Adjusting the trade – Staying Out Of Harm’s Way

The key to successful investment and or trading is risk management, Managing your risk entails that you have a plan in place, in case the trade goes wrong and more importantly that you execute on the plan.

An Iron Condor has two credit spreads the Bear Call Credit Spread and the Bull Put Credit spread. The credit spreads are established with a short strike on both the Call and the Put with a simultaneous long on both the Call and the Put. For our current July 2011 trade cycle we have established the following trade –

 

 

 

 

The goal of the above trade is to manage it till expiration with the goal of keeping the total premiums of $1.20 per contract which translates to a gross amount of (15×100) x $1.20 = $1,800. Remember each contract controls one hundred shares and is the reason why we are multiplying the 15 contracts we hold in this position by 100. Our short strikes are the 855 strike price on the Call spread and the 700 strike price on the Put spread.

Our risk in this trade is the difference in the strike prices which in this case is equidistant and is 10 points for both the Put an the Call credit spread (we only use the difference on one side of the spread) multiplied by the total number of contracts less the gross premiums received. In this case the calculation is as following –

 

(865-855) x (15 X 100) – ($1.20) x (15X100) = $13,200

 

The reason for using just one leg of the spread is because in an Iron Condor you can only lose on only one side of the spread technically.

Once the trade is established we now begin the process of managing our risk and to make sure that our short strike prices stated above are not breached. We normally put up the trades at a delta of between .8 to .12 and also two standard deviations from our short strikes. The goal is to monitor