a loss that I didn't manage well in 2010, that's a good feeling. In addition, I confirmed two precepts that I had been leaning toward for my personal trading style, a style still in transition and not appropriate for all: hedge early, and don't trade in and out of the hedge. If I hedge early, the hedge costs less. I'm a pretty good chart reader and have a solid period of day trading in my background, but attempting to trade in and out of the second hedges I put on just cost me money. Lastly, I trust what I've set up to work.

Of course, hedging early means that I'm going to hedge some times when it will turn out that I didn't need to hedge, and those extra hedges are going to cost me. That means I'll make less in a year. It may mean that, in a few trades, I'll hit my maximum allowable loss right before the markets reverse, when, if I hadn't hedged at all, I wouldn't have hit the loss and could have held on until the trade became profitable. It means that I'm risking overtrading this strategy, a real risk, too.

Taking a loss isn't the worst thing that can happen, even if you discover that you didn't have to take the loss after all and the trade would have profited. I don't like taking losses. I'm human, and I have all those thoughts that you all have: I'll never make this work, I'm dumb, all those things the rest of you think. I allow myself to feel them for a little while and then I go on. What's worse than taking that loss when it's wise to do so is not taking that loss when you should. You'll luck out a time or two and be glad you escaped, but over the long run your profit and loss and your confidence in yourself as a responsible money maker will suffer. I'm fortunately or unfortunately privy to hearing lots of stories of trades gone wrong, and these last two weeks have been tough as I listened to traders who suffered. I can tell you that those traders who elected to take their losses where they'd planned to do so when they set up the trade felt great relief mixed in with the obvious negative feelings. The markets did this to them, they realized, and iron condors, butterflies, and calendars are just not set up to endure these kinds of whipsawed huge moves. Those who let losses grow too big felt far more damaged, as they had to own some degree of responsibility, as I did in the spring of 2010.

As I've been experimenting this last year with new ways to manage my iron condors, my results have suffered as they do with any learning process. We all pay a fee for the learning we do. You better make sure that fee isn't too high, however, especially if the cost is damage to your own confidence, your loved ones' confidence in your reliability, or your health because of sleepless nights and incessant worry. I do worry about those who are currently going through what I did in the spring of 2010, but know that you can recover and the market conditions played a huge part in your losses.

By the way, the article started with the information that I tend to start my iron condors 60-70 days before expiration. I have not begun my October iron condors and may miss my window of opportunity. Oh, well. My reasoning? My platform has undergone an update that has produced such horrendous problems for traders--wrong account numbers, wrong margin calls, blocked trades, inability to sign on--that I don't dare put on iron condors in market conditions like these, knowing that I'm not certain of my ability to adjust them due to the platform problems. My fingers have been itchy all week, but you have to decide how much risk you want to take on when you're trading. I'm not taking on that much risk with iron condors.