Last week's article about adjustments didn't include all the possible adjustments. Options are so flexible that it's impossible to list all adjustments. However, another reason limited the adjustments I mentioned: options may be flexible, but FINRA isn't.

FINRA is, according to its website, "an independent, not-for-profit organization authorized by Congress to protect America's investors by making sure the securities industry operates fairly and honestly." The agency enforces securities firms and their brokers. Specific to our purpose when discussing adjustments, FINRA defines some of the strategies option traders employ and determines how such strategies are margined.

Let's look again at an iron condor strategy from a previous article, theoretically established on October 6 at about 10:55 AM CT. Option positions that make up this condor can be found on the sidebar on the left side of the graph.

Theoretical Iron Condor Position:

When iron condors used to be my monthly trade, I tended to adjust as soon as the absolute value of the delta of one of the sold options reached 16. The deltas are listed in the sidebar. Even those people who don't know or care much about the Greeks of options pricing can usually locate deltas of the options that comprise their complex options positions. The goal of an adjustment is to slow the losses incurred by further price moves in the wrong direction.

It wasn't long before one of the deltas in the graphed iron condor met that particular adjustment parameter.

Same Trade, Four Days Later:

Last week's article suggested several different possible adjustments, but it didn't suggest the one found on the following graph.

Rolling Sold Puts:

On the sidebar, the existing trade's proposed adjustment is listed alongside the green squares. That adjustment is to roll the sold 1790 puts down to 1785 puts. This is accomplished by buying the 3 1790 puts and selling 3 more at 1785. This action can be taken with a single order for this debit vertical: +3 1790 p/-3 1785 puts. The original ten-point put spread of -3 1790 P/+3 1780 puts is now a 5-point spread of -3 1785 puts/+1780 puts.

You may already be guessing that I didn't mention this possible adjustment because I was trying to stay away from those strikes ending in "5." However, I always found those strikes worked relatively well on the SPX when there might have been more volume than there is on recent low-volume days. Perhaps you think I didn't mention this adjustment in last week's article because it's not the best adjustment for the situation. However, I haven't studied the price charts and decided whether this would have wise under the circumstances. At times, that could be a workable adjustment.

There's a more important reason I didn't mention rolling into a five-point spread.

The real reason I didn't mention this as a possible adjustment relates back to FINRA, FINRA's definition of various strategies, and FINRA-required margin requirements. Most of us are used to having our iron condors margined on only one side. Let's do the math for the original position:

Original credit taken in for three contracts, minus two-way commissions: $442.50
Margin of $10 spread x 100 multiplier x 3 contracts = $3000
Margin reduced by credit taken in: $3000 - $442.50 = $2,557.50.

Notice that the second computation, the one for the margin before the credit was deducted, did not include a multiplication factor of two for each of the two sides of the iron condor. Iron condors have traditionally been margined as if the risk is only on one side, with the theory being that if the condor is allowed to run until expiration, it's possible for only one of those sides to be violated. Whether I think that's a valid argument or not, that's how FINRA and the brokerages have agreed that traditional condors will be margined.

Here's the hitch when it comes to employing a strategy that narrows the spread to five points on one side of the iron condor and keeps it at ten points on the other. FINRA has a definition of condors, and that definition includes the requirement that "the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order" [4210 (f) (2) (A) xxxix].

What does that mean? That means, among other conditions, that in order to meet FINRA's definition of a "short iron condor spread," the spread between strikes on the call side must equal the spread between strikes on the put side. You can't have a ten-point spread between strikes on the call side and a five-point one on the put side and meet FINRA's extremely tight definition of an iron condor.

What does that mean in live trading? That may or may not depend on your brokerage. Back a decade ago, many brokerages still margined only on one side of the iron condor. That all changed a few years ago when FINRA cracked down on the more flexible (and knowledgeable, some traders would say) brokerages. At least for a while, traders on our example would find they had to add an additional margin of $5 spread x 100 multiplier x 3 contracts = $1500 to the trade, as well as the cost of the adjustment itself. The same thing often happened with butterflies with unequal wing sizes. Traders could find that they were suddenly held to much larger margin or maintenance costs when they had moved to reduce risk. The same problem could occur if the trader elected to remove one sold spread entirely, so that what remained was two 10-point put credit spreads and three 10-point call credit spreads. They're unequal in the number of contracts, not spread width, but that FINRA definition requires all to "have the same contract size."

Various brokerages have worked with FINRA over the years to broaden these definitions and allow different margining practices, but you'll need to check with your individual brokerages to determine how they margin butterflies or condors with unequal wing sizes. In practice, margining may be handled differently in different brokerages.

What's the point? The point is that options are flexible, but FINRA isn't known to be particularly flexible. Be sure that before you try a new strategy or new adjustment practice, you check with your brokerage to determine how that will impact the margin or maintenance. Options are flexible, but FINRA isn't and your brokerage might or might not be.

For those interested in perusing FINRA's pages with definitions of the various strategies, you can find them here.

Linda Piazza