Top Trader

“Putting the odds in your favor”

Adjusting Sigma IC / Strangles

© 2008 Eagle Interests, LLC 1

Version 1.0 Rev 1 © Copyright under US and International Law
 Disclaimer
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taxes may affect the outcome of contemplated options transactions. A prospectus, which
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upon request, addressed to the Options Clearing Corporation: 440 S. LaSalle St., Suite 908,
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Chicago, Illinois 60605.
ANY STRATEGIES DISCUSSED, INCLUDING EXAMPLES USING ACTUAL
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© 2015 Eagle Interests, LLC 2
Version 1.0 Rev 1
 Why Stop Losses can be Dangerous!

Max Profit: $710 (Green Circle)

Stop Loss: -$1,420 (2 x Max Profit)

Current P/L Open: -$3,403.36 < We would already be out of the trade (white circle)
P/L on Expiration: -$654 (red circle)

By adjusting and maintaining such a trade open we can potentially minimize our loss or
even make money! 3
© 2015 Eagle Interests, LLC
 Adjustments (Advanced)
We can put alerts based on the following table and continually roll the untested side,
this is more complex and our way of trading, it minimizes losses and avoids being
stopped out when volatility spikes. It is recommended that you risk 1.5% or less per
trade when using this methodology

4
© 2015 Eagle Interests, LLC
 July 20, 2015 – IBM – Initial Trade

Initial Trade
Sold Aug 185 Call / Aug 160 Put for $1.44

Exit Order
Buy Aug 185 Call / Aug 160 Put for $0.72

Alert(s)
If stock goes above 185
If stock goes below 160

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 July 22, 2015 – IBM – Tighter Strangle
Our Previous alert is activated (Stock below 160)

Adjustment
Buy the Aug 185 Call and Sell the Aug 167 Call
(Strike with first Delta above 0.16) for a credit of
$0.31
I.C. Adjust Total

1.44 0.31 1.75

New Exit Order
Buy the Aug 167 Call / Aug 160 Put for $1.03
(1.44 / 2 + 0.31)

New Alert(s)
If the 160 Call’s Delta is at or below 0.35
If the 167 Put’s Delta is at or below 0.35

Note
Your account will go up in Value and the P/L
Open will go down since you bought back the 185
Call for a lower price than you sold it for (See
Appendix© for formula)
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 August 4, 2015 – IBM - Straddle
Our Previous Alert is Activated (160 Call Delta is
at 0.35 or below)
Adjustment

Buy back 167 Call and sell the 160 Call (Delta
between 0.3 y 0.4 ) for a $0.57 credit

I.C. Adj.1 Adj.2 Total

1.44 0.31 0.57 2.32

New Exit Order
Buy the 160 Call / 160 Put for $1.96 (1.44 * 0.75 +
0.31 + 0.57) < We use 0.75 because we are in a
Straddle and probability of exiting is smaller

New Alert(s)
If the 157.5 Call’s Delta is at or below 0.35
If the 162.5 Put’s Delta is at or below 0.35

Notes
We found the Strikes by:
Short Put Strike – 1 x Initial Credit – Sum of Adjustments
Short Put Strike + 1 x Initial Credit + Sum of Adjustments
© 2015 Eagle Interests, LLC 7
 August 6, 2015 – IBM – Inverted 1
Our Previous Alert is Activated (157.5 Call Delta
is at 0.35 or below)
Adjustment
Buy back the 160 Call and Sell the 157.5 Call (Delta
between 0.3 and 0.4) for an additional credit of
$0.60

I.C. Adj.1 Adj.2 Adj.3 Total

1.44 0.31 0.57 0.60 2.92

New Exit Order
Buy the 157.5 Call / 160 Put for $2.92 < At this point all
we want to do is break even if possible (we can only do
this if total credit > spread between strikes, on the
contrary we utilize the spread between strikes (since we
are inverted))

New Alert(s)
If the 155 Call’s Delta is at or below 0.35
If the 165 Put’s Delta is at or below 0.35

Notes
We found the Strikes by:
Short Put Strike – 2 x Initial Credit – Sum of Adjustments
Short Put Strike + 2 x Initial Credit + Sum of Adjustments
© 2015 Eagle Interests, LLC 8
 Why is it wise to do what we do?

