Front Month Iron Condors: Challenging to Trade?

Interesting trading points raised by Brian:


I have been trading front month ICs (opening 4-6 weeks out), but at times am finding it too challenging to manage. So in Sept I experimented by opening a Dec position (3 months out). One thing I noticed is that the theta decay was almost non-existent the first 30 or so days. I could have opened the position 30 days later for almost the same credit. Not sure if this is a usual occurrence or not.

Also am curious as to why you say that SPX is difficult to trade. I would think that RUT would be more volatile and hence more difficult. (it seems to rise & fall more, %-wise, than SPX)



Hello Brian,

1) 3-month options have time decay.  And I know that you know that to be true.  It is not anywhere near zero, nor should it appear to be near zero.

Here's one way to see that for yourself. When you look at a 3-month trade (even if it is not a trade you make in real life), also look at the 2-month trade with the same strikes. Then you can compare just how much more time premium is built into options with a 4- or 5-week longer lifetime. That should provide a reasonable estimate for how much time decay to anticipate over the next month or so.

Be careful to keep an eye on the implied volatility (IV) for the underlying: VIX (for SPX options) or RVX (for RUT options). Longer-term options are more vega dependent, and if IV rises, you may see what appears to be zero time decay. It's not. It's just what can happen when vega affects the option price by more than theta.

IV (hearts)  trumps theta (spades)

We have all seen examples in =  which a sudden market decline, accompanied by a surge in IV .  The result is a huge increase in the value of put options and even an increase in the price of call options as the market falls.  That's vega trumping theta, delta, and gamma simultaneously.

2) It's the negative gamma that makes spreads challenging to manage efficiently. Longer-term options have less gamma.  This may seem simplistic, but the truth is that when trading those 3-month options, you earn your profits more slowly (less theta).  In return, larger market moves result in less change in the price of individual options and option spreads – and less money is lost. 

If you want maximum risk and maximum reward, then you found it with front-month options.  If you prefer less risk and less reward, you can move out in time and initiate trades using 3-month options.  Then if you also plan to exit early – two to four weeks before the options expire – you avoid the period of maximum time decay and maximum effect of negative gamma. 

I know it's difficult to leave money on the table, but you are not really doing that.  From my perspective, early exit means taking a decent profit  – or perhaps a loss if you made an unfortunate adjustment or two earlier) – but the main benefit is eliminating all risk and being able to sell new, longer-term options with less risk. 

This philosophy is not for everyone, as short-term options constantly get the most play. If not convinced that this is true, the high volume of Weeklys ought to make it obvious that short-term options (when do the Dailys start trading?) are the favorite tools of most traders (and all gamblers).

3) I used 'difficult' to trade SPX in the context that it is more difficult to buy/sell the options at favorable prices.  The markets are wider, there are no exchanges making competitive quotes, and the last time I tried to trade these (a few years ago), they did not even have electronic trading.

I was not referring to managing the position. Yes, RUT is a more volatile index, presenting more management challenges.  However, option premium is higher, and that means the trader is compensated for taking additional risk.


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12 Responses to Front Month Iron Condors: Challenging to Trade?

  1. Steve 12/01/2010 at 11:25 AM #

    Thanks for the ongoing education.You run a great blog and I enjoyed your ‘Rookies’ book enormously.
    For the past 2 years, I’ve been selling naked options (mainly puts, a few calls) to generate monthly income.
    I sell WAY out of the money RUT puts in the front 2 months using an initial margin limit of about 35-40% in my portfolio margin (PM) account at Interactive Brokers.
    I keep the account about 65% invested in dividend paying ETFs and stocks, 35% cash.
    As an example, With RUT around 740, I’m currently short the following options:
    RUT Dec 540 P
    RUT Dec 580 P
    RUT Dec 590 P
    RUT Dec 810 C
    RUT Jan 480 P
    RUT Jan 500 P
    RUT Jan 540 P
    RUT Jan 850 C
    I normally sell puts at premiums around $1.00, calls around $0.40.
    My option income returns just over 1% per month on average on the total account value, which is more than sufficient for our needs.
    Over the past 24 months I’ve had just 2 losing months, in each case losing about one month’s average income.
    I wonder if you could comment on this strategy? I like to think this is quite conservative, but a catastrphic drop in the market wouldn’t be nice…
    Should I consider selling credit spreads instead? I assume I would need to operate closer to the money to generate similar returns and spend more time adjusting my positions.

