Building an Iron Condor Portfolio

Gary_Cooper_tipping_his_top_hat_smallTip of the hat to TR for suggesting this topic.

When you decide to open a new iron condor position, are you usually eager to own the position, or is there some hesitation?

If you hesitate, is it because you are afraid of losing money on the trade? Or are you concerned that you may not be getting the best price if you trade now? Is the market too volatile for this strategy and you are considering another? Do you lack confidence that this strategy produces good long-term results. Don't you trust your ability to manage the positions?

There are excellent reasons for postponing trades. If concerned about the viability of buying iron condors of if you don't believe you have a good enough understanding of how to manage risk, those are excellent reasons to hesitate. If you are worried about market volatility, then it may be advisable to reduce the size of your investment and buy fewer iron condors, thereby reducing risk.

But, If you think you can get a better price by waiting or if you believe you can time the market and place the trade at a better time, that's something few can do profitably. I know I can't, and thus, don't make the attempt. It's your decision whether to try.

But, there is something I do to reduce the chances I own a large position that quickly turns into a loser. And if it sounds reasonable, consider the idea.

You can buy a portion of the desired position, instead of going 'all in' with a single trade. This is similar to scaling into a purchase or sale of stock.Even though buying iron condors profits as time passes, you can concede a portion of that time decay to own a better portfolio – and that's especially true when markets are volatile and the underling stock or index makes a good-sized move before you buy your entire position.

One week after the initial trade, you buy more iron condors – perhaps with the same strike prices, but possibly with different strikes. The idea is to choose the new position that is currently best for you and your comfort zone. If the underlying stock or index has moved, you will not have lost much during the week because you owned fewer iron condors. If the markets were calm and implied volatility declined, you would have earned more by being fully invested.  Because the future is unknowable, I prefer to scale into most of my iron condor positions.

By opening your full complement of iron condors over a two or three week period, you may be able to own positions with different strike prices, reducing potential risk at any given market level. Obviously this cannot be used with front-month options, so to take advantage of this idea, you want to choose options that expire in the 2nd or 3rd month.

Investing is personal.  Choose the style that suits you. The purpose of this post is to suggest a slight modification to your methods – if those methods give you reason to hesitate.


2 Responses to Building an Iron Condor Portfolio

  1. Bill 10/22/2008 at 9:57 PM #

    Greetings, Mark.
    I have just discovered you and I’m grateful that I did. I ordered your rookies book from Amazon, will receive it and read it soon, but I thought of one question to ask now.
    I’ve read quite a bit about options and I feel comfortable with the theory. What would really make things sink in is to see real-life trading examples, and lots of them.
    So, my question is this: do you ever publish any actual trading results? For example, I’m interested in the iron condor, and would love to see your entry and exit positions and dates, plus any corrections you might have applied.
    For use as examples, the data does not have to be current. If it was you might wag the market with all your followers! But one month delay couldn’t hurt too much, could it?
    Thanks much,

  2. Mark 10/23/2008 at 7:16 AM #

    Agree that ‘lots of examples’ gives you something tangible to see, and numbers with which to play.
    I have published two such trades (of an experimental variety), but prefer not to do so because I fear that some readers will simply copy my trades, giving no thought to whether the trade is appropriate for them.
    Look here for more discussion: