Iron Condors: Risk Management and Position Size


My query relates back to your post on trading iron condors for a living which I found very informative. Without going over old ground, I am interested to know how traders who do choose to trade 100s of ICs each month on a single underlying manage the risk.

I ask because I found articles such as this one and also remember your having mentioned in the past that you traded much larger size. Any thoughts on this would be great.



This simple sounding question opens the doorway to a wider discussion.

When trading, choosing an appropriate position size is a crucial factor in the trader's ability to practice sound money management.  However, I don't believe size matters from the perspective relating to your question.  The requirement is that each trader use size that is appropriate for his/her account size, experience, track record etc.

If you trade 10x the size, adjustments would also be 10x larger.  You can easily make minor changes to achieve the desired result.  For example a 2-lot adjustment for a 10-lot position  may not be exactly 20-lots for a 100-lot position.  If its 18 or 23-lots, that's merely the effect of rounding.

Let's assume that a trader who has been using iron condors has opened a separate brokerage account that is used exclusively for trading iron condors, and that it has $20,000 in cash.   Important note: This is the amount that our trader is willing to place at risk for this strategy.  It is not his/her entire investment portfolio.

If we trade 10-point iron condors [The call spread is 10-points wide and the put spread is 10-points wide.  The distance between the calls and puts is not relevant], the margin requirment for each is $1,000 [although some brokers require $1,000 for each of the two spreads, and this practice may become more widespread].  The maximim position size for this account is twenty of these iron condors. [Some brokers allow customers to use the cash generated from the sale of iron condors to open more iron condors, but I believe this practice is being phased out].

Go all in?

Let's assume this trader frequently goes 'all in.'  That should not result in a portfolio of 20 iron condors.  It's essential to have cash available to make adjustments.  Adjustments are vital to your ability to prosper over the long term, and many traders (your reference for example) believe that adjustments add to profitability.

With this size account, I prefer to trade 16, or no more than 17 iron condors (and 14 to 15 is a lot more conservative), leaving $3,000 to $4,000 to meet margin requirements for some types of adjustmens.  Some adjustments require extra margin and some do not. Being prohibited from making necessary trades is equivalent to being placed in the penalty box and being forced to close positions (to generate margin room) or wait through expiration.  Most of the time when an adjustment is made, the entire iron condor is not involved.  The half iron condor that is at risk is frequently adjusted while the less risky portion is left as is – at least for the moment.

Don't allow that to happen.  Maintain enough free margin to provide freedom to trade.  Those readers who use portfolio margin instead of Reg T margin ($100,000 minimum account) should always have extra room.  If you use your entire margin allotment with portfolio margin, you are trading size that is far too big for your account.

More cash = more size?

Next, consider the trader with a $200,000 account.  If this trader wants to go all in I'd recommend doing approximately the same thing, but 10 x larger.  Keep in mind that if this trader feels that $200,000 devoted to iron condors is too much, then cash could be transferred to another account.

So to me, size trading depends on more than counting the number of contracts traded. If you have the ability to fund the account, are comfortable trading 160 iron condors simultaneously, don't feel uncomfortable with the money at risk, and have a successful track record of trading iron condors, then this is appropriate size for $200,000 account holders.

Joe, I don't believe there is any true difference.  When the trader can comfortably handle the size traded, and meets the criteria mentioned above, the risk is not too difficult to handle.  The smaller trader's $2,000 risk is the bigger guy's $20,000 risk, but each should feel about the same pressure when that amount is on the line.  The only warning I would give to the larger trader is to be certain that the underlying has enough liquidity to handle his orders. 

It's not enough to say that RUT is very liquid.   I have discovered that OTM 3-4 month options have far less liquidity [I've had several instances for which I was able to buy only one-lot of 3-4 month RUT iron condors.], and would not be comfortable trying to trade 100-lots of a RUT December iron condor today – unless I were willing to trade closer to the money options or accept a less than desired credit.