  2. Brian 12/01/2010 at 12:10 PM #

    Hi Mark,
    Interestingly enough, I’m seeing a similar situation now, with some Feb ’11 ICs. Last week, when the VIX was about where it is today, I opened an SPX Feb ’11 position.
    Today, that same position is selling for significantly more (at midpoint of bid-ask spread), even though the VIX is about the same (and the position is/was fairly delta-neutral)
    The ‘problem’ is the IV for the Feb positions seems to be higher now(expectation of higher vol after Jan 1?).

  3. Mark Wolfinger 12/01/2010 at 2:22 PM #

    This is a very important topic and I’ll post a reply withing a day or two.
    Yes it’s risky. No it is not conservative.
    I cannot tell you whether to sell credit spreads instead, but you would get very little credit. Dimes instead of a dollar. I doubt you want to do that.
    Questions: Do you ever exit early? Or do you always ride to expiration? When you did lose, did you exit early, buy protection, or take any defensive measures?

  4. Mark Wolfinger 12/01/2010 at 2:36 PM #

    ‘Feb ’11’ threw me. I found your comment very confusing, until I finally realized what that ’11’ stood for. When we deal with options, there is no need for the year to be included in the description. We use the year ONLY for LEAPS options because ‘Jan’ is not a sufficient description.
    The situation you describe is probably due to a re-evaluation of Feb options. Yes, due to a increase in Feb IV.
    The markets have been making some semi-volatile moves recently, and that could be the reason. It’s impossible for me to speculate becasue IV is merely the result of lots of trading among lots of players.
    Either MMs raised IV on their own because they want to buy vega, or the order flow has been on the buy side. I have no idea.

  5. Larry 12/01/2010 at 4:44 PM #


  6. Mark Wolfinger 12/01/2010 at 8:22 PM #

    Hi Larry,
    Yes and no.
    You understand it correctly except for the trivial problem that you cannot buy that put @ $4.60,
    1) Why do you believe that is the price at which you can buy that put? That option did not trade today. In fact I have no idea when it last traded.
    2) The ask price is $8.30. Why do you believe that you can buy the put by bidding $3.70 less than the ask price? Believe me, you cannot buy it at your price.
    3) If you do not use the CURRENT bid/ask prices to get an idea of what price you can pay to buy the option, then you have NO IDEA at what price the option can be traded. Using the ‘last’ price is worse than worthless. Just becasue someone bought or sold at that price has nothing to do with whether you would be able to buy or sell at that price.
    4) But the real question you are asking is: Why are the market makers so stupid that they don’t make this trade? Why would they allow someone (such as you) to make the trade and walk away with the free money?
    You must (yes, beginner or not, you must) understand that free money is never there for the taking. If it were, it would be taken and long gone before you found that opportunity.
    5) If you want to trade options, concentrate on learning how to use options and how options work. You do understand that buying a put under parity is a good and profitable thing to do. That’s good. But it is not practical knowledge because you will never be able to do it. Not once in your entire lifetime.
    Think about realistic ways to make money.

  7. Steve 12/02/2010 at 2:38 AM #

    I look forward to your longer reply.
    Yes, I do often exit early. I don’t usually hang on for the last $0.05 or $0.10.
    I lost in May (for example) by exiting early as the market dropped. One of my losers was an SPX May 1000 Put. Sold in April for $1.00, bought back on 05/06/2010 for $4.00!
    As with almost all my losers, if I had hung in I would have made my $1.00 (the SPX never reached 1000).

