How To Adjust the Iron Condor
KerryW.Given,Ph.D.(Dr.Duke) ParkwoodCapital,LLC
2011ParkwoodCapital,LLC.AllRightsReserved.
Disclosures and Disclaimers
BuyingandsellingstocksandopAonsinvolvesrisksandmaynotbesuitableforallinvestors.PriortobuyingorsellinganopAon, theinvestormustreceiveacopyofthebooklet,CharacterisAcsandRisksofStandardizedOpAons,fromyourbrokerorfromThe OpAonsClearingCorporaAon,1NorthWackerDrive,Suite500,Chicago,IL60606. TheinformaAoninthispresentaAonispresentedforeducaAonalpurposesonly.ItshouldnotbeconstruedasarecommendaAon orsolicitaAontobuyorsellopAons.ManyexamplesofopAonstradesarepresentedinthispresentaAonasillustraAonsofthe principlesbeingtaughtinthiscourse.TheseexamplesarenotrecommendaAonsorsolicitaAonstobuyorsellanystockoropAon. TosimplifythecalculaAons,commissioncostshavenotbeenincludedintheexamplesinthispresentaAon.Commissioncostswill aecttheoutcomeofanystockoropAonstradeandmustbeconsideredpriortoenteringthetransacAon. NorepresentaAonisbeingmadethatanyaccountwillorislikelytoachieveprotsorlossessimilartothosediscussedinthis presentaAon.ThepastperformanceofanytradingsystemormethodologyisnotnecessarilyindicaAveoffutureresults.
2011ParkwoodCapital,LLC.AllRightsReserved.
Agenda
BuildingtheIronCondorSpread PuttheProbabiliAesOnYourSide TheProtEngineoftheIronCondor RiskManagementfortheIronCondorSpread BacktesAngtheAdjustments DevelopingaTradingPlan
2011ParkwoodCapital,LLC.AllRightsReserved.
Building the Iron Condor
VerAcalspreads:thebuildingblocksofmorecomplexopAonsstrategies CreatedbybuyingoneopAonandsellinganotheropAonatalowerorhigherstrikeprice Creditvs.debitspreads Buildtheironcondorwith: Abearcallspreadplacedabovethestockprice,and Abullputspreadplacedunderthestockprice
2011ParkwoodCapital,LLC.AllRightsReserved.
Building the Iron Condor
PCLNat$458on3/16/11 Notestrongsupportandresistancelevelsat$443and$475,respecAvely EstablishtheApr430/440putspreadforacreditof$2.55 EstablishtheApr475/485callspreadforacreditof$3.35 Maximumprot=$590/contract;maximumloss=$410
2011ParkwoodCapital,LLC.AllRightsReserved.
Many Different Condors Are Possible
CondorSpread(debit)vs.theIronCondorSpread(credit) Lookforchannelingstocksascandidates. Tradethebroadindexeseverymonth. Strikepriceplacementnearorfar? TimetoexpiraAon? ArespreadsestablishedsimultaneouslyorbyleggingintotheposiAon? OpportunisAcmodelvs.Insurancemodel
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The Most Common Condor Strategies
Twobroadcondorstrategiesarecommon: 1. TheOpportunisAcModelLookforachannelingpaferninastockorindex. 2. TheInsuranceModelTradeeverymonthtogenerateincome. WithineachofthesestrategiesareseveralpossiblevariaAons: Strikepriceplacementnearorfar? TimetoexpiraAon? ArespreadsestablishedsimultaneouslyorbyleggingintotheposiAon?
Asiso?enthecaseinopAonstrading,thereisntabeststrategy.EachvariaAonhasitstradeos. Findwhatsuitsyourstyle,risktolerance,andAmeavailabletomanagetheposiAon.
2010ParkwoodCapital,LLC.AllRightsReserved.
The Opportunistic Model
Lookforstocksorindexesyouexpecttotradewithinachannelforthenext30days CalculateonestandarddeviaAon()fortheunderlyingstockorindexwiththecurrentIVandthenumber ofdaystoexpiraAon.Lookatthestockorindexspricechart;hasitmoved>1inthepastseveralweeks? Acondorwithahighprobabilityofsuccess(>85%)willhaveshortstrikeprices1fromthecurrentprice LookforlevelsofsupportandresistancetoposiAonyourshortstrikes Somesokwarecanscreenforchannelingstocks ThisisadirecAonaltrade,basedonyoursidewayspredicAon
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The Insurance Model
Usethebroadindexes,e.g.,SPX,RUT,NDX,etc. DevelopandconsistentlyapplyaprobabilisAcmodeltoselectstrikeprices ConsistentlyuseasimilarAmetoexpiraAon Sefleonanadjustmentmethodology,includingtriggercriteria ThisisanondirecAonaltrade;youarereacAngtowhatthemarketgivesyou
2010ParkwoodCapital,LLC.AllRightsReserved.