Worth repeating

I would NOT advise a person with a one million dollar account who is first learning about options to place significant money at risk.  That is true for any rookie.

I'd recommend using no more than $25,000.  In fact, I'd suggest paper-trading to give the new trader some much needed practice.

Joe, once you decided that trading $X is appropriate, and as long as the underlying has the liquidity needed, and if you adhere to the guidelines above, position size should automatically be at an acceptable level. The larger trader is not at a disadvantage.

Extra note:  I have some disagreement with the advice offered in the article that you referred to above.  The major one is this statement: "Condor manage­ment requires adding size when rolling."   Adding size is increasing risk, and is only appropriate under certain conditions.  That's a topic for another time.


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13 Responses to Iron Condors: Risk Management and Position Size

  1. davmp 09/30/2010 at 10:09 AM #

    Curious for your take on whether, for a $20K to $25K account that wanted to trade RUT ICs, would it be better to go for that 80% all-in on a single, larger size, 90-days IC trade OR split up the total size amongst three separate months of trading 90-day out ICs? For the latter, I mean split into using ~$8K/month per IC trade.
    Either way, the change shouldn’t effect the amount to keep in reserve for adjustments, right? But its smaller per month in the latter case.

  2. Mark Wolfinger 09/30/2010 at 10:27 AM #

    Hi davmp,
    It comes down to a single decision:
    If you prefer to trade the short month options, then you have to have all positions in the front month. You could have two different iron condors by opening half the position at a later date, or choosing two different positions right from the start.
    I trade the 90-day IC. I would never consider going all in for that 90 day trade. In 30 days, I would have no cash for new 90-day trades. When I started, I simply traded both 60-day and 90-day positions for the first month. After that, new trades were 90-day (except when IV is low, then I do 60-day) for new positions).
    Thus, I always have positions in three different months, and that means my total number of ICs per month is ~ 1/3 of the total.
    Right now, I already closed a significant portion of my Oct (front month) position. When I closed, I add to my Dec positions. [I would add Nov if for some reason I had too many Dec].
    That’s how I end up with different trades in each month. As I close front month, I add to back month.
    Yes, the margin reserve is important. Don’t ignore it.
    Good follow-up question

  3. Jason 09/30/2010 at 11:04 AM #

    Just to throw in my 2 cents:
    For my option trading account, I rarely ever use more then 50% of my margin (generally the only time is when I am bridging months). I favor 2-3 month IC’s, and pretty much never make adjustments when there is < 1 month remaining - I just take it off. That being said, sometimes I run more margin intensive trades/adjustments, so I like to have the wiggle room.

  4. Mark Wolfinger 09/30/2010 at 11:18 AM #

    I appreciate your opinion, but I cannot find the two pennies.
    Yes. Wiggle room. It’s never appreciated until it’s needed.
    Keep in mind that using 50% of your margin is really the equivalent of trading a smaller account with discipline.

  5. Antonio 09/30/2010 at 11:42 AM #

    Hi Mark
    Reading past posts I found the answer to a question that is possible you wont remember:
    From January 22, 2010
    Here is a portion of your reply:
    5) R/R ratios are important considerations – but you don’t have to calculate them. For me, a $2.50 minimum credit turns into a 3:1 ratio. And I prefer better than that. A $3.00 minimum give me a 2.33 ratio. Thus, I never bother with this number, knowing that my premium requirement takes it into consideration.
    In special I´d like you, if where possible, to explain in detail the reason of your comment (5) because I can´t understand:
    Thanks a lot,

  6. Mark Wolfinger 09/30/2010 at 1:01 PM #

    Risk vs. reward.
    If I trade an iron condor (or a credit spread) with strike prices that are 10-points apart, the maximum loss is $1,000 – less the premium collected when selling the spread.
    Thus, if I sell that spread and collect $250, my maximum reward is $250. My maximum loss is $750.
    I can calculate the risk/reward ratio by dividing 750 by 250 and getting 3.0
    If I collect a premium of only $200, the ratio is 800/200, or 4.0
    I have no need to make the calculation, as simple as it is. Why? Because if I always collect a premium of $300 or more, then I know that the ratio is 700/300 or 2.33 or less.
    I know that ratio is acceptable to me. So why do I have to waste time thinking about it?
    If you vary the premium collected, if your risk/reward ratio is very different for each trade, then – continue to make the simple calculation.

