Iron Condor Questions

I received an interesting perspective from a reader, signed Mr. Green:


I'm an active IC [iron condor] trader with an adjustment strategy that opens up my IC
when the market moves toward it.
assume you means you adjust your position when the underlying asset moves near to the strike price of your short option.]

I've found that the opening of IC's is
a bit tricky lately and it often pays to watch them carefully or enter
GTC orders at favorable price because the midpoints change more
intraday than a person might expect given that the overall market
movement has been relatively small recently.

I believe the reason that it's more difficult (or 'tricky') to get good fills recently is that the market makers are simply less willing to play.  In my opinion, they appear to be holding out for better prices – probably because they have not been making money.  But, that's just a guess.

I don't like the idea of using GTC opening orders.  When a new trading day arrives, you may find that you prefer to use different strike prices or that there's a chance to get an even better fill (because implied volatility has been increasing).  But this is a comfort zone decision, and if it works for you, then GTC it is.

I also think
it is wise to enter a position slowly, rather than all at once. For
example, if you want to have 20 contracts in RUT, I would go in
about 3-5 at a time over a few days until I'm in

I agree and seldom enter an order to open a full position at any one time (but I usually close profitable positions all at once). 

Part of the time, I never get to own my 'full-sized' position because

  • The market has moved and an IC with different strike prices has become more attractive.
  • The price is less favorable than it was, and does not meet my criteria for a new position.

I also like to have a lot of extra
margin, too, so I can move things around. 

Extra margin is simply a good idea.  Period.  No investor wants to receive a margin call and get squeezed out of a position that he/she still wants to own.  Your rationale for allowing yourself room to 'move things around' makes a lot of sense to me.  If you lack excess margin, when it comes time to modify or adjust a position, many times that margin limitation prevents the type of adjustment you prefer. 

I'm being slowly won over to
the longer term style of IC investment (in the position 2-3 months from
expiry and out whenever I can sell for 0.20 or 0.25 cents– but always
more than two weeks from expiry). If things are looking Ok with two
weeks left, they will also be just fine if I roll out a couple of
months!! It is a little easier to adjust these positions, and the gamma
is way more manageable.

What has been your experience?

I've reread this paragraph several times and I'm not sure how to take it.  But I now believe that you like the idea of paying that $0.20 or $0.25 to sell the iron condor you already own.  At first I thought you were saying that you open new iron condors positions and collect only $0.25 for them.  That would be a very bad idea, and it seems that you agree.

I suggest that you loosen up on that 'two-week' requirement for two reasons.  First, you can always bid $0.15.  But more importantly, part of the time the new position appears to be so enticing that you truly want to open that position NOW.  That's a very good reason to pay an extra nickel or two to get rid of the front month position.

I prefer buying those those 2-3 month iron condors also, but to me, this is a matter of personal preference.  It suits my comfort zone to own positions with 'more manageable' negative gamma (front-month iron condor positions lose money more rapidly than longer-term ICs with the same strike prices, when the underlying stock or index moves significantly through the short strike price).  But, buying near-term iron condors is the strategy of choice for most investors.

I believe that buying iron condors (that means selling a call spread and selling a put spread) is a strategy that provides long-term success.  There are many winning trades and some losing trades.  To me, success depends on avoiding large losses, not on winning 95% of the time.  Thus, I recommend that an iron condor trader should never collect a credit as low as 25 cents  when the strike prices are 10 points apart.  That's just asking for trouble.  You will not lose often, but those losses can be devastating.  Why?  Because it's simply human nature that an investor will not want to adjust an iron condor that gets in trouble.  When collecting a very small premium, it's not easy to lock in a big loss to close the position.  Most investors would rather (incorrectly, IMHO) take the risk of a maximum loss, rather than adjust the trade when the loss is so much larger than the original premium. 

When you collect $0.25 month after month (and at that low premium, commissions become significant), one maximum loss ($9.75) wipes out more than three years of profits.

Not a viable strategy, IMHO. 


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