Low Premium Iron Condors


mentioned that collecting a 0.25 credit is a horrible trade for many
reasons [MDW: I was discussing 10-point iron condors].

I have been following various options trading services, and
there are 2 that I have come across that actually use this exact
strategy (xxxxxx xxxxxx and xxxxxxxxxxxx).  They recommend very small
credit spreads on indexes that are far out of the money. It seems they
have been pretty successful using this strategy but they also have
certain months where they don't issue a trade recommendation because of
excessive volatility.

Is the reason that you don't like collecting low credits for far out
of the money spreads because of the bad risk:reward ratio? It would
seem that with this strategy, there can be 10, 20, or 30 months in a row
where the spreads never come under pressure. The key is to have a risk
management plan so you know what to do when the market eventually does
make one of these sigma 3+ events.

Obviously you also couldn't close
the spreads early when you are bringing in such a low initial credit.
You would generally have to let them expire worthless to gain the full
credit. During options expiration week, you can usually close out
spreads that are far out of the money for .05 to .10, however this still takes a fairly large bite out of the very meager credit that you
initially took in.

Are there other negatives that I'm missing?



Thanks for the question Tom,

It's far more than the risk/reward ratio.  But first let me explain that when I offer a strong opinion, it is just that.  An opinion and not a fact. 

I believe that those who sell low-premium spreads eventually blow up their trading accounts. 

I agree that there are ways to manage risk, but there is often a psychological barrier.  Too many traders think in terms of the cash collected when opening the trade and cannot allow themselves to pay $1 or $2 to exit a position when the original premium collected was a mere twenty-five cents.  These are the traders who will hold to the bitter end.  And that means the occasional $975 (+ commissions) loss.

That would not be an insurmountable problem if traders held positions of appropriate size.  But Tom, as I'm sure you know, success brings confidence, over-confidence, and cockiness.  Eventually position size is too large and that inevitable loss is often enough to destroy the trader.  Very sad.

Thus, the primary reason I dislike these trades is that the wrong traders use this method.  In my opinion, this is not a great trade for anyone, but I'm sure there are experienced people who make decent money doing this.  But I feel a responsibility to do whatever I can to discourage this very risky strategy.

I would never consider it myself, and am comfortable recommending that everyone stay away form these low reward plays.

Plan ahead

I agree that having a plan in place is important for the trader who adopts low-premium, high probability trades.  I just feel that the inexperienced trader will find any number of reasons for not following the plan.  And that's even more true when the first time an adjustment is made – it turns out that the adjustment was unnecessary.

Although I'm a big fan of exiting such trades early, there is not much incentive to do so when the original credit is so small.  Holding to the end is probably part of the trade plan.

I don't think you are missing anything.  This strategy, as any other, is appropriate for the right trader.  But it requires enormous discipline – just to keep size at an appropriate level – and then more discipline to lock in a loss to exit – even when the probability of success is still on your side (the short options are not yet ATM).  I believe that someone who has the experience to be certain he/she has that much discipline would choose a different strategy.


Trade King Webinar

August 10, 2010; 5PM ET

Mark D Wolfinger

Adjusting Iron Condors.  Part I

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29 Responses to Low Premium Iron Condors

  1. Don 08/03/2010 at 8:57 AM #

    Hi Mark, you have often mentioned the effect that Gamma has on front month trading. Are there strategies that can use Gamma to advantage of the trader either in IC’s or other strategies?
    When reviewing graphs of the non-linear time decay properties for options, it is apparent that starting at the 6 weeks from expiry to expiry is the most dramatic Theta effect. Would you explain the positive and negatives of this trade and have you ever considered trading IC’s in this time frame? It would seem to lessen the time-frame of possible negative effects but you may receive too much less in credit to compensate.
    Buying LEAPS and selling calls against it. Let’s say that an option trader believes that a stock will become bullish in the future (less than 24 months). For example VLO. The stock has been trading at about 17.35. A trader could buy the Jan 12 15 Call for 4.25 (Delta 68) and sell the Sept 18 call option for .54 (Delta 32)making the net cost 3.71
    If a trader then continued to sell options against it for 6 remaining times that would pay for the call and be ITM. Yes,the stock may always move down and if it goes below 15 you are going to incur additional costs as the LEAPS loses value – but are there other negatives to this?
    PUT if a trader was bearish on a stock, how would the LEAPS work with Puts? Buy the ITM Put and sell OTM puts against it?
    A web site I saw recommended selling calls and selling puts on a stock you like at the same time. I get worried about this. Anytime you sell, you have an OBLIGATION rather than a RIGHT and you never know when a black swan event will hit an individual stock. But I was thinking that this may be more acceptable on an index, I’d like to hear your opinion.
    As usual, thanks for the great info!
    Take care, Don

