Buying Iron Condors: Too Risky, or a Great Opportunity?

When the markets are extremely volatile, buyers of iron condors have a difficult time making money.  Wild market swings  may threaten the put spread of the iron condor (the underlying asset is quickly diving towards the strike price of the puts you sold), forcing you to decide whether the position still resides within your comfort zone, or whether an adjustment is necessary.  No one likes to make an adjustment, but it's far better to accept a small loss now, rather than allowing for the possibility of a large loss. [My philosophy is: small losses + moderate profits = success. Large losses, even when infrequent = unhappiness.]

Once you make your adjust/no adjust decision, you may find yourself watching in amazement as the market sharply reverses direction. So much so, that the call spread of the same iron condor can become threatened within a day or two.  That's a new, undesirable phenomenon for me.

What's an iron condor trader to do?  Sit on the sidelines?  Buy very expensive insurance?

The ideal situation for all of us iron condor owners is for the market to be non-volatile and not threaten to breach the strike prices any options we sell.  But there are extraordinary times.  The nice part about increased volatility is that we can collect higher premium when we make our initial trades,  As an alternative, we can sell call and put spreads that are further out of the money than we usually sell – again due to that higher premium.

But, that's not good enough.  I know then when I collected $350 for a 90-day RUT (Russell 200 Index) iron condor position in 2006 and 2007, I had an excellent chance of being able to see time pass, make few adjustments and collect my profit.  Those were the good 'old' days. 

Recently, it's been difficult to find any iron condor that has not seen it's strikes breached.  Nevertheless, because I followed my own advice (Chapter 20 in The Rookie's Guide to Options; and discussed here) and purchased insurance when it was inexpensive, I was able to withstand the huge downside move.  Without that insurance, it would have been a more difficult experience.

The question is: What now?  I still believe buying iron condors is a good idea, but I have adjusted to the times – to be certain that all positions remain within my comfort zone.  I've made three specific changes:

  • Smaller size (buy fewer iron condors)

  • Settle for a bit less premium
  • Move further out of the money when selling spreads

I also try to gather a few extra puts and calls, without paying too much.

Whatever decisions you make, it's most important to remain within that very important comfort zone.  That may require sitting on the sidelines for awhile.  There's nothing wrong with that choice.  I've said this before: don't force trades.  Only take on positions you want to own.

Please remember my four rules for trading – and the sequence is important:

Rule One:  Don't go broke.

Rule Two: Make money

Rule Three: Build Wealth

Rule Four: Never, never forget rule number one.


One Response to Buying Iron Condors: Too Risky, or a Great Opportunity?

  1. dave 10/31/2008 at 8:07 AM #

    Great post. I especially like your comment about not doing anything at the end and waiting patiently . We don’t need to trade if there is no opportunity. When I have forced trades it has been costly. I have learned to be patient and when I have been patient I have found the best opportunities. Thanks