Learn to trade iron condors

When trading options, there are a multitude of available strategies. When choosing one (or more) to trade, it is imperative that the trader understands how to initiate the trade, manage risk, and have a solid understanding of when to exit.

There is much to learn and it takes time. I know that I offer a good explanation in The Rookie’s Guide to Options and that there are people – some very qualified, others not so much – who sell courses on trading iron condors. This series is not an attempt to compete with anyone. In fact, I have no intention of offering a complete soup to nuts description of the strategy, including all that I know about it. At least I cannot offer it free. However, there is no reason not to begin the journey.

Today’s video:

Iron Condors

Part 01: decisions that must be made

12 minutes



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2 Responses to Learn to trade iron condors

  1. Robert 05/10/2011 at 12:00 PM #

    Mark,

    Thanks for the solid intro to iron condors. I think many beginners will appreciate how you take your time explaining these fundamental concepts.

    I do have a question regarding your mention of how a more volatile underlying will offer a higher premium and higher risk: Isn’t that true only if a trader chooses ICs based on strike width? That is, if trades were chosen on the basis of delta, wouldn’t the differences in premium be less apparent?

    Robert

    • Mark D Wolfinger 05/10/2011 at 12:55 PM #

      Robert,

      The best way to get that answer is to play with an options pricing calculator. Compare iron condors (or to keep it less time-consuming, just a call or put spread) and look at the numbers.

      I compare the situation with when I trade RUT. When RVX (VIX: SP = RVX: RUT) is near 20 vs. when it it above 30, it’s the same as trading a volatile stock vs. a non-volatile stock. [It’s really a volatile environment vs. a less volatile environment, but the numbers come out the same].

      This topic does NOT relate to strike-width. That is a totally different concept. Strike selection s what I am discussing. Remember that choosing spreads with non-adjacent strikes is usually foolish (in my opinion) – without a very good reason for doing so. A very good reason.

      True: If you choose strikes with identical delta, then the chance of finishing ITM is identical, and one is no more risky than the other. I’m finding this difficult to put into words.

      I just look at it as more volatile stocks more frequently and they move farther. They are more likely to cause trouble before expiration arrives. It was not supposed to convey any more that that idea. If you choose the same strike prices, regardless of delta, then the premium is higher and the chances of loss are greater – when IV is higher and larger market moves are anticipated.

      If you trade same delta, this idea is negated. The same delta option is farther OTM for the more volatile stock, so choosing same delta reduces risk to the same level as that for a lower volatility stock.