  2. Don 08/03/2010 at 9:45 AM #

    Mark, I forgot a follow up on Gamma. Today F is trading at 13.20 the Sept 13 Call has a 57 Delta and 22 Gamma (am I correct that like Delta you simply remove the decimal to factor in Gamma?) Meaning (to me) that for each 1 point move in the stock the Delta of the 13 Call will be 77 if it moves up and 35 if it moves down. Is this right? The Sept 14 Call has a Delta of 35 and a Gamma of 21 so if it moves up the new Delta will be 56 and if it moves down 24?
    If I move out to the Dec 13 Call the Delta is still 57 but the Gamma is now 12 while the Dec 14 Call Delta is 45 with the Gamma of 13. The reasoning behind this is: as the front month moves into the money and is near expiration, the Gamma is more pronounced due to the reduction in time, is this the correct view?

  3. Mark Wolfinger 08/03/2010 at 10:10 AM #

    Important questions, but far too much for a comment reply.
    Look for a new post tomorrow 8/4/2010

  4. Jason 08/03/2010 at 11:30 AM #

    Is there a method, tool, website, calculator, etc. that can quickly determine the profitability comparison of 2 or more options at a time?
    Example: PG gapped down today. Looking to purchase a few calls on the upside. I know closer to money and in the money increase the fastest, but also more expensive. So I could purchase a 57.5, 60, or 62.5 option all at varying premiums. Lets say stock is trading at 59 right now and I think it could hit 63 before expiration and want to see which of these can give me the best bang for my buck and determine which would have the highest % return at that price. Does one just have to calculate the p/l chart per strike or is there an easier way?
    And my 2 cents to Tom about the low credit, low probability newsletter condor service. I traded these based on these newsletters advice for over a year and did great. Little adjustment, “easy” money, and had big plans. Every month I did well I allocated a little more of my capital, and a little more, etc. That all stopped in March when the market creeped and creeped up to my strikes with low volatility and almost no way out. The newsletters were of no help and I found out first hand how quickly a 5% gain can turn into a 50% loss. Then add to the fact the settlement took away another 10%. Couldnt sleep, slaved over the ticker, kept putting on additional credit spreads as the newsletters suggested to help lower some of the loss which only made things worse.
    Lost $50,000 in a matter of a week. Had close to a 85% gain up to that point but a 50%-60% loss of what had been built up was more than 85% gain of what I started with. Came out negative after everything.
    Look at ALL those newsletters results for March. I know many that straight changed the way they show results to hide their 50% – 100% loss.
    Its not worth the sleepless nights, biting nails, upset stomach when that 10% of the time you lose money comes along.
    I believe in condors, but I go much longer term with farther out strikes, higher credit, and wider spreads and just adjust casually when needed which is not much. I will NEVER go back to front month, low credit condors again and would warn others to do the same … IMHO

  5. Kim 08/03/2010 at 12:26 PM #

    I couldn’t agree more. I would like to exchange some ideas with you if you don’t mind. My email is ak100467@yahoo.com.

  6. Mark Wolfinger 08/03/2010 at 12:30 PM #

    I’m very sorry to hear of your experience. Thanks for sharing.
    Yes, there is such software. I know that I’ve seen it before, but don’t know where that may be.
    Two suggestions:
    Ask your broker if something they have will provide this information. You never know what tools are hidden.
    I know you want information in a hurry so you can make the trade, but to me the simplest method is to use plotting software. Add a buy of an equal dollar amount of each of your choices to the position. Then change the date and stock price. You can see the value of each of the individual options and choose the one that meets your criteria.
    Don’t ignore the fact that the stock may not perform quite as well as you hope – and buying the 2nd biggest bang for the buck may be a better (more conservative) choice – just in case the move is less than expected.
    Thank you

  7. Mark Wolfinger 08/03/2010 at 12:31 PM #

    If you and Jason reach some interesting conclusions, please consider sharing.

