Iron Condors: Establishing an Exit Point or Profit Target

hai mark


i just want to know about iron condor; which is the best to you??
for example,if the margin i use is $1,000 and
i trade an iron condor.


1. i collect $250-$300 credit;
so it will be 25%-30% profit from margin…
i will close my position when it reach 80% profit…
around $200

2.i will have the 40-50% range profit. it should be very tight, and i will close when reach 50% of my profit…around $200

3. i will have 10-15% profit from margin. it should be small return on margin.  i will close when 80% profit…around $80

-with these three strategies, which one is better?

-between number 1 and 2,  in your opinion, which will get to the closing price sooner?

-do you have another idea…

thanx mark…

soemardi

***

Hai Soem,

First, some comments:

You cannot group all iron condors together.  The premium you receive when trading the iron condor depends on the implied volatility of the options.  It depends on the strike prices. 

For example, you are asking about iron condors with strike prices that are 10 points apart ($1,000 margin). A $30 stock would be unsuitable.

Trading 10-point GOOG iron condors is not the same as trading 10-point iron condors on IBM. 

Iron condors are not created equal and it's a good idea to establish a set of  'rules' – but the rules apply to a specific underlying asset, or at least underlying assets that are similar in price and implied volatility.  If you choose stocks that are very different, you should have a different set of rules.

Now – your questions:

'Best' is impossible to determine.  Much depends on your personal comfort zone and which position gives you the most confidence that it will provide the profits you seek.

From my perspective, your biggest problem is that you seem to be ignoring the possibility of losing money. I want to tell you that some trades will lose money.  I guarantee it.  Thus, risk cannot be ignored.  I believe it's important to own a position that you can live with – and to be certain that any losses are not too large for your pocket book or your ability to take that loss.  If you lose too much, it can be devastating and kill all chances for trading successfully.  Please be certain you allow for the chance that positions will lose money.

What will you do if the position is in trouble?  It's important to know when you will close the trade, take the loss, and (maybe) find a new position to trade.  You have rules for taking profits.  You must also have rules for not allowing losses to grow too large.

I know every trader wants to concentrate on profits, but it's the losses that are more important.  Your job is to prevent large losses.

That's why you must make your own decision on how to proceed – it's a decision I cannot make for you.  You must decide how much risk to take for every trade and recognize that you will not always achieve your profit target.

1) Number one is an excellent strategy.  It is essentially the method I use.  80% of the profit potential is a very good goal, especially when you collect a $300 premium.  The major question is: at what point do you give up, if the trade is not working?

It is also not as simple as stating the iron condor will collect a '$300 credit.'  Which expiration month will you choose?  It makes a very big difference because gamma is much higher (and the risk of a quick loss is much greater) with front-month options. A $300 credit with front month options translates into selling options that are much closer to the money than when you trade 2nd or 3rd month options. There is nothing wrong with doing that, but you should choose which iron condor is more suitable for you and your comfort zone.  I cannot help with that choice.

2) Also a good choice.  But this type of trade is better-suited for more experienced traders.  Why?  Because the options you sell are going to be closer to the money (higher premium collected means higher delta) and it's very likely that the position will have to be adjusted at least once. 

You must learn how to adjust positions, but you may prefer to begin trading iron condors when the probability of making an adjustment is low, rather than high.

One problem with seeking a profit target of 50% of the premium collected is that you may find it temping to wait 'just a little longer' before closing the trade, seeking a larger profit.

3) I don't like opening 10-point iron condors for $1 credit in index options or higher priced stocks such as GOOG or even AAPL.  It's my personal preference to avoid this trade.  I want you to know that many iron condor traders do trade these spreads, collecting $1 – or less.  It's a very popular strategy.

These trades are more difficult to close than you realize.   There are few sellers when these spreads get down to ten cents each.

This trade comes with a higher probability of earning a profit, but because the premium is small, any losses (and there will be losses) will be large, when compared with the possible profit.

If you are talking about an individual stock with strike prices 5-points apart, then collecting $1 for an iron condor is more acceptable to me.

Your last question:  #2 will lose half it's value more rapidly than #1 will lose 80% of its value, and you will be able to exit position #2 more quickly.  But only if you survive.  These spreads are not far out of the money when you sell them.

Another idea?  There are as many ideas as there are traders.  Your examples represent good methods for trading iron condors.  Just remember these are not rules cast in stone.  If you decide to take 78% instead of waiting for 80%, there is nothing wrong with that.

576

8 Responses to Iron Condors: Establishing an Exit Point or Profit Target

  1. Andy 01/12/2010 at 6:57 PM #

    Mark,
    I wanted to get your thoughts on a RUT put spread I sold yesterday. A few weeks ago I sold a RUT call spread with the intention of selling a put spread to complete the condor at a later date. Shortly after, though, RUT jumped more than 20 points in less than 2 weeks and I never got around to selling the put spread.
    Monday afternoon (yesterday), I became concerned that good earnings reports would skyrocket the indices and I’d have to take a loss on my call spread and roll it. To hedge myself, I desperately sold a put spread for much less than I felt it was worth in the closing minutes (I had to lower my ask price several times before it finally sold).
    Do you feel it was worth selling that put spread for less than I felt it was worth in order to balance my call spread before earnings?

