Iron Condors and Delta Neutral Trading


Was wondering if you would be able to comment on maintaining a
'delta neutral' portfolio. Particularly, when dealing with condors,
delta can become unbalanced as price approaches one of the wings… is
rolling the OTM spread closer to the money a legitimate strategy?



Condors, 'regular' or the iron variety, are held by traders who believe (or hope) that the underlying asset will trade within a range during the lifetime of the options.  That range is between the strike prices of the options that comprise the position.

Thus, the condor begins with a neutral outlook.

When trading 'delta neutral,' there is no universal definition as to what that means.  Traders with gigantic portfolios have computers dynamically hedging to neutralize as many factors as possible.  That's not for us.

You cannot remain delta zero – you cannot adjust every time the position gains or loses one delta.  Thus, your first decision is how far away from delta neutral are you willing to go before taking action to reduce risk. 

Next, how would you adjust delta?  Some traders prefer to adjust with stock, futures, or deep ITM options.  I understand why many people concentrate on the benefits of this method, but it's not even on my list of possible choices. 

Advantages: Avoids buying options with negative theta.  Premium sellers hate to buy negative theta. The deltas purchased (or sold short) are real, and provide a good hedge when the market continues to move in the same direction.

Disadvantages: Does nothing to solve the continuing problem of negative gamma.  Is subject to a substantial loss when the market changes direction

From my point of view, 'delta neutral' is not good enough when trading iron condors.  Andy, you point out that 'delta can become unbalanced as price approaches one of the wings.'  That's too obvious.  Of course delta is unbalanced when one of you short positions has a delta that moves towards zero delta as the other has a steadily increasing delta.

What you fail to mention is that delta gets out of balance because the position has negative gamma and that negative gamma is accelerating.  Too many traders look to delta as the dominant Greek and ignore the others.  That's why I prefer to adjust by buying options.  To clarify: options have positive gamma.

Perhaps that option purchase is the closing of all, or a part, of the position.  Perhaps it's buying calls or puts.  But please be careful.  It's important to buy options that are closer to the money than the short options in your iron condor.  [Farther OTM options look good, but that's deceiving.  When you know that you will be holding the position for awhile, those FOTM options are going to decay badly.  Unless there is a gigantic market move, they will be worthless when you need them most.]


Is rolling the 'good' side of the iron condor a legitimate strategy? 

Yes, of course it's a legitimate strategy.  The problem is that it does not help.  It's merely an illusion.  A very similar situation was discussed recently

Your 'legitimate' trade would transform a position with one serious problem into a position with one serious problem plus a second problem that's almost as serious.  Read the linked post and try to relate that situation to moving an OTM spread nearer to the money.

The fact that the position would be nearer to delta neutral is deceiving. It actually increases the probability that you will be in deep trouble soon.  Why?  Same answer:  It's a minor delta fix, but increases negative gamma – this time allowing you to get hurt on a decline as well as a rally.


Andy – here is one problem that I frequently encounter  but never previously mentioned.  As a true options rookie, it's natural to ask question one and then question two.  What you must understand is that many answers are connected.  It's important to understand principles and apply them.  The answers are good for more than the single answer to your specific problem. 

Connecting the dots…that's the way to understanding how options work.  


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8 Responses to Iron Condors and Delta Neutral Trading

  1. Burt 02/24/2010 at 9:44 AM #

    Mark, this is a great post. While I understand you’re probably very busy, but an interesting post might be to examine how you choose the appropriate delta/gamma when adjusting. You have, of course, discussed adjustments and pre-insurance from the perspective of price and moneyness. But incorporating the Greeks would be insighful too. I apologize if you have done this already and somehow missed it. Obviously, it would be what you feel comfortable with and not a recommendation as to how to trade. Thanks!

  2. Mark Wolfinger 02/24/2010 at 10:32 AM #

    A good idea.
    But think of all the variables:
    There are many variables to consider when making any trade. Adjustments are even more complex because the primary purpose is to reduce risk.
    But the adjusted position must be worth owning.
    There is so much to discuss that I don’t know how I could ever put it together.
    I’ll consider this idea, but I think it’s a book, not a post! [This is a book that could never be written by me]

  3. Don 02/24/2010 at 10:42 AM #

    Hi Mark, as I was reading this post I looked up a trade that I was interested in both in RUT and APPL- I found something that doesn’t make sense to me but maybe I missed something-
    When looking to trade AAPL I noticed the following IV’s
    March 28.97
    April 35.18
    Oct 31.82
    Jan 11 37.65
    Jan 12 34.66
    I thought that this would be linear, or close to that- if you have a moment would you tell me what these wold indicate to you?

  4. Burt 02/24/2010 at 10:54 AM #

    Mark, thanks for the response. I understand there’s a lot to think about. I was just curious about your process, which you have covered a great deal from a comfort level/worth owning perspective, but not so much from a Greeks perspective. No worries though if you think it is too much to tackle.

  5. Mark Wolfinger 02/24/2010 at 11:30 AM #

    When are the next earnings to be announced? We all know those options will eventually get an IV bump. Thus, each of those expiration months may be bid a bit higher right now in anticipation.
    March is low because there are no earnings, the market has been dull, and there are not enough buyers to push prices higher.
    I don’t know why the LEAPS are as high as they are. Perhaps there is an increased bid for the calls due to an anticipation of higher interest rates. But if this is true, it will appear in more options than AAPL.
    Bottom line, I don’t know the answer.

  6. Mark Wolfinger 02/24/2010 at 11:36 AM #

    Stay tuned.
    I must think about how I can give you a concise reply and cover much ground.
    Much of the time my ‘process’ is semi-automatic. I don’t consider as many things as you should – simply because I’ve been doing this for a long time and some of the decisions are immediately apparent.
    That’s not efficient. It’s probably not best. But, it’s good enough for my needs.

  7. Burt 02/25/2010 at 2:05 PM #

    Mark, I understand exactly what you mean. The intuition you have from your wealth of experience gives you an innate feel to the riskiness of the position without necessarily having to labor with all of the Greeks.

  8. Mark Wolfinger 02/25/2010 at 2:22 PM #

    My job is to help rookies understand how options work.
    Thus, I reply to questions.
    But when the question arises of how I treat my trading, sometimes it’s not so readily explained.