  8. Kim 08/03/2010 at 12:50 PM #

    I had long and detailed discussions with Brandon from XXXX. This service had an incredible string of 60 winning months (about 3% per month on average) before having a 27% loss in March 2010. Taking smaller credits gives you much higher probability of success.
    We had the discussion before he had this losing month. I pointed out that risk/reward is about 1:30 which seems too high, and one losing month can wipe more than a year of returns.
    His answer was:
    “The service evolved into what it is today. My customers, for the most part, prefer the consistent, small returns with no losses. I always do get a few emails here and there from people that say they would like more aggressive, higher returns like we used to get. However, once a trade nears our exit but doesn’t touch it, it is often these same people that email me saying they will never complain about lower returns again.
    At the same time, people don’t like to lose, period. Many people feel a losing month to be the equivalent of a poor working service / strategy (they want to win and never lose). For my customers, quite often, a 10% loss is seen the same as a 100% loss so I like to avoid them all together.”
    After the 27% loss he wrote:
    “We can have a 30 to 40% loss. To get the consistency and returns we have, we have to take the good with the bad. Although past performance certainly does not guarantee future performance, the particular method I use has worked out well in the past. But, just hypothetically speaking as nobody can predict the future, say we did lose once every 5 years or something. If we made 30% a year for four years and lost 30% one year, we would still be up 30% X 4 = 120% after 5 years which is still 24% a year. If our good years are +30% and our bad years are breakeven, I think that’s pretty good. Of course, we could have 25 losses in a row so we have to be careful about making any assumptions though.”
    So this particular service was very successful with low credit strategy, but tell it to someone who started in March 2010. For me, it is not good strategy for all the reasons that Mark mentioned, but ironically, this is probably the most successful of all condor services.

  9. Mark Wolfinger 08/03/2010 at 1:11 PM #

    Excellent contribution. Thanks.
    1) If this guy is in business, then it’s a good idea to satisfy his customers. But I confess, that if people promised to send me good cash for supplying OTM condor picks, I would hope that my personal ethical standards would decline that cash.
    I could take the cash and issue a pile of disclaimers, but that’s just not good enough.
    2) This is the type of service that performs very well until it disappears from the face of the earth. If risk is handled well, and if occasional losses are acceptable (as they should be) then this method is okay – for some traders. Just not me, nor any rookie.
    But if risk is ignored on the basis that ‘it’s too costly to adjust’ then trouble looms.
    We saw Jason’s problem. He increased size as he made money. That’s a fairly common practice as we all want to compound earnings.
    3) If a customer wants a profit all the time, I would tell him//her not to trade options. [I started to write ‘buy T-bills’ – but who knows if that’s safe these days?]
    4) I don’t know why he would expect (his example) to lose once every 5 years. If he sells 2 delta calls and 2 delta puts, he would lose one time in 25. That’s every two years. And that also assumes he can hold when the position moves ITM and then expires safely.
    Once every 5 years? That tells me he believes his own hype. Statistics tell me that he has been lucky.

  10. Jason 08/03/2010 at 2:38 PM #

    RE: buying leaps and selling calls against it
    Not to steal Mark’s thunder, but you have to be careful of volatility, especially with such a long dated option. You can be right on the bullish direction, but if volatility gets crushed (and it generally does when a stock rallies), you may still lose on the options.
    Also, if the stock rallies strongly before the September expiry, you will lose money – you can check by graphing it out on your option software.
    BTW, if you don’t have it already, Options Oracle by Samoa Sky is a really nice freeware option program that allows you to do all sorts of nifty things. At the very least, its a lot of fun to tinker around with.

  11. Jason 08/03/2010 at 2:47 PM #

    Hi Jason,
    Not to spam, but I mentioned Options Oracle earlier, its a great freeware program that is really powerful and just helpful for figuring out what might happen to various options positions on the off chance your broker doesn’t provide something for you. It doesn’t handle portfolios particularly elegantly, but given my trading style (I tend to stick to just a small number of indices) it works brilliantly.
    On a somewhat unrelated note, my general experience is that the decay on far OTM options from 4 weeks to a couple days out of expiry is pretty tiny, only ATM decays in that graph they usually show. James Bittman has a book called “Trading Options as a Professional” that shows time decays of various strike options in just about the clearest way I’ve ever seen.
    The Other Jason

  12. Mark Wolfinger 08/03/2010 at 3:21 PM #

    Not My thunder.
    It’s reality. It’s the type of risk that is so often ignored.

