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Morning Mailbag – 10/1/2014

October 1, 2014

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Morning Mailbag!

In this edition of the morning mailbag, I address how to manage an Iron Condor gone wrong and how to setup an exit order for an option spread using a contingency.

Morning Tim,

I had an Iron Condor with eBay and after yesterday’s move the calls are in the money and the trade took essentially a $785 loss.  What are my options in regard to my position?  Thanks, Logan.


When a stock has news like eBay did recently and jumps (either up or down) on you and moves in the money it can really hurt an Iron Condor trade.  These situations are the most difficult for a trader to manage because the news wasn’t planned for and caught you off guard.  The best thing to do is 1st go to the risk graph and split the trade mentally into 2 separate trades – a bear call spread and a bull put spread.  Then, look at the risk, break-events, remaining value and risk on each side of your spread.  You will need to manage them independently.  If the Bear Call has moved in the money you may need to take the loss and move on.  If the Bull put still has value in it you might let that run and expire.  After some practice, you will also have other strategy choices in your playbook.  For example, one common technique traders use is to buy back the short leg of a stock that is running to open the risk graph.  You should only do this if you are now seeing the stock as a directional opportunity.

Hi Tim,

 I think I will be using strategies like BP and BC spreads, condors and such in my professional trading,
the low deltas and controlled risk strategies. 

1 Could not implement the stop loss feed back on AGN/BP spread
missed some of the info. Can you explain again how to estimate/figure it out ?
You said 169.40, how did you get to that number and what kind of Order (LMT, STOP ….?) GTC ?

 Thanks for your insights


You are using a stock with a  Bull Put spread.  The strikes you chose were the 167.50 (short) and 162.50 (long) put options.  Most traders would put an exit point above the short strike.  A common technique is to use half of the daily ATR rate for the stock and add it to your short strike.  Here are your numbers:

  1. Short strike 167.50
  2. ATR = 3.80 /2 = 1.90
  3. 167.50 + 1.90 = 169.40

169.40 would be a reasonable price to set up your exit on.  Now you have many choices that you personally have to make.  And different traders would decide to go different ways on this choice.

You could simply set an alert to email or text you if that price is met.  Then it would be your job to go in and manually take the trade off and execute your trading strategy.

Next, you could set up an exit order using a stop or stop limit price on the option.  On credit spreads, your stop or stop limit prices would be higher than the original credit entry price.  For example, if you sold a credit for .75 cents then your stop or stop limit prices would be higher than that – say 1.50 or 1.75.  The exact number you use should be either based on your risk tolerance rule or calculated by using the risk graph.  You may need some one on one training to learn how to do this.

Finally, you can use a contingency based on the stock price to exit.  This is like a stop order – but many traders like the contingency because its based on the stock price instead of an option price.  If you use a contingency you also have to make a choice on whether to trigger it into a market or limit price.

In both the 2nd and 3rd choices above – its natural to be intimidated by all of the steps involved in calculating your numbers.  That’s why they make practice trading so you can work it out.  Again, sometimes the best thing to do is speak with a mentor and work with them one on one to help you work through the steps and practice.

When I use stop or contingent orders I always trigger them into limit prices.  I won’t take the risk of stopping or contingent triggering into a market order.  Market orders have no control on how much I get filled for so I can be a victim – with no recourse – to the will of the market.  Not a position I’m comfortable with.

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