Managing Iron Condors with Imagination

This post is based on the very thoughtful comment/questions posed by Chris O.

Dear Mark,

I have been thinking lately, If one always exits an IC early, say one month before expiry on an IC that was opened three months before expiry, is it useful to do the following:

As the short legs of the IC ought to be closed one month early and I want to discipline my self to do so, why don’t I select my protection, the long legs of the IC, at one month earlier expiration.

Such wings of the Condor are cheaper to buy. The wings of an IC chosen the normal way, extending to the same expiration, are mostly worthless when I sell them one month before expiration, together with buying back the short legs of the IC.

So using shorter duration long legs on the IC takes away any hapless covering of the entire IC, and allows me to make more money?
Looks like Free lunch = I must be overlooking something.

Not so free lunch

This is not a free lunch, and there is likely to be significant margin problems. However, the strategy has a great deal to recommend it.

You envision an iron condor similar to the following:

Buy X INDX Jul 1050 calls
Sell X INDX Aug 1040 calls

Buy X INDX Jul 880 puts
Sell X INDX Aug 890 puts

Your long options expire before the short options. This has a lot going for it, per your description above. However, the margin gods don’t like such positions. When the long option expires after the short, they are considered to be naked short. That uses up a ton of margin for the average investor.

Portfolio margin

However, if your account uses portfolio margin, you are granted many special advantages regarding margin. Such accounts are margined by looking at the overall risk associated with the portfolio – and not by looking at each individual position. The bad news for many is that the account must be at least $100,000 to qualify. But readers should ask their broker about portfolio margin, just in case they do something different. [IB follows the rules mentioned here]

Forced exit

If you want to ‘discipline yourself’ to exit one month early, this is certainly a good way to do it. However, do keep in mind that when INDX is near 880 or 1050 (the strikes of your long options), the longs are going to expire worthless and it is going to cost a lot of money to buy back your shorts.

Nevertheless, that specific result will not occur very often and over the longer-term this may well be a winning play. This trade allows the position to be opened for a large cash credit, and there are obvious benefits in doing that.

1) one spread, put or call, might be too close to the money and have to be bought back at a loss or a additional wing must be bought for that side to cover a short position during this last month. Does not make sense as an argument, I want to stick to the rule of closing the short legs on month before expiration, so closing at a loss is “biting the bullet”. I definitely don’t want to stick around in a high gamma last month environment with a short option close to the money, even when it has a long option covering to the final month.

Yes, it makes sense to me. However, I urge you to take the worst case scenario, estimate an implied volatility for the August calls, and get yourself a good estimate of how much can be lost. If you size this trade properly (that loss is acceptable, not devastating), then you will be in good shape when using strategy.

It’s easy to back-test, if you have the data. Or you can accumulate data in a paper trading account. To gain data quickly, do three different indexes simultaneously.

2) IV might have jumped on the underlying, and both short options may have higher value than I collected – even with one month to go. Does not matter? If IV is so high I don’t want to remain in the last month when gamma is also high. Wild swings can happen. So again, why bother buying wings on an IC when the plan is to carry the IC to the final expiration?

Are long legs of an IC carrying to to the last expiration date worth anything, one month before expiration at a high IV?

Yes, it matters. Yes, IV may become a problem. And yes, those one-month options would have a very high value in your high IV scenario.

However, a low IV offers an occasional extra profit. The key to survival here is being very careful about position size.

There is a point you are missing. If you own the traditional iron condor in a high IV environment, one month prior to expiration, your remaining long call would significantly cut the loss when exiting. But, as you say, your plan is to earn extra profit all those times when IV is not extra costly and your long option is not near the stock price. Probability is important for a good analysis of this play, and having he ability to back-test this method for a bunch of years would be helpful.

3) I am trying with a small position, now running until final expiration in May, at Interactive Brokers and see little effect on margin requirements. No argument either.

Can you shed some light?

