Iron Condor Option Trading Course Part Four

Part Four: Iron Condor Trading Strategy

There are as many iron condor trading strategies as there are iron condor traders. Everyone has their own preferences and style.

To create your own iron condor strategy you have to first choose the underlying. You don’t really need an iron condor screener or software program to find suitable candidates for you. Stick to Indexes and ETFs at first. As you become more experienced you can move into stocks.

Indexes and ETFs have the benefit of being composed of several companies and so the news, good or bad, of any one company will not affect the price as much. Pick one that you feel is relatively stable. Some good candidates are: SPX, SPY, RUT, IWM, DIA, QQQQ, NDX, MNX, XLE, XLF, and RTH.

Step two in creating your own iron condor strategy is to decide how far out from the money do you want to go. The farther out, the greater the probability of profit but the lower the return. You have to offset this by going out farther from expiration.

So let’s say you are looking to sell an iron condor on SPY that has an 80% probability of success. If you sell it at 60 days from expiration your max gain can be 18%, but if you sell it 30% from expiration you can get only 11%. Which do you go for? With experience you will be able to determine which is the best time to get into a condor that is best suited to your risk tolerance and trading style.

Iron condor adjustments

Step three in creating your iron condor trading strategy is creating your trading plan. How many spreads will you trade? How much money will you put at risk? Will you get into both the puts and call at one time, or will you leg in? Will you use all your capital or keep some in reserve for adjustments? Will you adjust or not? Will you enter all the spreads at one time, or will you enter some today and more a few days later to try to diversify the trade? What will be the max loss you are willing to accept? Will you take the trade off for a profit before expiration? If yes, then when, and under what circumstances?

As you can see there are a lot of things to think about when trading iron condors. The better your trading plan, the less you have to worry about when you are in a trade that goes bad.

Let’s finish up with Part Five

7 Comments

  1. […] Onwards to Part Four… // […]

  2. Fred Robertson on September 13, 2010 at 1:23 am

    Do you have a general guideline for using Put(s) as protection on the Iron Condor? For example, do you select a long Put strike that is “x” percentage below the sold options?…or, do you limit the amount of premium you will spend to buy protection as a percentage of the credit you recieve selling the Condor? Good stuff!, thanks, Fred

    • Genius on September 28, 2010 at 2:19 pm

      The Put could be used as insurance, and so i would use a percentage of the credit i recieved.
      The cost of the put is a big factor in choosing which one to buy.

  3. Jeffrey Jayne on January 11, 2014 at 2:06 pm

    I use an Iron Condor modified with a protective long position one strike closer to being ITM from the short position and the condor is 20 point spread rather than 5. The end result is that if the underlying is approaching the short position of one spread the smaller number of long positions plus further out of the money long positions are more profitable than the short position loss. The key to this strategy is to buy the long positions when they are cheap. So if the underlying is below the 50 day moving average buy the long Calls and reverse for the Puts. The key is to be efficient so the ITM protective position is 60% of the number of positions you short on the same leg. For example:
    3 AAPL March 600 Call
    -5 AAPL March 605 Call
    5 AAPL March 625 Call

    3 AAPL March 475 Puts
    -5 AAPL March 470 Puts
    5 AAPL March 450 Puts

    • Genius on January 13, 2014 at 12:59 pm

      Sounds interesting.
      How has the strategy been working out for you?

  4. Tobin Martin on February 9, 2018 at 10:19 pm

    What is the most you would risk on one trade (%)? And what is the most you would risk on one underlying in one cycle?

    • Ameen Ka on February 13, 2018 at 6:36 pm

      Depends on your trading plan. I don’t have a problem using up to 30% of my account in one Iron Condor although mostly I use less. And once you get good at a strategy, you probably want to put most of your money into it because you are so good at it.

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