MODULE 4 – ADJUSTMENT

MASTER CLASS
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 DISCLAIMER
Any information contained in this presentation is for educational purposes only. Neither IQ Financial Services, LLC or
Gavin McMaster are licensed financial advisors, registered investment advisors, or registered broker dealers. Neither do
they provide investment advice, financial advice or make investment recommendations and they are not in the business of
transacting trades. Nothing in this communication constitutes a solicitation, recommendation, promotion, endorsement or
offer to buy or sell by IQ Financial Services, LLC or Gavin McMaster of any particular security, transaction or investment.

Any trades and / or results covered in this presentation may or may not be live trades.

All trades and trading results are believed to be accurately presented. However, since the trades may not have been
executed in the market, the results may have been under or over compensated for the impact, if any, of certain market
factors such as liquidity, slippage and commissions. Therefore there can be no guarantee of accuracy or completeness.

No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown.

The risk of loss in trading securities and options in particular can be substantial. Customers must consider all relevant risk
factors, including their own personal financial circumstances, before making any financial transaction. Options involve risk
and are not suitable for all investors. See the Options Disclosure Document: Characteristics and Risks of Standardized
Options, available from www.optionstradingiq.com/risks

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 TYPICAL IRON CONDOR

Sell 10 Put Spreads for around $1.00

Sell 10 Call Spread for around $1.00

Total Credit = $2.00 or $2,000

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 AS THE MARKET MOVES UP

Put Spread Now $0.30

Call Spread $3.00. An increase of 200%.

Total Spread = $3.30

Total Loss To Date = $1.30 or $1,300

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 ADJUSTING THE CALLS

Buy Call Spread for $3.00

Now We Have A Loss of $2.00 Just on the

Calls

Roll Out To Higher Strikes

Receive $2.00 for the New Call Spread

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 AT EXPIRY
If All Goes Well the Initial Put Spread and
New Call Spread Expire Worthless

Profit on Puts = $1.00 or $1,000

Profit on Calls = $0

TOTAL Profit = $1.00 or $1,000

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 ADDING SIZE WHEN ROLLING
Started With 10 Contracts. Add Another 5
When Rolling

Loss on Initial Call Spread: $2.00 x 10 =

$2,000

Credit Received for New Call Spread:

$2.00 x 15 = $3,000

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 AT EXPIRY
If All Goes Well the Initial Put Spread and
New Call Spread Expire Worthless

Profit on Puts = $1.00 or $1,000

Profit on Calls = $1.00 or $1,000

TOTAL Profit = $2.00 or $2,000

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CONDOR ADJUSTMENTS

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 ROLL UP PUTS

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 ROLL UP PUTS
• Pros
– Delta is reduced
– More income potential in the trade

• Cons
– Short puts are now closer to the money
– Delta is reduced, but not by a huge amount. A further rally could still hurt
the position

• When To Use?
– Early on in the trade if most of the risk parameters on the threatened
side are ok

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ADDING CONTRACTS TO SAFE SIDE

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ADDING CONTRACTS TO SAFE SIDE

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 ADDING CONTRACTS TO SAFE SIDE
• Pros
– Delta is significantly reduced
– More income potential in the trade

• Cons
– Capital at risk on the downside has doubled
– High Vega exposure

• When To Use?
– Early on in the trade as you are building up to your full allocation

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ADD A DEBIT SPREAD

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ADD A DEBIT SPREAD

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 ADD A DEBIT SPREAD
• Pros
– Nice way to reduce Delta and Vega
– Reduces capital at risk on the threatened side
– Allows you to stay in the position and not move your short strikes
– Potential for the stock or index to close in the profit zone (although unlikely)
• Cons
– The adjustment costs you money to make it, reducing the income potential from
the trade
– You can get “sucked in” by the profit zone

• When To Use?
– When the market is overextended, mainly on the upside. When the chances of a
correction are high and it doesn’t make sense to increase risk on the put side.
– When volatility is low, this can be a good adjustment on the call side as the debit
spread will be cheaper.

