Managing a tested side, and when to close

A condor is "tested" when the stock reaches one of the short strikes. It happens to roughly a third of 16-delta condors, so it is a normal event, not an emergency. What you do next is where condor traders differ most, and where a lot of the strategy's real risk is created. This lesson walks through the choices with numbers, then gives the closing rules that make the choices rare.

The tested condor

You sold the 39/44 – 56/61 condor on XYZ at $50 for $0.78 with 45 days left. Twenty days later XYZ is at $44.50, sitting on the short put, and IV has risen to 34%.

The condor is worth $1.52 against $0.78 collected: a loss of $0.74 per share, $74 per condor, almost exactly 1× the credit. The call side is worthless, doing nothing. 25 days remain.

Four choices

A. Close. Buy back the condor for $1.52. Loss $74. Simple, final, and the answer most systematic traders choose at 1× credit.

B. Roll the untested side in. Buy back the 56/61 call spread for $0.02 and sell the 50/55 call spread, worth about $0.43 with the stock at $44.50. Net credit $0.41. The structure is now 39/44 – 50/55.

• Total credit collected: 0.78 + 0.41 = $1.19.
• New max loss: 5.00 − 1.19 = $3.81 (on the put side; the call side's max loss is the same width).
• New breakevens: 44 − 1.19 = $42.81 and 50 + 1.19 = $51.19.
• Profit range is now $44–50, and the stock is at $44.50.

This is the adjustment that feels best because it takes in money. Look at what it did: the upper breakeven moved from $56.78 to $51.19. A rally back to $52, which a minute ago was a full-profit outcome, is now a losing one. You reduced the loss on the put side by $41 by accepting a new way to lose.

C. Roll the whole condor out. Close it for $1.52 and sell the same 39/44 – 56/61 in the next monthly cycle (45 days out), worth about $1.93 with the stock at $44.50 and IV at 34%. Net credit $0.41, total credit $1.19, max loss $3.81, and now 45 days for XYZ to recover above $44. Same arithmetic as B, but you kept the wide range and paid for it with 45 more days of exposure to a stock that is falling.

D. Convert to an iron butterfly. Roll the call side all the way down to 44/49: buy back the 56/61 for $0.02, sell the 44/49 call spread for about $1.25. Net credit $1.23, total credit $2.01. Max loss 5.00 − 2.01 = $2.99, breakevens $41.99 and $46.01. Max profit now needs XYZ to expire at exactly $44. The loss is smaller and the target is a pin.

None of B, C or D reduces the loss already on the books; all of them reduce the maximum loss by adding a new way to lose or more time. Whether that is worth it is a judgement about XYZ, not about the condor.

Profit range before and after rolling the call side in (B)

  Before:  |------- loss -------|=== profit 44 to 56 ===|------ loss ------|
           39                   44                     56                 61
  After:   |------- loss -------|= profit 44-50 =|------- loss -------|
           39                   44               50                  55
                                 ^ stock at 44.50

When to close: the rules

The best management is the kind that keeps you out of the table above.

• Take profit at 50% of the credit. Buy the condor back at $0.39. On a 45-day condor this typically happens between days 15 and 30 if the stock is quiet.
• Exit at 21 days to expiration regardless. Whatever the P&L. Gamma on the short strikes from here on is not what you were paid for.
• Stop at 1× to 2× the credit. At $1.56 (1×) or $2.34 (2×) condor value. The 1× stop would have triggered at exactly the situation above.
• If a short strike is breached, decide the same day. Do not wait for expiration to "see what happens." What happens is gamma.
• Adjust at most once, for a credit, and only if you would open the adjusted position fresh. If you would not sell a 39/44 – 50/55 condor on a stock at $44.50 today, do not create one by rolling.

The honest summary of the evidence on adjustments: they change the shape of outcomes, not the expectancy, and every adjustment adds a cost in bid-ask and a new risk. Traders who close at 1× and move on have a simpler book and, over many trades, roughly the same result as traders who defend, with fewer large losses.

Key idea: A tested condor at 1× credit has three "defenses," and every one of them reduces the max loss by adding a new way to lose or more time. Rolling the untested side in collects credit and narrows the range; rolling out extends the exposure; converting to a butterfly requires a pin. Closing is the default; take profit at 50%, exit at 21 days, stop at 1–2×.

Try it: Build the tested condor in the options profit calculator: XYZ at $44.50, 25 days left, IV 34%. Model choices B and D and note the new breakevens. Then move the stock to $47 and to $52 and record the P&L of the original condor, B and D at each. Decide which one you would actually have wanted.

Recap

• A 16-delta condor is tested about a third of the time; it is normal, and the decision should be made the same day.
• Rolling the untested side in adds credit, lowers max loss and shrinks the profit range; the stock is usually right at the edge of the new range.
• Rolling out buys time for a credit; converting to a butterfly cuts max loss but needs a pin.
• Adjustments reshape outcomes; they do not reduce a loss already taken or add expectancy.
• Close at 50% of credit, at 21 days, or at a 1–2× credit loss; adjust once at most, and only into a position you would open fresh.