  13. Mark Wolfinger 08/03/2010 at 3:22 PM #

    Hi OJ,
    Good freeware links are always appreciated

  14. Kim 08/03/2010 at 3:54 PM #

    Those are excellent points. I actually forgot to mention one very significant detail: he is trading credit spreads, not condors. He always opens one side only, based on his market analysis. I guess this changes the picture a bit.
    I agree that if he opens trades with say 95% success, then statistically, he should have a losing month every 20 months. The fact that he had 5 years without losing month tells us that he has excellent directional skills (but then you can ask why not to trade directional trades?). I know that the 5 years strike is real, based on many testimonials and on his huge customer base (hint: look at open interest on Aug 710 and 720 calls and compare with other strikes).
    His rule is to exit the trade when the underlying is moving above (or below) the short strike. Depending on when it happens, he might have between 10%-40% loss.
    I agree that he was also lucky, but he also skips approximately one month every year if he is not completely satisfied with the setup.
    Again, I personally agree that this is a bad strategy, but it works for him and his subscribers. He is in business since 2000, probably one of the oldest services.

  15. Mark Wolfinger 08/03/2010 at 4:36 PM #

    Thanks Kim,
    One point: If he is trading 10-point spreads In RUT, and if he exits when the short option is ITM, he would be forced to pay roughly $5 to cover.
    I don’t know how anyone else calculates % loss, but to me, if I sell a spread and collect $0.50 and exit by paying $5, then I lost 9X the profit potential. To me that’s a 900% loss (900% of my maximum gain).
    This is consistent with those who exit early, gaining $0.40 and refer to it as earning 80% of the maximum. If $40 is 80%, then it’s unreasonable to refer to a $450 loss anything less than 900%
    To some it’s a 45% loss because it represents 45% of the maximum loss.
    However, there is no way that anyone can call this a loss of 10 or 20%. When you sell for near nothing and pay $5, that’s a big percentage loss.
    This service has obviously done well for its customers. So far.

  16. Steve 08/03/2010 at 4:59 PM #

    I know there is so much more than price involved in the selection of options to sell, but if you were presented with a list of RUT trades with various premiums, where would you start to be interested (I know $0.25 doesn’t interest you – what does)?

  17. Kim 08/03/2010 at 5:05 PM #

    If you sell a $10 spread for $0.5 and buy it back for $0.1, it’s not 80% gain. The gain is calculated as your return on margin ($40/$950=4.2%). In a same way, I don’t think that buying it back for $5 is a 900% loss. The loss is $450/$950=47.3%. I know for fact that this is how he calculates his returns. Anyone calculating returns as you mentioned (40/50=80%) is a pure scam and is not worth even to be mentioned on such reputable blog like yours.
    When he had a loss in March, he was holding into Settlement Friday (I know, taking settlement risk is a big mistake and unacceptable). He had 1170/1180 call spread and SPX settled at 1172.95. His loss was 2.95 less the credit of $0.35 – 260/970=26.8%. The spread could be covered on Thursday for less than $1, resulting a loss of less than 10% (I actually followed this trade on another service and advised him to cover).
    So the cost of the ITM spread could be much less than $5, depending on time to expiration.

  18. Mark Wolfinger 08/03/2010 at 6:39 PM #

    I’d want to know if IV is on the high or low side. If low, I’d choose 60 day options. Then I would go as far OTM as possible to collect approximately $2.20 to $2.40.
    If I felt that these were too close to the money (CTM) for comfort, I’d have to decide between going one strike farther away or passing on the trade.
    If IV were on the high side, I’d go for 90 day (120 if available). I’d want about $3.25 for the 90 day and perhaps $370 for the 120-day.
    Those are the price levels I like and go as far OTM as necessary to get them. Obviously, sometimes I must take less. But not too much less.

  19. Mark Wolfinger 08/03/2010 at 6:50 PM #

    I agree with you.
    I did not suggest it was an 80% gain. What I said was that some people refer to that as collecting 80% of the maximum available profit.
    That conversation occurs when traders ask when to exit – i.e., how much should they try to collect per trade. I never have an answer for that, but people like collecting 80%, 90% (of the maximum) etc.
    You are correct. I had a ‘senior moment’ when I wrote that reply. Of course the amount invested in the trade is the margin requirement or the maximum loss. Thus 47,% loss is correct. Humble pie. Yum!
    It never dawned on me that holding into settlement was a possibility. I guess that goes along with his idea of refusing to take a loss – in an attempt to please customers.
    When the spread could have been covered the day before at ‘less than $1’ – the conditions you set were not present. The 1170 was not ITM at that time.
    Appreciate the arithmetic lesson. Thanks

  20. Logan 08/03/2010 at 11:51 PM #

    Just curious. What numbers do you consider to constitute low/med/high vol levels on vix and rvx?

