Iron Condor - Part Four: Managing Risk

In the world of trading there is an axiom that always holds true. Manage the losses and the profits take care of themselves. With Iron Condors this is more true than ever, because the risk/reward absolutely stinks. There are many cases where I will risk 8 or 9 to make 1. In other words, if we aren't carefully managing risk one loss can wipe out eight or nine months of profit. That's a tough way to make a living. Does that mean Condors are bad trades? Not at all. They can be great trades IF they are well managed.

Managing trades has several aspects, but with Iron Condors it pretty much boils down to three main points:

• When do I take profit?


• When do I take loss?


• When do I make adjustments?
  

When I learned to fly an airplane it was interesting that the vast majority of the time in training is spent learning what to do when things go wrong. I would guess that about 20% of the time was learning to fly the plane, and 80% was spent on what to do in an emergency (a fire, losing an engine, bad weather, getting lost, etc.). Trading IronCondors is very similar. Putting the trade on is easy; but there will come a time, pretty regularly, when things aren't going so well. What happens then? Most of my personal learning came from experiencing those situations.

So let's answer the first two questions above. When do I take the trade off and pocket the profit? On far out of the money vertical spreads and Condors I set a target at about 1/4 my original credit. If I sold it for 60 cents, I immediately put a GTC order in for 15 cents. I say about, because I sometimes round it off. For example, I posted a trade a couple of days ago where I sold it for 55 cents and bought it back for 15 cents... close enough. Part of my overall trading theme is that I like to make things easy to manage, so these orders go in immediately after the trade is on. That way I never have to think about them until I get that beloved email that says:

BOT +5 VERTICAL RUT 100 FEB 09 550/560 CALL @.15

And when do I take a loss? You will see in the next post (Part Five) that I may make several adjustments prior to reaching my max loss point, but sometimes nothing seems to work. Sometimes you lose anyway. My max loss point is 1.5 times my original credit. In other words, I don't want to lose much more in a bad month than I would make in a good month. I don't ever want to be in a position that one loser wipes out eight or nine winners.

These first two questions address the easy parts of risk management. The next segment will deal with how to make adjustments when things go wrong. There are many ways to alter the trade, based on one's beliefs about the market, that might make the trade more profitable, or provide an edge.

Next Time: Making Adjustments

Good Trading...