Iron Condors vs. Credit Spreads

Hi Mark,

I've been buying spreads recently instead of iron condors
since I fancy myself to be a market prognosticator.

I want to be certain that you know this, although I suspect you do.  Whether you buy a spread or sell a spread with the same strikes (puts vs. calls), it's the same play with the same risk and reward.

Example:  Buying IBM 120/130 call spread is equivalent to selling IBM 120/130 put spread (same expiration).

Thus, whether you buy the call spread, or sell the put spread, it's the same bullish play.

The difference between your spread (or it's equivalent) and the iron condor is that the latter involves selling both a call spread and a put spread.

That strategy
worked for my Jan bull put spread but my Feb bear call spread in RUT is
starting to get a little too close for comfort…hopefully I won't have
to ask you for exit strategies in a few days. 

Once again, I want to mention a pet peeve of mine.  The term 'bull put spread' is unpalatable to me.  I prefer 'sold the Jan put spread.'

If the Feb call spread that you sold is making you nervous, there's not much to an exit strategy.  You just exit at the proper time.  I assume you are referring to adjustments.  Much depends on how far OTM your call spread is when you decide to act.  There are usually good alternatives.

Anyway, I wanted to ask
if my supposition is correct: that the risk is the same for spreads and
iron condors with equal deltas. ie: a spread with a 15 delta and an
iron condor with a 15 delta will both expire ITM roughly 15% of the
time. Somehow I think it's not that simple since it seems the premium
collected has been larger for spreads than iron condors of equal

Right you are.  It's not that simple.

I'll assume you are referring to the same underlying asset, or at least ones with very similar implied volatility.  It depends on what you mean by a 15 delta iron condor. 

If the call spread portion of the IC and the put spread each have a 15 delta, then the IC finishes ITM 30% of the time.

If the sum of the deltas is 15, then yes, one or the other finishes in the money 15% of the time.

The premium for an IC should be double that of a single credit spread, when the call spread and the put spread are each 15 delta.  Double the premium; double the risk.

As an aside, I was wondering what your opinion is on the
current market volatility? It seems the only index worth trading
currently is RUT, but with earnings coming up this month I presume
volatility will only go upwards from here.

I truly don't look at the other indexes, seeking better trading opportunities.  I lack the time, being far too busy writing.

My opinion is that I don't know in which direction IV is more likely to go.  Higher would be my choice if I had to wager, but as recently as Jan 2007, VIX was under 10.  I don't believe earnings season will play much of a role – unless there are many earnings surprises.

If you want to have positions that do better when IV expands, consider single or double diagonal spreads.  They are long vega and both iron condors and credit spreads are short vega.


3 Responses to Iron Condors vs. Credit Spreads

  1. Bill 01/07/2010 at 11:55 AM #

    Mark, the kite spread sounds like a great way to get some peace of mind throughout the life of an iron condor. In your own experience with the kite spread, what percentage of your IC premium do you find you are giving up in order to put on the insurance? I expect it varies from month to month, but on average would you say you’re paying out more like ten percent or fifty percent of the IC’s premium? Thanks.

  2. Mark Wolfinger 01/07/2010 at 7:03 PM #

    I’ll give you an answer, but it’s not a good one. If you trade a three month IC and collect $300 and then wait six weeks before buying a kite, the percentage is far less than if you open a front month iron condor and buy a kite the same day.
    I find that I spend at least 25% of the premium collected on the kite spread. But – and this matters – I frequently get all, or a significant portion, of the kite premium returned.
    The kite premium should not be considered as ‘the cost of doing business’ because you do get some back – on average.

  3. Bill 01/08/2010 at 11:00 AM #

    Thanks very much, Mark. I think that’s quite a good answer.