  7. Antonio 09/30/2010 at 1:39 PM #

    OK, now I understand…
    I thought you were talking about the ratio wins verse losses. Somewhere you explained it but I can´t find the post.
    Should be possible to explain again?
    In the post you told the reason of selling for the amount of premium you require based on the times you were supposed to win a trade verse the times you lose, and be positive.
    Or I understood something like that…

  8. Mark Wolfinger 09/30/2010 at 2:39 PM #

    This is a problem in arithmetic, not options. Antonio, I cannot tell you what you want to know.
    We are dealing with statistics. Sometimes the results are favorable and we profit more often than expected. Sometimes we lose more often than expected.
    We do not always profit by the maximum. Every time we exit a trade early, we sacrifice some potential profit.
    We do not always lose the maximum. By practicing good risk management, we exit early and lose far less.
    When I collect more premium, my chances of losing increase. When I collect less premium, my chances of winning increase.
    With all of those variables, I cannot tell you how many winning trades you, Antonio, must have to earn a profit. Nor can I know that number for my own trades.

  9. Joe 09/30/2010 at 6:45 PM #

    Thanks for addressing my query, makes sense. I thought the article did a good job of explaining how it can be done. I think the biggest concern I would have if I was trading such a large account of many ICs is the pyschology involved when the single underlying keeps going one way.

  10. Mark Wolfinger 09/30/2010 at 7:36 PM #

    I thought the article was good also. But I don’t agree with all of it.
    I think you are missing a big point Joe – if you had an account that was 10x the size of your current iron condor trading account, would you trade it the same way you are trading today – only 10 x larger?
    Whether it’s psychological factors, or simple fear, or simple conservatism – does not matter. You, Joe, would not be comfortable
    Why? I’ll wager that it’s because the wealthier you get, the more conservative you become. That’s true of many folks.
    But I hope you can see that the arithmetic behind the idea: If a person is neither too poor to afford to trade, nor too wealthy to be concerned with the results, then if that person devotes 15% (or any number between 1 and 100) of his/her capital towards trading iron condors, and if making money is a prime consideration behind investing, then that person should also be comfortable trading the same 15% – no matter how much money is involved. [Note: sometimes preservation of capital is the prime motive and that person would not be trading iron condors]
    I’m not talking about trading a $20,000,000 account in the the same way as a $2,000,000 account. At some point we need more liquidity.
    But using more realistic numbers, I used to trade a 50k account the same as a 500k account. Now that I am older, I would take less risk with larger (larger to me) accounts.

  11. Joe 09/30/2010 at 10:36 PM #

    Ahh yes now I think I understand, the size of the account really shouldn’t matter as its all relative.

  12. Jason 10/01/2010 at 2:13 AM #

    Agreed, I do tend to scale up when I suspect IV is seriously out of whack, and leaving that extra firepower aside is also helpful. Still, even using 50% of my margin if I get a rate of return on the capital I’m comfortable with, that’s good enough for me.
    Very early on when I was trading (not options, just equity) I learned just how painful a margin call was. Not making that mistake again, hah.

  13. Mark Wolfinger 10/01/2010 at 8:55 AM #

    This is just bookkeeping and semantics.
    If you cut your account in half and went all in, you’d double your rate of return. But you would make zero additional money.
    So you are right. The rate of return meets your needs. The income meets your needs. You have plenty of extra ammo when needed.
    Cannot beat that combination.