  21. joe 08/04/2010 at 1:23 AM #

    FYI. To anyone using optionsoracle from samoasky as mentioned in an earlier post please be mindful that some indexes (RUT) are not updating with correct prices. I monitor their forum regularly and have yet to get a response as to when the prices will be fixed. Sometimes they are off marginally while other times it is a considerable amount. Please be careful.
    I would like to say that I have been using optionsoracle for the past few years and think it’s the best free options software available, just hope they fix it soon.

  22. Don 08/04/2010 at 7:50 AM #

    Hi Mark/Jason- thanks for the tip on optionsoracle, looks nice-
    As to the Long LEAPS/short call, of course you are right the volatility is a consideration- if one buys the LEAPS with IV near it’s low that would address that as much as possible. IF the stock rallies strongly for the September short call I don’t see it causing a loss. The Delta on the ITM long call is 57 and the short call 32 so at least at the beginning movement favors the ITM Long if it rallies strongly I have the 15 call with the 18 sold against it and the 15 had 2.35 extrinsic (time) value at the time of purchase that would not erode substantially in the 45 days that would be included (pro-rated daily) so if the stock rallied to 19 my 15 call would be worth about 6.35 (4+2.35) while the sold 18 call would be worth -1.40 or so I could close out the trade, roll the short or adjust in some manner- have I overlooked something?

  23. Mark Wolfinger 08/04/2010 at 7:54 AM #

    My opinion:
    VIX >30 is high
    VIX <18 is low for now. I do expect it to be 10 again, some day
    RVX in low to mid 30s is high enough
    RVX low 20s is low

  24. Mark Wolfinger 08/04/2010 at 7:55 AM #

    Thanks for the information.

  25. Harshad 08/04/2010 at 8:02 AM #

    Hi Kim
    Particular service you mentioned left every body
    hanging in Oct of 2008 with giving no constructive
    direction to exit the losses they made and than he changed his website with new way of showing his losses he changed all the data in it.

  26. Harshad 08/04/2010 at 8:09 AM #

    Hi Mark,
    What do you consider Hi IV or Low IV

  27. Mark Wolfinger 08/04/2010 at 8:45 AM #

    The volatility is more than a consideration. This trade is very vega sensitive and I believe that if you make this play repeatedly, your results will be based on IV.
    Yes, restricting the trade to times whee IV is low is the right idea – at least for my comfort zone. However, this is a popular trade technique, and inexperienced traders just ignore IV levels.. An IV crush really hurts. Not just in the premium decline of your long option, but as time passes and you sell new options, you collect less for each.
    Have you missed something? Yes
    a) “The time value would not erode substantially.” Did you use a calculator to see just how much would erode? 45 days should not be small enough to ignore in the life of an 18-month option.
    b) Do you understand that by the time the stock hits 19, you are short delta and continue to lose money on a continued rally?
    c) Look at the stock trading at 20. Drop IV by 25%. How does the trade look now?
    How about 21 on the stock and IV down 50%?
    I have not made any of these calculations. That’s your assignment. When trading LEAPS, you want to know, not guess, what happens in a bunch of ‘what if’ scenarios.
    Don – the real problem here is that you are looking at a low-priced stock where a one-point move is a big deal. To get a better feel for how all of this works, why not look at a $50 stock or even AAPL. In those stocks, a one-point move is far less significant.

  28. Mark Wolfinger 08/04/2010 at 8:53 AM #

    This is a serious accusation. If true – and I’m sure it is – this cannot be ignored and would represent a red flag.
    This is not something a service can recover from – if they did this, then I’d ignore them forever.
    This is one reason I delete the name if services mentioned by those who comment. I made an exception this time. I’d like to help readers find good services, but can never verify claims. Takes far too much time.
    Thus, I thank you for the update.

  29. Mark Wolfinger 08/04/2010 at 8:54 AM #

    See reply to Logan below.