The last three Options 101 articles have discussed the decisions options traders make when deciding between two complex strategies. We've been comparing and contrasting the butterfly and iron condor, two positive-theta and negative-vega strategies, to illustrate the decision-making process.

Last week's article touched on one of the major decisions. Will you adjust, and how often are you willing to do so?

Because of the butterfly's construction, the butterfly often requires more frequent adjustments than the iron condor. The tradeoff for the butterfly trader lies in the amount of potential profit available. Adjustments cost traders, in the form of a debit paid, an increased margin requirement or buying-power effect, or just commissions fees and slippage. The high-probability iron condor as set up in the last few articles requires less frequent adjustments. However, the iron condor just doesn't have much potential profit to recover from the money spent on adjustments.

This article will illustrate several of the many possible iron condor adjustments and their impact on the maximum risk and the maximum profit. We start with a look at the original setup, as seen on January 26.

Original Iron Condor Setup, from January 26:

On January 31, as this article was roughed out, the iron condor needed no adjustment. The OEX was at 674.89, not far from its position when this original chart was snapped the prior week. Delta was a rather flattish -8.40, and there was a theoretical loss of $7.48 plus commissions.

It's still possible to examine the effects of several adjustments, even if none was absolutely necessary when this article was roughed out in preparation for publication. Let's imagine that on January 31, the trader felt that the OEX would likely head up, not hard to imagine under the market conditions at the time. The delta would grow more negative, and the trader might want to raise the position delta to a less negative number.

The original MAR iron condor was composed of the following strikes +3 715 calls/-3 705 calls/-3 620 puts/+3 610 puts. To raise the position delta, one of the -705/+715 calls spreads could be moved to the -720/+730 strikes. As this article was roughed out on January 31, this could be accomplished in a single trade by buying a condor (regular, not iron) as follows: +705/-715/-720/+730, at a debit of about $0.45 (or $45.00 after the 100 multiplier is applied).

Condor-rolling a Call Credit Spread Further Out:

Studying the "Live" line reveals that this condor roll has raised the position delta from the prior -8.40 to the current -4.96. As had been the purpose of the condor roll, the delta is less negative. Less harm would result from price movement if the OEX rose. This isn't a necessary adjustment at this point, but we're demonstrating the effect.

All adjustment choices have pros and cons. This one may have raised the position delta, making it less negative, but it dropped the theta. The passage of each day would benefit the trade less than it did previously. The trader who adjusts must accept the possibility that the trade's profit may take longer to mature. Making an adjustment is sometimes like resetting the clock measuring days to expiration. That's true of both iron condors and butterflies.

There's another con. The cost of this adjustment--$45.00 plus slippage plus four commissions--reduces the profit available in the trade. Without the adjustment, the maximum profit was $300.00 minus commissions. With the adjustment, the maximum profit is $255.00 minus commissions, or likely less if there was slippage getting the condor placed. One reason I like to roll with a condor, however, is that there might be less slippage than if the roll were accomplished in two different trades, buying in an in-trouble credit spread and selling a new one further out.

What may not be as evident immediately is that the margin or buying-power effect also increases by the money spent on the adjustment. Can you imagine the damage done to the iron condor's original maximum $300 profit if all three contracts of call credit spreads were rolled? Moreover, because this adjustment wasn't needed, it was relatively cheap. It wouldn't be that cheap it were actually needed!

Another possible adjustment is to roll one or more of the -705 calls to -710's. Below, I've rolled one.

Second Possible Adjustment:

Notice that this potential adjustment also raised the delta, not raising it quite as much as the prior condor roll of the whole credit spread. The effect on theta is about the same as for the condor roll. The cost, however, is a little less. This trade cost only $35.00 plus commissions and any slippage incurred. Because this adjustment is cheaper, it would normally increase the margin requirement or buying-power effect by less than the more expensive condor roll.


We active options traders trade in different times than we once traded. The condor roll rolled one 10-point spread into another 10-point spread. This second adjustment, a vertical roll of one of the sold calls into a higher sold call without also rolling the long call, creates an unbalanced iron condor. At least for that one contract of iron condors, one side has a 10-point spread and the other, a 5-point spread. A strict interpretation of FINRA rules may mean that you're now paying margin on both sides of the iron condor, dramatically increasing the requirements for this trade. While brokerages once used their own discretion, many will now hold margin on both sides on one of those condor contracts. If you elect to trade iron condors, check with the margin or trading desk at your brokerage in advance to determine how they handle margin or buying-power effects with unbalanced iron condors.

Other adjustments exist. You could take off one of the call credit spreads.

Third Adjustment Possibility:

Again, position delta has been raised so that it's not so negative. However, theta has been reduced even more than the previous adjustments had reduced it. Moreover, there aren't as many profits to take, and, if this tactic is taken too late in the trade, there may be none. This trade cost $60.00, so the potential profit is reduced by that $60.00 plus commissions and any slippage you incur, while the margin requirement is increased by that much. The expiration chart shows that your potential loss to the upside has been dramatically reduced, however.

What about spending some money to make some money? What about buying a debit spread in front of the call credit spreads? Here's an example that buys a 700 call and sells a 705.

Fourth Example:

We see the by-now familiar raising of the position delta set off by a lowering of the theta. The maximum risk to the upside has been decreased. We see that the expiration line kicks up in to a little hillock, too. Many traders who buy debit spreads in front of their credit spreads at inception find that that they flatten out the T+0 or today lines even more than is apparent here.

We can guess one of the cons for this adjustment possibility: debit spreads cost money and that adds to the margin and reduces the potential profit in a trade where there isn't that much potential profit to be had. In this case, buying the debit spread in front of the sold spread reduces the profit to $240.00 minus commissions and the effects of slippage.

Notice that I have not included the buying of a long call as a possible adjustment. While traders can of course find that a helpful tactic, it may be less helpful than imagined. When prices first break out of a congestion zone and zoom up, for example, the implied volatilities of the calls may temporarily rise as everyone rushes to buy calls. That means that they're expensive. Then, if a move continues to the upside, those implied volatilities sink and sink and sink as the climb continues. That means that any benefit from the rise in the underlying's price may be offset by both sinking implied volatilities and the passage of time. The lonely long call may not be as helpful as anticipated. In rabid rallies, it may be difficult to do anything other than buying a call, but certainly be aware that if you need to buy a call, probably lots of others do, too, and they're likely expensive. Any kind of spread lessens the risk from changing implied volatilities and the passage of time.

If you wait until the moment when you most need an extra put to buy that extra put, then you're also going to be buying an option that's likely expensive. However, in general, if the move does continue to the downside, puts don't suffer from a deflation in implied volatilities. They tend to get more and more expensive. In a downturn, implied volatilities continue rising, inflating the value of the put. Of course, if the move reverses, value rapidly seeps out of the expensive put you bought.

What have we learned? This was an unrealistic view. Because the adjustments didn't have to be made yet, they weren't as expensive as they would be when needed. In fact, iron condor traders sometimes find that the adjustments are so expensive that they need to roll into more credit spreads to make up some of the debit for buying in the in-trouble credit spread. Without increasing the size or number of new credit spreads sold, the entire trade might be underwater, with no possibility of profit. Traders can increase the size if they have enough funds and have allowed for increased margin requirements in their planning. However, that tactic can be a dangerous one. Particularly when the markets are running to the upside, the number of extra credit spreads needed to make up the debit and maintain profitability may double or more the margin requirements. Do you really want to double your exposure when the markets have already proven that they're going far more than anticipated in any one direction? Moreover, in a runaway upside market, implied volatilities are falling. The iron condor trader may find that, in order to get anything near the credit they want to reimburse them for the risk they're taking, they can roll up only a short distance. They can't really move that trade far out of harm's way. Think carefully.

If you're going to employ this tactic when adjusting iron condors, plan before the trade is initiated for how much additional risk you'll take on in the trade and stick to that when you roll into new credit spreads. Always keep your eye on the unrealized losses, and don't placate yourself by thinking that you can always roll again if the trade keeps getting into trouble and those losses keep growing bigger. At some point, you might be forced to realize an unrealized loss when you no longer are willing to roll into more credit spreads and take on more risk.

Because iron condor traders find that adjusting to the upside in a falling-volatility scenario can be particularly difficult, some iron condor traders elect to be proactive. They may start out with fewer call credit spreads than put credit spreads or add a hedging call debit spread at the money or higher when they open the trade to flatten that risk somewhat. It's a little difficult to set up a small trade that way because the cost of the adjustment overwhelms the profit. The small size of the trade may be its own guarantee that losses don't mount too high.

Traders need to weigh the pros and cons when deciding between iron condors and butterflies. The prior articles have shown that, in normal circumstances, the high probability iron condor is probably not going to need adjusting as frequently as the butterfly will. This article illustrates the tradeoff for that: the iron condor, as set up here, has a less favorable risk/reward setup. Adjustments can be more painful when needed. Next week's article looks as some possible butterfly adjustments.