  2. Mark Wolfinger 01/12/2010 at 7:08 PM #

    This is a constant problem. Sell or don’t sell. Increase risk or take a loss.
    Obviously there is no easy reply.
    Sorry for your quandary, but I like this question and will post a reply. It may not be ready for tomorrow morning (I’m swamped with work).
    Quick response: My least favorite method for making an adjustment is selling put spreads on rallies or call spreads on dips. Your situation is a bit different.
    More soon…

  3. Andy 01/12/2010 at 9:51 PM #

    I sold the call spread near the end of the holidays, believing people would take money out at the beginning of the new year. Instead, I ended up selling calls near the beginning of a big rally… from then on I swore only to sell calls on down days and puts on up days.
    Ultimately, though, I don’t expect the market to ‘wake up to reality’ until the fed starts charging interest rates on its loans.
    Anyway, I hope ‘swamped with work’ means you’re working on a new book. If that’s the case, I’m definitely looking forward to it.
    Appreciate your input, as always!

  4. Mark Wolfinger 01/12/2010 at 10:49 PM #

    Yes, working on an e-book. Plus webinars, this blog, and magazine articles.
    Selling calls on down days feels wrong to me, but I can never time the market, so if it works for you, continue.
    Thanks

  5. NK 01/13/2010 at 3:29 AM #

    Hi Mark,
    I’ve been having some trouble in deciding how I should be exiting and/or adjusting my Iron Condor trades.
    (1) I like the your idea of exiting once x% of the potential profit from the trade has been achieved. How should this be executed? Should I just
    leave a limit sell order with my broker the moment I put on the trade?
    (2) I bought a RUT Iron Condor 650/640 C and 540/530 P about 1 month from expiry (Jan). I’ve received $200 credit a piece. When I entered this
    trade, RUT was trading around 609. Seeing as how RUT is trading around 640 (it breached my sold strike for a few days), have I left it too late to
    adjust?
    It will be a loss if I exit it at market (roughly $80-90 each spread) now but I also don’t really want to face settlement risk with RUT that close to my sold strike.
    I would like to find out what more on what I could have done to save my position. The “when to adjust” question seems to be difficult to answer, but leaving it until the underlying breaches the sold strike doesn’t appear to be viable.
    It might be to late to salvage this position, unless the market heads south. I did actually open 3 more Iron Condor FEB positions on RUT, in effect “rolling” it to another month, without closing the initial. My plan was to close these at the same time as my Jan positions – in the hopes that the credit I receive can offset any loss from the Jan options
    What is your opinion?

  6. AJV 01/13/2010 at 5:35 AM #

    Hi Mark,
    Recently found your blog and ordered your book. Great stuff and a heartfelt thanks. Much easier to follow than Nattenberg. My question is on % of portfolio to risk on a given strategy. And also how much you look at the correlation between the markets you are trading? Say I want to trade IC’s on RUT how many would you consider trading with the maximum loss per spread being considered your total risk to the portfolio. I realize that adjustments can make this risk # change over the holding period but do you have a starting point? And if you held IC’s in RUT would you also look at IC’s in SPY and if you would how would you look at the risk of these positions relative to your portfolio?
    Thanks AV

  7. Mark Wolfinger 01/13/2010 at 9:27 AM #

    reply posted as blog post

  8. Mark Wolfinger 01/13/2010 at 9:43 AM #

    Hello AJV,
    Thank you.
    Natenberg is a more advanced book, not intended for new option traders.
    I have a portfolio devoted to trading iron condors. I am willing to invest 100% of it at any one time into those iron condors. Note: This portfolio was established with a certain percentage of my assets – the percentage devoted to iron condors.
    Rather than seek a percentage right now, begin small. If you make money doing these trades, you can inch up the percentage. But, it’s good to be diversified in strategy selection, so don’t go overboard.
    I do not look at correlation risk. I decided to sacrifice better diversification in favor of making it far easier to manage my portfolio. I trade only one broad based index. That means when trouble hits, I have only one position to adjust, not several. That works for me. If you prefer better diversification, that’s a good thing.
    I do not consider loss per spread as a percentage of my portfolio. Rather I look at loss per position. In other words, POSITION SIZE is the crucial factor, not risk per spread.
    I prefer a variety of iron condors (on that one underlying, RUT) and choose to own positions that expire in different months. I have Feb and Mar now and will open some April next week (unless IV is too low). I also open positions at different times and have different strike prices. Thus I usually have no more than 15% of portfolio in any one position. It can build to 20 or 25% over time, if I add to it. I try to avoid that.
    I also own insurance, so that really changes the numbers. That insurance limits the losses, so when I say 25% of my portfolio may be at risk with one trade, that is partially offset by an insurance policy.
    Keep in mind: RUT options are European and SPY options are American. I would not trade SPY, I would choose SPX. But smaller traders may prefer the comfort of lower priced underlying assets.
    To diversify, I would want an equal dollar risk in each underlying I traded. That means I would allocate 50% of total risk to RUT and the rest to SPX (or SPY).
    The easiest way to keep tabs on the ‘amount at risk’ is to total the margin requirement for each position.