MODULE 4 – ADJUSTMENT MASTER CLASS

MODULE 4 – ADJUSTMENT MASTER CLASS
© Copyright Options Trading IQ. All Rights reserved.

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 © Copyright Options Trading IQ. All Rights reserved.

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 3 © Copyright Options Trading IQ. All Rights reserved. 3

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 4 © Copyright Options Trading IQ. All Rights reserved. 4

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 5 © Copyright Options Trading IQ. All Rights reserved. 5

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 6 © Copyright Options Trading IQ. All Rights reserved. 6

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 7 © Copyright Options Trading IQ. All Rights reserved. 7

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 8 © Copyright Options Trading IQ. All Rights reserved. 8

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 11 © Copyright Options Trading IQ. All Rights reserved. 11

ADDING CONTRACTS TO SAFE SIDE
12 © Copyright Options Trading IQ. All Rights reserved. 12

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 14 © Copyright Options Trading IQ. All Rights reserved. 14

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. 17 © Copyright Options Trading IQ. All Rights reserved. 17

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. 20 © Copyright Options Trading IQ. All Rights reserved. 20

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 23 © Copyright Options Trading IQ. All Rights reserved. 23

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 26 © Copyright Options Trading IQ. All Rights reserved. 26

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 29 © Copyright Options Trading IQ. All Rights reserved. 29

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 32 © Copyright Options Trading IQ. All Rights reserved. 32

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 35 © Copyright Options Trading IQ. All Rights reserved. 35

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 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. 38 © Copyright Options Trading IQ. All Rights reserved. 38

MODULE 4 – ADJUSTMENT MASTER CLASS

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