1) Bought 100 shares of stock when

we sold our Strangle and did
nothing
(157.5 - 174)*100 = -$1,650

2) Sold 1 contract of Strangle when

we did and did nothing else
(157.5 - (160-1.44))*100 = -$106

3) Sold 1 contract of Strangle when

we did and adjusted
(157.5 - (160 - 2.92))*100 = $42

We choose 0.35 Deltas to hold off

doing the adjustment in case it goes
back but do the adjustments as
© 2015 Eagle Interests, LLC needed (can’t afford not to) 9
 Alerts Screen

If you sort your screen by Current Price you will have and organized way of telling which positions might be
closer to needing adjustments
You will want to move your Alerts to the next month on expiration Wednesday (avoid large
© 2015 Eagle Interests, LLC fluctuations in Delta - Gamma Risk)!! 10
 Positions Screen
If you have ATM Options on Expiration Week you will see your Delta move a lot (Gamma Risk), move them to
the next month if you do not want to see this (you will give up some Theta Decay though)!!

By Adjusting you do not let your Deltas get too large or too small, remember that we want to be close to Delta
Neutral and high positive Theta (so that an up or down move in the market does not affect us too much)

If you adjust and Beta Weight your Portfolio to the SPY, your Delta should not be outside a 1% of your
account Value (in this case a portfolio of $100K, max overall Delta +/- 1000)
© 2015 Eagle Interests, LLC 11
 Other Important Points
Entry
The selection of an instrument and timing (liquidity, high IVPercentile, etc. etc.) is still very
important! Where we sell our initial strikes is key, even if we know how to adjust!!

Size
The more and smaller trades we have the better off we will be, just so that a single bad trade
does not affect us as much! It is recommended that a maximum of 3% of the portfolio is
risked in each position (however if we plan on adjusting a 1.5% or lower is recommended)
In the case of Sigma IC / Strangles the risk is defined as 2 x the initial credit (even
though we know we may lose more)

Why adjusting
We adjust because we receive additional credit and lower our cost basis. By adjusting we also
keep our Deltas in control, we do not incur additional risk either. We also get closer to the
market and stand a chance of exiting with a profit or minimizing our losses. By adjusting we
avoid using stop losses that may take us out of the trade prematurely

© 2015 Eagle Interests, LLC 12

 Other Important Points
Strangle vs. Sigma Iron Condor
When doing Strangles we can adjust indefinitely. With Sigma IC we can even go inverted as
long as we don’t get to the long strikes bought on the other side for protection.

Rolling to the next month

As expiration approaches and if we chose to we can roll to the next month for a credit on the
same strikes we already have, how do you know when to roll?
- If you are short an ITM Strike, look at the corresponding OTM Strike and if the Bid is at or
below $0.05 go ahead and roll that strike (Vertical) to the next month*
- You will notice that deep ITM Options fluctuate a lot in price, so a trick is to look at the corresponding (Call vs. Put)
OTM Roll to figure out at what price to initially try to roll your position at
- If you are short an OTM Strike and it is trading below $0.05 on the Bid go ahead and roll
that strike (Vertical) to next month
- And of course, if you are on the last trading day of the expiration month you will have to roll
your Options regardless of the Bid’s Price

*ITM Short Strikes are the ones that have risk of assignment so keep an eye on these. Also, realize that if both of your short
positions are in the money they will both get assigned (automatically) at expiration (for a fee) and net you out of the position. If
you are ITM a short Call with less extrinsic value than a upcoming dividend in the stock or $0.05 you should roll out of it/close
the position to avoid assignment
© 2015 Eagle Interests, LLC 13
 Appendix – Realized Gains Formula
As we do our adjustments we are receiving credit by closing previously sold options and
selling new ones. For this reason our account’s value, defined as Net Liq – P/L Open, is
usually going to go up by the below value

Rp = Total Realized Profit

C = # of Contracts
Ic = Initial Credit
Ca = Credit Adjustment (Total of all additional credits received)
Spc = Mark Spot Positon Cost (Cost of the positon in TOS (mark price))
Spl = Spot Profit and Loss of Position

Rp = (100*C (Ic + Ca - Spc)) - Spl

© 2015 Eagle Interests, LLC 14

 Appendix – Adjustments in Analyze Tab
First Adjustment (Initial Credit 1.24, Adjustment Credit 0.49)

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 Appendix – Adjustments in Analyze Tab
Second Adjustment (0.75 Credit)

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 Appendix – Adjustments in Analyze Tab
Third Adjustment (0.80 Credit)…..

© 2015 Eagle Interests, LLC 17

 Appendix – Adjustments in Analyze Tab
After the third adjustment why can we only make $ -72?

We have received a
total credit of $3.28
($328 per contract)
and the most we
would receive for
selling the 89 Call /
93 Put is $4 (since
we are inverted,
$400 per contract),
therefore our profit
is limited to -$72
($328 - $400)

© 2015 Eagle Interests, LLC 18