Put the Probabilities On Your Side
StandardDeviaAon()
GaussiandistribuAons Blueshadedarea=84%probabilityofsuccessforacreditspreadoneOTM DisAnguishprobabilityofclosingvs.probabilityoftouching
2011ParkwoodCapital,LLC.AllRightsReserved.
The Profit Engine of the Iron Condor
TimeValue($)
60
45
30
15
DaystoExpiraAon
2010ParkwoodCapital,LLC.AllRightsReserved.
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Risk Management for the Iron Condor
AconAngencystoplossorder Adjustmenttechnique Anadjustmenttrigger AAmestop Aprotstop
2011ParkwoodCapital,LLC.AllRightsReserved.
Risk Management For The Iron Condor
Contingency Order Triggers
HerearesomeguidelinesforselecAngtheconAngencyordertriggerprice:
WatchthedeltaoftheshortopAon;whenitreaches35,Ishouldbeoutofthetrade.
Forexample,on12/15/09withtheRUTat$606,Iestablishanironcondorwiththe510/520putsandthe680/690 calls;the$580puthasdelta=33,soIsetmyconAngencyordertotriggeratavalueof$26(606580=26)abovemy shortputstrikeprice.SomyconAngencystoplossorderwouldtriggerifthepriceofRUTdropsbelow$546(520+26).
JudgmentCall: Settriggerfartherdown=greaterriskofloss Settriggercloser=greaterriskofbeingwhipsawedoutofthetrade
2011ParkwoodCapital,LLC.AllRightsReserved.
Risk Management For The Iron Condor
Adjustment Techniques
1. The200%Rule: a) Monitorthedebitrequiredtocloseyourspreads;whenthedebittocloseis200%oftheoriginalcredit, closeallofthespreadsonthatside 2. ClosingSpreads: a) IfthedeltaofeithershortopAon18,closeonethirdofthespreadsonthatside b) IfthedeltaofeithershortopAonhits30,closetheremainingspreadsonthatside 3. TheBuyBack: a) IfthedeltaofeithershortopAon18,buybacksomeoftheshortopAons b) IfthedeltaoftheshortopAonreturnsto15,sellopAonstorecreatethespreads c) IfthedeltaofeithershortopAonhits30,closethespreadsonthatsideandselltheextralongopAon(s) 4. TheLongHedge: a) IfthedeltaofeithershortopAon18,buylongopAonsattheshortstrikeinthenextmonth b) IfthedeltaoftheshortopAonreturnsto15,sellthelongopAon(s) c) IfthedeltaofeithershortopAonhits30,closethespreadsonthatsideandsellthelongopAon(s) 5. RollingSpreads: a) Whenyoucloseallofthespreadsonaside,youmaychoosetorollupordowntoconAnuethetrade
2011ParkwoodCapital,LLC.AllRightsReserved.
Risk Management For The Iron Condor
Adjustment Techniques
The200%Rule:
Simpleandeasytouse. AveryconservaAveadjustment;raretolosemuchmoneywiththisadjustment. Downsideisbeingfrequentlystoppedoutoftrades. ReducesonespotenAalloss. Strongdeltaimpact. Minimalthetadamage. FlafenstheR/Rcurve(bigadvantage). RequireslesscapitalthantheLongHedge. Smallerdeltaimpact. Worstthetadamage. FlafenstheR/Rcurvebest. Strongdeltaimpact. Moderatethetadamage. Increasesthecapitalatrisk.
TheClosingSpreadsAdjustment:
TheBuyBackAdjustment:
TheLongHedgeAdjustment:
2011ParkwoodCapital,LLC.AllRightsReserved.
Risk Management For The Iron Condor
Adjustment Techniques
WhenmakingadjustmentstoyourcondorposiAon,trytoreducedeltawithoutreducingthetatoomuch. IftheproposedadjustmentcausesthetatogonegaAve,thenclosetheposiAon. IfusingtheBuyBackorLongHedgeadjustments,watchtheneartermrisk/rewardcurve;wewanttoafen theslopesothataddiAonalmovementoftheindexagainstusdoesnothurtustoomuch. Whenyouradjustmenthasplayedoutandyouclosethespreadsonthatside,youmayrollthosespreadsupor downtoconAnuethetrade. Youmayalsowanttoconsiderrollingthespreadsonthegoodside.Butthisisincreasingyourrisk. Sometradersincreasethenumberofcontractswhentheyrollthespreadstorecoverthelossofclosing; butbewareofthistacAcyouareincreasingthecapitalatrisk.
Thekeytosuccessintradingtheironcondorismanagingyourrisk. Ifyouarecarefultominimizeyourlosses,yourgainswillcome.
2011ParkwoodCapital,LLC.AllRightsReserved.
Risk Management For The Iron Condor
Using the Greeks
DeltameasurestheriskofyourposiAontoapricemove,e.g.,ifmyposiAondelta=$125andtheindexincreasesby $12tomorrow,myposiAonwilllose$1,500. Therefore,keepdeltasmall;Iwatchthetheta/deltaraAomorethantheabsolutevalueofdelta. YouradjustmentcriteriawillfuncAontokeepyouwithinsomedeltalimits,orcoulduseposiAondeltaasour adjustmenttrigger.
