Many traders like to experiment with new options trades. I don't. I like a trade I know well. I want to put it on in the same size on the same underlying vehicle month after month. However, even I grant that sometimes market conditions require us to rethink our setups. I might want a familiar sameness month after month, but that's not always what the market delivers.

For example, for years, I traded iron condors. Many people fear the damage that a sharp decline can do to an iron condor, and I used to regularly buy an out-of-the-money put for Armageddon protection when the implied volatilities were low. However, the real damage is done with a relentless grind upwards.

A sharp rollover will inflate an extra OTM put so that it's useful in ameliorating losses or stabilizing the trade long enough that it can be adjusted. However, an OTM call purchased at the inception of the trade may not do as much to help an iron condor suffering from a relentless grind up. Not only does the price action hurt, but premium pours out of OTM calls as implied volatilities drop during a relentless rally. Not only will an extra long call not provide as much of a hedge: the calls that are part of the call credit spreads don't help much, either.

If you fear a relentless grind upward what can you do? Let's set up an iron condor and play around with ideas. The markets were open as I roughed out this article about two weeks ago, so prices will be slightly different on different charts.

First, I'll show a theoretical 10-contract SPX iron condor set up as I used to set them up. The call is located at the first strike with a delta under 10, and the put, the first with a delta higher than (because it's a negative number) -9. The theoretical credit was $1.30/contract. Potential profit is $1300 minus commissions. As a note, I rarely used to let my iron condors go into expiration, though, so I tended to collect less than the maximum potential profit. Also, remember that since this article was roughed out some time ago, the charts do not reflect current prices.

Original Theoretical 1270/1280/1500/1510 SPX JAN13 Iron Condor:

As you can see, the white T+0 (today) line slopes quite sharply downward to the right side of the chart, right from the inception of the trade. Reasons exist for the shape of this today line, but that characteristic shape is not the subject of this article.

Since this position is highly negative vega, the trade benefits from a decline in implied volatilities, at least over a short distance. That benefit shows up on a profit-and-loss chart by flattening the today line a bit to the upside. Too big a change to the upside, however, will mean the delta- or price-related risk grows bigger. In general, a sharp sudden or a long relentless climb is going to hurt this trade and hurt it from the beginning.

Options are flexible, so let's be flexible in our thinking. What if we do away with the call side altogether, if what we fear is a relentless climb?

Put Credit Spreads Only:

That would work. It would work, but this tactic means risking $9450 to make $550 minus commissions. Iron condors are probability trades and don't have a strong risk/reward outlook anyway, but this setup has a worse risk/reward outlook. That is a lot of money to put to risk for such a small payout unless one is very, very sure of that upside move. Some traders regularly trade such directional trades and have trading plans or setups that they feel minimize their risks. However, all traders contemplating these trades should be aware that these probability trades have this kind of risk/reward setup.

How about putting on the regular iron condor, but putting one or more call debit spreads in front of the credit spreads?

Call Debit Spread in Front of the Call Credit Spreads:

Obviously, debit spreads can be of many different widths and placed at many different strikes. I chose this one because it demonstrates the characteristic shape of the expiration graph when a debit spread is placed in front of the credit spreads, not because it is the ideal debit spread. A hulking shape is created at the far right of the graph, but profit is lowered to the left of that shape. It's lowered to $335 minus commissions in this case, everywhere to the left of that shape until just before the expiration breakeven. Of course, at that point, the profit slopes down to the flatline and then below the flatline if price were to continue lower.

The nearly flat delta is revealed in the today line, too, which allows for more upside before it curves down so steeply. In fact, decreasing implied volatility on an upside move would flatten it to the upside even more than is visible here. This trade would still require adjustment at some point during a relentless upward grind, but that adjustment would not be as painful as it would otherwise be. The debit spread would have been gaining profit as the adjustment point was approached.

Let's try another way of altering the traditional iron condor if one fears a relentless climb. How about selling half as many call credit spreads as put credit spreads?

Trade with Half as Many Call Spreads as Put Spreads:

The same strikes are used here as were used in the original iron condor, but only 5 call credit spreads were sold to the 10 put credit spreads that were sold. Delta is nearly flat again, evidenced by the flatter today line. However, potential credit is reduced across the expiration graph, to $800 minus commissions. It's reduced, but not reduced to the level that the tactic of put credit spreads alone reduced it.

We often think we know which direction the markets might go, but we're sometimes surprised. If it was your intention to create a directional trade, then that's fine. However, I would not make a non-directional, meant-to-be-market-neutral trade too directional. Neither do you have to stay in the little box proscribed by the traditional, standard setup. Be aware that each change you consider has pros and cons, and please do include margin changes in those pros and cons if you unbalance a traditional iron condor.

However, if you like a flatter today line, options are flexible enough to help you create one. Experiment. Check with your broker on how such changes would impact margin requirements. Back or forward test the ideas. A forward test is a test in which you run the theoretical date forward and change implied volatilities and the underlying's price. Paper trade or trade in very small lots if you're trading live.

I used the iron condor for the purposes of this article. I know many of our subscribers trade them, as did I for many years. I now trade butterflies, not because they're superior to iron condors, but because they better fit my changing needs. The suggestions here are not specific trade suggestions, nor was the "relentless upward grind" representative of any current market view. This was just an invitation to think beyond the box.