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Defending an Iron Condor

The Iron Condor (IC) proves effective when there is minimal volatility and trading within a narrow price range. However, there are days where market conditions initially favor this strategy, only to shift intraday, consequently threatening one side of the IC and necessitating an adjustment. 

Let's look at an example,

Shortly after the opening on April 27, 2024, I entered into a 5-wide IC with my Call Credit Spread (CCS) short strike at 5255 and my Put Credit Spread (PCS) short strike at 5210, collecting a total of $80 in premium.

Since the 1-Day implied move on April 27, 2024, was 0.5%, participants were expecting low volatility for that day, so I opted for an IC over the Opening Range Break (ORB).

My recent analysis looked at the historical performance from the perspective of IV. In short, I concluded that when IV is low, say below 0.7%, and trading above the Flip, ICs performed better over time. However, in this instance, my PCS came under pressure and required a slight adjustment.

Shortly after I entered the IC, markets began to move lower and attempted to fill the downside gap. With this move, the CCS lost value and decayed quickly from $40 to $10. Since the CCS was near worthless, I closed the CCS realizing $30 profit per contract. However now my PCS was trading for $100 per contract, just shy of my 3x stop per leg of $120. 

To reduce my directional exposure and prevent an early stop out, I rolled down my CCS to 5240, collecting an additional $65 in premium. By rolling down the spread and collecting additional premium, I extend the window for managing the at-risk PCS while also affording buyers the time to enter the market and push price higher. This adjustment effectively mitigates the unrealized loss on the threatened PCS, postponing the potential stop-out.

Theta decay was active on both spreads as the SPX traded sideways for a few hours. As the value of the CCS decayed, I closed it at $15, realizing a profit of $50 per contract. 

Subsequently, I opted to close the PCS at $50, incurring a marginal loss of -$10 per contract. This decision was made due to the potential risk of further market declines, which could have resulted in filling the downside and triggering my stop. However, that scenario did not materialize, and the PCS ultimately expired worthless.

The total profit on the IC was $20 per contract, but with the adjustment, the total profit amounted to $70 per contract.

The IC did end up expiring worthless, with SPX closing at 5250, although this outcome was unknown at the time.

In summary, being adaptive and implementing strategic adjustments often proves effective in managing risks and enhancing profit potential for the Iron Condor strategy.

Related content: Rolling a Credit Spread


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