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ADD A LARGER DEBIT SPREAD

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ADD A LARGER DEBIT SPREAD

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 ADD A LARGER DEBIT SPREAD
• Pros
– Nice way to reduce Delta and Vega
– Reduces capital at risk on the threatened side
– Allows you to stay in the position and not move your short strikes
– Potential for the stock or index to close in the profit zone (although unlikely)
• Cons
– The adjustment costs you money to make it, reducing the income potential from
the trade
– You can get “sucked in” by the profit zone

• When To Use?
– When the market is overextended, mainly on the upside. When the chances of a
correction are high and it doesn’t make sense to increase risk on the put side.
– When volatility is low, this can be a good adjustment on the call side as the debit
spread will be cheaper.

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ADD A LONG OPTION IN NEXT EXPIRY

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ADD A LONG OPTION IN NEXT EXPIRY

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ADD A LONG OPTION IN NEXT EXPIRY
• Pros
– Gives a much greater reduction in Vega, which can be good if you expect a rise
in volatility.
– Reduces capital at risk on the threatened side
– Allows you to stay in the position and not move your short strikes
– Nicely sloping profit graph if the market continues to trend
– Easy adjustment to make and manage

• Cons
– The adjustment costs you money to make it, reducing the income potential from
the trade
– Can be expensive

• When To Use?
– When volatility is low as the long call will be cheaper
– When the market is moving fast and you need to quickly cut delta

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ADD A LONG OPTION PART 2

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ADD A LONG OPTION PART 2

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 ADD A LONG OPTION PART 2
• Pros
– Gives a much greater reduction in short Vega, which can be good if you expect a rise in
volatility.
– Reduces capital at risk on the threatened side
– Allows you to stay in the position and not move your short strikes
– Nicely sloping profit graph if the market continues to trend
– Easy adjustment to make and manage
– Cheaper than the previous example and the long call is further out-of-the-money

• Cons
– The adjustment costs you money to make it, reducing the income potential from the trade
– Can be expensive
– Provides less protection than a close to the money long call

• When To Use?
– When volatility is low as the long call will be cheaper
– When the market is moving fast and you need to quickly cut delta

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ADD A CALENDAR SPREAD

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ADD A CALENDAR SPREAD

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 ADD A CALENDAR SPREAD
• Pros
– Very nice profit zone if the market continues to trend
– Cuts Delta and Vega exposure while also increasing Theta

• Cons
– Can be expensive and cuts into the income potential if the market
reverses

• When To Use?
– If you think the stock or index will finish around the short strike
– When volatility is low and you are expecting an increase

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ADD A BUTTERFLY SPREAD

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ADD A BUTTERFLY SPREAD

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 ADD A BUTTERFLY SPREAD
• Pros
– Creates a profit zone around the short strikes
– Easier to manage with all strikes in the same expiry month
– Maintains short Vega exposure which may be good if volatility is high
and expected to come down
• Cons
– Does not reduce Vega
– The profit zone can create a false sense of security. If the market
continues to trend strongly and gets into the profit zone too early, you
will still have losses.
• When To Use?
– When volatility is high, so may be better to use on the put side

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REPOSITION ENTIRE CONDOR

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REPOSITION ENTIRE CONDOR

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 REPOSITION ENTIRE CONDOR
• Pros
– Gets you back close to delta neutral and better aligned with the short
calls and puts
– Not too expensive (if the market hasn’t moved too far) as the loss on
one side will be somewhat covered by the increased income on the
other side.
– Can be a good opportunity to add capital to the trade, further
decreasing the cost
• Cons
– Sometimes it can be better to wait for the market to revert to the mean,
rather than repositioning
• When To Use?
– If the stock or index has broken out of a trading range

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 SUMMARY

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 SUMMARY

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 ROOKIE MISTAKE #1

I’ve seen countless traders get in to trouble with iron condors by leaving it
too late to adjust.

I’ll get an email from someone saying, “my short strike is at 1200 and RUT
is at 1195, what should I do?”

Unfortunately by this point it is too late and there is very little the trader can
do other than hope and pray which is not a good long-term strategy in the
markets.

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 EXAMPLES

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 THANK YOU!
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