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How To ‘Suffocate’ Trading Risk In A Credit Spread

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While the stock market has continued to climb higher and higher over the last few weeks, in our most recent iron condor paper trading lab case study we’ve managed to stay ahead of it’s ascent through the use of our ‘constrictor’ adjustment…

Sure, quick fast drops in the market can be scary – but on the other hand, the occasional relentless grinds upwards – you know the type – the ones that just continue to go on and on on – well, those upward moves can be pretty torturous for iron condor traders as well.

At least when the market crashes, the volatility goes up, increasing premiums and allowing for some potential continued juicy credits to be brought in to combat the move – nice thick credits which can come in real handy with proper adjustments to the trade.

But those non stop upward climbs – where the volatility stays steady – or even worse – drops – potentially leaving you in a spot where there’s just no real premium to be found in any potential trade repair – well those types of moves can be pure misery -

Unless – you’re able to stay on top of things and keep ahead of the move.

Our ‘constrictor’ iron condor adjustment can do just that – and it’s a great method to use in those situations – one that can be perfect with those relentless upwards moving markets.

Here’s our definition of this options hedging strategy:

“The Constrictor Adjustment: An Iron Condor Adjustment that kills its prey by coiling tightly around it, causing suffocation.”

With this hedging technique, we stay slightly ahead – or at least, we ‘keep pace’ with the move in the underlying stock / index – by rolling our spreads ‘inwards’ as the trade progresses – at the correct times – banking the premium that has fallen off the initial, older spreads – and replenishing our ‘premium bank’ – or our ‘adjustment fund’ with new credit spreads closer to where the underlying is trading at.

When done correctly, this adjustment can eventually ‘suffocate’ the risk in the trade and create a trade where whatever risk is left can be flattened out and easily managed.

Keep an eye out for more up coming where we’ll get more into these types of trades / adjustments – and also be sure to join our FREE iron condor option income trading newsletter for info on how you can learn more about this type of option trading.

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