CTM Iron Condors

I've been mulling over your earlier comment on this thread. Ordered your "Lessons" booklet (very interesting) and as I started skimming through I read some deja vu. Did great for a while, lost a bundle in an instance, got it back and felt overconfident, got side swiped again.

You said earlier that low delta trades will be a losing battle over time but do advocate iron condors and credit plays in your writings. So have you found higher credit, lower probability trades come out ahead with proper risk management? Is that what you were suggesting?



The bottom line answer is 'yes.'

But I must confess that I do not have a specific recommended type of iron condor to trade.

Some experienced traders convinced me that buying (I know, many prefer the term 'sell') fewer CTM (close to the money) spreads is mathematically superior to trading other types of iron condors.  I no longer remember the 'proof' but
never tried to trade those 10-point iron condors while collecting a premium of $6 or $7.

Those CTM positions don't leave me in a comfortable place.  I know I would often feel the desire to adjust.  That's self defeating when collecting such a high premium. The idea of buying an iron condor at a 'high' price is to have a comfortable risk/reward ratio, guaranteeing that the maximum loss is low enough to be acceptable.  In other words, there's no need to adjust frequently because both the size of the trade and the max loss per spread are already within your comfort zone.  Adjustments may be needed, but there is less urgency.

However, an investor is not forced to choose between far out of the money (FOTM), low delta, high probability trades and CTM trades.   There's a ton of space between those choices.

FOTM iron condors – perhaps $0.50 or less per 10-point iron condor -  appeals to many.  Just not me.  When collecting so little premium, I don't believe most traders would be willing to pay whatever is necessary (perhaps $2 or $3) to exit the trade.  If that belief is true, then these iron condors become gambles – with no exit other than expiration.

When the position becomes a 'let's hold to the end and see what happens' trade, then it's a pure gamble.  That's fine for some, not for me.  I don't like the odds.

I choose my iron condors between those extreme choices.



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9 Responses to CTM Iron Condors

  1. scott 03/29/2010 at 5:36 AM #

    I only recently started trading spreads. I was so glad to read this post because CTM spreads fit much more into my style than playing the FOTM option spreads. I have been trying CTM and FOTM and simply am more comfortable having more risk for greater return. I am having a very hard time taking on large risk for such small returns. Mark is spot on that I have a hard time adjusting the FOTM and taking a large hit.

  2. Mark Wolfinger 03/29/2010 at 8:47 AM #

    I’m not sure that CTM translates into ‘more risk.’
    CTM condors have a greater risk of losing money. But the amount that can be lost is much less. ‘Risk’ is one of those words with different definitions.
    I prefer to think of risk as measuring dollars that can be lost, while others prefer it to measure probability of loss.
    Thanks for the comment

  3. Jason 03/30/2010 at 10:27 PM #

    So out of curiosity .. Since you sell for higher premium at closer range, how often on average do you have to adjust? I would think much more often and have to pull the trigger quicker causing more frequent losses albiat at a lower loss rate than FOTM. I’ve always done far out trades to make things less “stressful” less often but am most concerned with making money so may have to reconsider if a bit closer in statistically brings in higher amounts even after adjustments.

  4. Mark Wolfinger 03/30/2010 at 10:38 PM #

    If you find FOTM to be less stressful, then go for it.
    I have no idea how frequently I adjust. My methods are very different from yours.
    I own protection. That means I adjust at the time that I initiate the iron condor trade – or shortly thereafter. I don’t have to make trades that you would call ‘an adjustment’ as often as you may expect – because I have that early adjustment already in place.
    You are incorrectly assuming that all adjustments result in losses. That is a misconception.
    Adjustments reduce risk, increase the probability of making money going forward, and often add profits that would not have been possible without the adjustment.
    Yes, some adjustments – especially those that are delayed and delayed can mean in locking in a loss.
    Jason, I’m not suggesting you change your plans if you like what you are doing. My purpose is to tell you what I believe and beg you not to accept it as gospel. I want you to think about it and decide if it works for you. I ‘teach’ by example. if you like the example after giving it serious thought, then you can adopt the suggestion. if you don’t feel right about it, then you gained something different. You reinforced your current ideas and that has to be worth something
    If you sell FOTM spreads and have had success adjusting when necessary, then you have a system that’s viable for you. You can’t beat that.

  5. Dauddy 03/31/2010 at 4:35 AM #

    Mark, could you clarify:
    $0.50 credit for 10-point Iron COndors, as in -115P and +105P, and you get only 50$ of a margin $1000?
    Similarly $7 for above IC, means, $700/$1000 margin?
    Am I correct?
    Thank you

  6. Mark Wolfinger 03/31/2010 at 7:26 AM #

    1) $0.50 credit means you sell the call spread AND the put spread, creating an iron condor. The total cash collected is $50. Each spread is 10-points wide.
    The maximum possible loss is $950 and the maximum possible gain is $50.
    Yes, margin requirement is $1,000 – less the $50 cash.
    But, I was thinking in terms of SPX: Perhaps the 1060/1050 P spread PLUS the 1250/1260 C spread, not SPY: the 115/105 P spread all by itself.
    2) Collecting $700 means both the margin requirement and the maximum loss are $300.
    The call spread and put spread are sold for approximately $350 EACH, and are not too far OTM. These are not SPY spreads. These are ‘big index’ spreads.

  7. Dauddy 03/31/2010 at 9:13 AM #

    Thank you Mark, I got it now…Dauddy

  8. scott 03/31/2010 at 5:06 PM #

    Any reason your book is unavailable in Kindle version? These days I rarely bur paper books. Either way I will get it, but wanted to get it quicker. Also, thanks for all the great info and your quick responses. I am learning an incredible amount from your blog and from several books I have been reading. My issue right now is trying to find my risk tolerance. In stocks I always had a high risk tolerance because I looked for large returns. In treading option spreads I am trying to reduce risk yet want to have a decent level of return to make all the efforts feel worth it (if that makes sense).

  9. Mark Wolfinger 03/31/2010 at 7:10 PM #

    1) Kindle is the publisher’s decision, and they say it’s too much trouble. I don’t own the rights to publish it in any format. I do plan to try Lessons of a Lifetime in Kindle format.
    2) Scott, I thank you. I appreciate your kind words.
    3) Sure it makes sense. The potential returns are more than enough to satisfy almost any investor – even with reduced risk. Of course, maintaining discipline and being aware of risk causes us to prudently accept less than the maximum reward. But I cannot imagine that your potential return doesn’t exceed your requirements.
    The true problem is meeting those expectations. High risk and losses have a way of getting in the way of our best laid plans.