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Iron Condor Strategies

 
     
 

 

This page is about how you can use Iron Condor Strategies profitably, and safely. You need to be more active in managing the trade than you would with credit spreads, but the effort is worth it!

 
     
 
 
     
  This exceptional trading course teaches you how to trade Iron Condors, make adjustments and set yourself up for profits. It is REALLY good! Get it here.

Iron Condor Course


     
 
 
     
 
 
     
 

Iron condor strategies are useful in a neutral market, especially when the summer doldrums come around. They work best with index options, which do not have sudden or extreme movements. This page gives some tips and ideas on how to trade iron condors, and how to adjust an iron condor. If you have not already done so, you may wish to review the general introduction to the iron condor strategy, which shows the risk profile, and shows how it works.



When to Trade an Iron Condor

  • The iron condor strategy works best for a non trending or very weakly trending market. It can work for a mildly oscillating market, but the risk increases.
  • Even though more volatility means more value on the options that you sell, it is best to use this strategy on index options that do not often have large, sudden movements or gaps. This is because they are a conglomerate of many different stocks that all react to the market in different ways. The jumps of individual stocks all get averaged out and dampened by the other stocks in the index.
  • The underlying index (or stock, if you choose to trade on one) needs to have a reasonably high volume or open interest, so that it is easier to get into the trade. As you will be trading fairly far OTM in order to minimise your risk, you need to have a better probability of being able to find a buyer for your iron condor, and you need to have a good chance of getting out of the trade if it goes wrong.

Probability of Success
When you trade an Iron Condor, you need to aim for a probability of success of 80% or higher. To identify this probability, split the trade and think of it as selling two credit spreads. Using the credit spread calculator, make sure that each spread has a probability of success of 90% or better. This is a higher standard than you would apply for credit spreads, but you need to lower your combined risk profile. Alternatively, your online broker is likely to have a risk analysis section to their trading software. I use Thinkorswim, and as you are setting up the trade, you can immediately analyse the trade using a clear graphical presentation, and make adjustments until you are sure that you have the best possible position. A third option is to look at the Delta of each spread. As long as the Delta for each spread is 0.10 or lower (i.e. a combined delta of less than 0.20), then you know that you have an 80% chance or better of entering a successful trade.

Iron Condor Adjustments

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When trading iron condor strategies, you need to pay attention to the trade, and be careful to make adjustments when the underlying stock starts moving vigorously in one direction or the other. If this happens, one leg of your condor will start to lose value very quickly, which is good for you. However, the other leg will start to get expensive, and you could lose all the profit from your trade. Again, think of the whole trade as two independent credit spread trades, and treat each leg differently.
  • You can quite safely ignore the leg that is losing value. It is safely locking in your profit, and is doing what it should do.
  • You need to pay attention to the leg that is increasing in value (i.e. the side that the stock is moving towards. When (or before) this spread (treating it as a credit spread trade) reaches about double the value of which you sold it (this is maximum!), you should buy this leg back. This means that your whole trade, at worst, will come out profit neutral.
  • If the underlying is moving very rapidly, you can buy back the short part (the part of the credit spread that you sold) of the endangered leg, and keep the portion that you bought. If the stock goes rapidly ITM, you can then sell this at a profit. Exiting the Trade It is quite acceptable to let the iron condor remain until expiration, at which point your margin will be released, and you will have retained 100% of your profit. On the other hand, once time decay has done its work, and the trade is almost valueless, it often does not make sense to hang on for another week in order to save another 0.15. Buy the whole trade back, release your margin, and trade again.

Paper trading
Iron condor strategies are very profitable, but their risk reward ratio is higher than that of credit spreads. It is really important that you read a lot, look at some real examples, and paper trade for at least three months before diving in with real money. .

 

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