TheposiAvethetavaluemeasuresthebenecialeectofAmedecayonourposiAon. Becarefulthatyouradjustmentsdonotremovetoomuchtheta. IfthetaevergoesnegaAve,closethetrade.
WatchtheraAoofthetatodelta.RaAos>2:1aregood(thehigher,thebefer). Whenthetheta/deltaraAoisapproximately1:1,thisisdangerousground.Mayhavetocloseorrollspreadssoon.
2011ParkwoodCapital,LLC.AllRightsReserved.
Back-Testing Adjustment Techniques
2/5/10:MarRUT510/520and650/660ironcondorwithcredit=$2,800on20contracts Adjustmenttrigger:whenthedeltaofeithershortopAon>16 2/12/10:deltaofthe650call=17;closingspreads,buybackandlonghedgeadjustmentstriggered 2/16/10:200%ruletriggered 3/1/10:allcallspreadsclosed;putsallowedtoexpireworthless. Alladjustmentsheldlosstoonemonthsgains
Date 2/12/10 2/12/10 2/12/10 2/16/10
Adjustment Closing Spreads BuyBack LongHedge 200%Rule
New Delta $54 $62 $45 n/a
%Change 44% 35% 53%
New Theta +$78 +$76 +$77 n/a
%Change 26% 28% 27%
Net G/L $2,080 $2,750 $2,220 $700
2011ParkwoodCapital,LLC.AllRightsReserved.
Back-Testing Adjustment Techniques
7/8/09:AugRUT390/400and550/560ironcondorwithcredit=$2,960on20contracts Adjustmenttrigger:whenthedeltaofeithershortopAon>16 7/15/09:deltaofthe550call=22;closingspreads,buybackandlonghedgeadjustmentstriggered 7/15/09:200%ruletriggered 7/23/09:allcallspreadsclosed;putsallowedtoexpireworthless. Alladjustmentsheldlosstoonemonthsgains(onaverage)
Date 7/15/09 7/15/09 7/15/09 7/15/09
Adjustment Closing Spreads BuyBack LongHedge 200%Rule
New Delta $71 $72 $56 n/a
%Change 39% 38% 52%
New Theta +$64 +$53 +$57 n/a
%Change 26% 39% 34%
Net G/L $3,400 $3,270 $2,750 $560
2011ParkwoodCapital,LLC.AllRightsReserved.
Back-Testing Adjustment Techniques
9/2/08:OctRUT660/670and810/820ironcondorwithcredit=$5,200on20contracts Adjustmenttrigger:whenthedeltaofeithershortopAon>16 9/4/08:deltaofthe550call=22;closingspreads,buybackandlonghedgeadjustmentstriggered 9/15/08:200%ruletriggered 9/15/08:allputspreadsclosed;callsallowedtoexpireworthless. Alladjustmentsheldlosstoonemonthsgains
Date 9/4/08 9/4/08 9/4/08 9/15/08
Adjustment Closing Spreads BuyBack LongHedge 200%Rule
New Delta +$9 $10 $20 n/a
%Change 75% 128% 156%
New Theta +$75 +$39 +$48 n/a
%Change 18% 58% 48%
Net G/L $1,301 +$580 +$920 $1,000
2011ParkwoodCapital,LLC.AllRightsReserved.
Back-Testing Adjustment Techniques
The200%ruleissimpleandusuallygetsyououtofthetradeearlyforaminimumloss. TheLongHedgedecreasesdeltathemostwithlessthetadamage. TheBuyBackcausesthemostthetadamage. TheBuyBackandLongHedgeadjustmentsallowyoutosalvageatrade. TheLongHedgerequiresmorecapitaltobeputatrisk.
AlloftheseadjustmentsaccomplishthekeyobjecAve:minimizethelossesinthebad monthssoyoucanbeprotableinthelongterm.
2011ParkwoodCapital,LLC.AllRightsReserved.
Develop the Iron Condor Trading Plan
1. Developandfollowaconsistenttradeentryprocess. 2. ImmediatelyakerestablishingtheposiAon,enterthestoplossorderwiththebroker. 3. Writedownthekeypointsofyourtradingplan: Whatisthestoplosspricetrigger? Iwilladjustatwhatpoint?Whatisthespecicmeasure? WhatadjustmentwillIuse? IsthereaAmestop? IsthereaprotlevelatwhichIwillclosetheposiAon? IfIclosethespreadsononeside: a) WillIrollthosespreadsupordown? b) WillIincreasethenumberofcontractstocoverthedebit? c) WillIrollthegoodspreadsatthesameAme?
2011ParkwoodCapital,LLC.AllRightsReserved.
Summary
Theironcondor: IsanexcellentincomegeneraAngtradingstrategy Doesntrequireyoutopredictwherethemarketisgoing Butriskmanagementiscrucialforlongtermsuccess
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