  8. Brian 12/02/2010 at 7:02 AM #

    Sorry for the confusion on “Feb ’11”. No, definitely not LEAPS!
    I went back and looked at the IV using ThinkorSwim’s “thinkBack” tool, and can see that the IV has gone up for the Feb options since the day that I purchased (though VIX relatively unchanged … understood that VIX does not reflect 3 months out)
    Regarding trading the front month ICs, it seems to me that one needs to have a different system for risk management than when trading them 2 or 3 months out. Rolling positions farther out can be costly (the closer to the money options cost a lot to close, and farther out often doesn’t bring in much premium). If you roll the position just a strike or 2, and the underlying continues in that direction, you’re faced with the same situation.
    Similarly with your “kite spreads”. When there are only a few weeks until expiration, the close to the money options are costly.

  9. Mark Wolfinger 12/02/2010 at 1:26 PM #

    Paying $4 for an option sold at $1 shows that you have some discipline. Your index option selling may work for you, but please note just how risky this can be.
    Glad to see you cover some shorts prior to expiry.
    Your last paragraph above MUST be removed from your mind. Woulda, coulda, shoulda, has no place in trading. It may be used as a learning situation, but once you make the trade decision – it been made and it’s time to move on and manage your CURRENT position as it exists.

  10. Mark Wolfinger 12/02/2010 at 1:35 PM #

    Yes I know. No FEB option is a LEAPS. I just stared and could not figure out what the ’11’ was supposed to represent.
    Rolling: Your description is exactly why I loathe ‘rolling’ as a strategy. At least I don’t like it the way most people use it.
    This is an important topic. Rolling consists of two trades. First and foremost, when you want to exit the front month (or any) troubled iron condor, or part of an iron condor, then do it. That’s the position that places you at risk right now, and that’s your priority.
    Once that is closed, it may or may not be a good time to open a new position. If you do, choose that position based on what you want to own right now. Pay NO attention to whether it cost this or that cash to ‘roll.’
    If you ignore the fact that it’s a roll and look at it as two separate spreads, then you will be making two good trades. One to exit a risky position. The other to open a position that suits your needs now. If you allow the cost of the ‘roll’ to affect your decision then you will NOT own a good position.
    When you have a loss that makes you uncomfortable, take it and move on. Do not worry about collecting enough cash to recover that loss. Your goal is NOT to recover that loss. Your goal is to make money today, tomorrow, and in the future. the past is the past and it’s done. Forget about it (except for lessons learned).
    Yes, the kite gets costly near expiration, and also more risky. I think it’s best as an early play – before insurance is badly needed.

  11. Brian 12/05/2010 at 9:08 AM #

    this comment should be printed out and displayed in plain view every day:
    “Do not worry about collecting enough cash to recover that loss. Your goal is NOT to recover that loss. Your goal is to make money today, tomorrow, and in the future. the past is the past and it’s done. Forget about it (except for lessons learned).”
    I’ve seen you say this multiple times, yet it is still so easy to fall into that trap — looking at a losing position and thinking that the next trade has to recover the loss(or some of it), rather than looking at the next trade as a new trade, on its own merits.
    If/when one can internalize that mindset, it seems like that is a big step on the option trader’s journey.

  12. Mark Wolfinger 12/05/2010 at 11:13 AM #

    The truth is that there is some psychological satisfaction in recovering a loss. That’s why it is so difficult to dissuade people from making the attempt.
    At the end of the day, your account is worth exactly the same, but if you convert a loser into a break even, that just ‘feels better’ that losing $1,000 and making that $1,000 from a different trade.
    A good trader recognizes that the difference is probability. Continuing to own a bad trade is far less likely to make $1,000 than opening a new ‘good’ trade.
    I don’t know why people think this way – but my guess is that ‘losing’ hurts more than ‘winning’ feels good. A case of emotions getting in the way of logic.
    It is well understood that most people would rather ‘not lose’ than win. It’s the same cash, but the mindset is different.
    Thanks for sharing your thoughts.