Iron Condor Spread Mini Course Part Three

Part Three: The Risk of the Iron Condor Spread and How to Mitigate it.

So far we have talked about how the iron condor has great probability of success and can generate a decent return month after month.

In this section we are going to talk about what happens when things go wrong.

Most traders say that iron condor options trading is a conservative strategy. Others say it is very risky because you can lose a lot more than you can make.

It all depends on how you set up the condor spread. You can choose strikes that are way out of the money and that give you a 95% probability of success or you can choose strikes that are close to the money and give you a 40% chance of success. The closer your short strikes are to the money, the more your iron condor becomes a butterfly. A butterfly is also two credit spreads like a condor but close to the money.

As an example, let’s look at a condor spread that has an 80% probability of success. In our example we get a credit of $1.00 and the max we can lose is $9.0. So we can make $100 per spread or lose $900. As you can see you don’t have to lose too many times to lose all your money. Even if you win 9 times and lose once, you will be negative. And since the odds are saying you will win 8 times and 2 two times for every ten trades this is a losing proposition.

But no one said you have to lose the whole amount.

By using money management you can limit your losses in the months your condor spread is not going to make money. And yes, there are several months like that where no matter your adjustments, you are still going to lose unless you are willing to throw an endless supply and money at it and are willing to roll into other months.

Instead of letting our condor spreads go all the way to the max loss; let’s say we decide to limit our loss to 20%. For simplicity sake we will limit our loss in the example to $2. Once we enter the trade, we get $1. But if we are ever down $2 or $200 per spread then we exit the trade.

What about Stop Loss Orders?

You can use them. Place orders to buy back your spreads at whatever you decide as an acceptable max loss. That should help you sleep at night.

What about another 9/11 event?

The iron condor does well when the markets are flat. Or if they go in one direction then it works if the move is a slow on. A major event like a 9/11 event that makes the market move huge in one day can kill an iron condor trader.

Normally, these types of moves happen to the downside. If there is a nuclear explosion, or war, or earthquake, or anything similar, the markets will drop. As is the common phrase “Bulls go up the stairs. Bears go out the window.”

An iron condor trader can protect herself from such an event by buying Put insurance. You simply take some of the credit you get and buy enough put protection to protect yourself in case the word ends. With this insurance, if the markets go down enough you can still make money even if you lose the max on the condor spread.

Let’s recap our lesson on iron condor risk.

To mitigate the risk of getting to the max loss, you simply decide on an exit point. “When I am down ____ % or $_____ I will exit the trade and live to trade another day.”

Trading calls and puts

And to protect yourself from the end of the world, simply buy some Put(s) as insurance. How many puts and which puts is a matter of personal preference and depends on your trade size.

Onwards to Part Four…


  1. Jim Thelen on July 29, 2010 at 2:26 pm

    Is there a part 4 coming? You can talk about timing and how to determine the probability of success.

  2. Jason Wingfield on August 18, 2010 at 5:14 pm

    Do you actively use put protection on all, or most of your trades? Does it cut into profits much?

    Would you recommend buying puts below your condor “box” – since they are just for catastrophic protection and you want to minimize their cost?

    • Genius on August 20, 2010 at 11:33 am

      Sometimes I will. The main reason is to act as insurance when the underlying is not behaving properly. Especially when it is moving very quickly in one direction, rolling might not be the best option. In that case, buying a long option cuts your deltas down and that flattens the amount you can lose in the short term if the underlying keeps moving. You have to balance the cost of the insurance vs how much you are going to make in the trade. Spending up to 10% of your credit on insurance is not a bad idea. Especially when there is a risk of a large drop in the market. Some traders add the insurance when they get into the trade, I like to add it if needed when the trade is not going my way.

    • Genius on September 28, 2010 at 2:43 pm

      If I were to add a put or a call it would be to reduce the deltas of the trade. That way I can figure out exactly how many and of what strike to buy.

      I would use put protection as soon as I entered a trade if I felt that the markets were trending lower.

  3. David on February 2, 2020 at 6:40 am

    1 standard deviation = how many delta’s? When do you discuss this part of the trades?

    • Ameen Kamadia on February 3, 2020 at 3:10 pm

      The length of one standard deviation varies based on how volatile the underlying is at the moment.
      SD has to do with the underlying. Delta has to do with the option.

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