Thanks a lot for your efforts

I don’t understand why there is no problem with margin. Please let me know if you are using portfolio margin.

Do keep in mind that there is little to be learned from a single example. You can develop some novel adjustment ideas, but this study requires a good deal of data.


P.S. On Options for Rookies Premium, is the planned content difficult to organize for people in a very different time-zone than yours?

[Visit the link above for a short video that describes live meetings (and the problem of time zones), one of the important features for Gold Members. You must become a free member (Bronze) to gain access to the video]

Yes, different time zones present a problem when planning live meetings. We already have members from Hong Kong, Singapore, and the Netherlands. Therefore, I am requesting that members suggest times that are best for them and I’ll do what I can to make it convenient for as many as possible. If necessary, I’ll add extra sessions. For now, I’m promising four live sessions per month, but I suspect it will have to be more than that.


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7 Responses to Managing Iron Condors with Imagination

  1. Chris-O 03/10/2011 at 4:07 PM #

    Hi Mark,

    What I meant to say under 3):
    I am running an IC position with short legs expiring in May, long legs expiring in April. Before April this has no adverse effect on margin requirement, afterward I’m just naked short the inner calls & puts, at massive margin (Called IB, they confirmed).
    This is different from my previous dutch broker (ALEX) who would not accept unequal duration legs in one spread as margin reducing e.g. would consider a short option as being naked short, when no covering long option carries protection until the expiry of the short option. MDW: Are you using ‘portfolio margin’ or ‘reg T’ margin? Or Neither because you don’t live in the US?]

    I will try to patch some research I did using price prediction software to provide numbers with your suggested checks: (columns don’t patch nicely from excel, sorry, hope people find this useful anyway)

    Starting situation now (IV matched to known price)

    UL 362,14 Strikes 300 320 400 410
    days 36 / 71 # 5 -5 -10 10
    vola 18,7% Type P P C C
    free 2,5% IV 30% 25% 13% 18%
    div 4,5% days 36 71 71 36

    Price 0,27 2,63 0,31 0,09

    Compare the below normal IC, we make extra money nicely in the above odd-IC:

    UL 362,14 Strikes 300 320 400 410
    days 71 # 5 -5 -10 10
    vola 18,7% Type P P C C
    free 2,5% IV 28% 25% 13% 13%
    div 4,5% days 71 71 71 71

    Price 1,20 2,63 0,31 0,10

    Situation April expiry, “odd”-IC, no changes IV & underlying assumed, I make money and are forced out:

    UL 362,14 Strikes 300 320 400 410
    days 0 / 35 # 5 -5 -10 10
    vola 18,7% Type P P C C
    free 2,5% IV 28% 25% 13% 13%
    div 4,5% days 0 35 35 0

    Price 0,00 0,64 0,03 0,00

    Situation April expiry, “odd”-IC, assume a drop in UL and associated raise in volatility:

    UL 325 Strikes 300 320 400 410
    days 0 / 35 # 5 -5 -10 10
    vola 25,0% Type P P C C
    free 2,5% IV 40% 30% 20% 25%
    div 4,5% days 0 35 35 0

    Price 0,00 9,85 0,00 0,00

    Compare situation April expiry, normal-IC, assume a drop in UL and associated raise in volatility:

    UL 325 Strikes 300 320 400 410
    days 35 # 5 -5 -10 10
    vola 25,0% Type P P C C
    free 2,5% IV 40% 30% 20% 25%
    div 4,5% days 35 35 35 35

    Price 6,18 9,85 0,00 0,01

    A normal IC will vary quite a significant amount of value in the long leg one month before final expiry, to reduce my loss on the short leg. But I could withstand such a big loss from my “odd-IC” if I make more than 7 wins for the extra gains.

    Mwah….. I don’t know. Does not look splendid from this one exercise. But I took quite an extreme ‘bad case’.

    On the upside I don’t know, I don’t trust the numbers returned by the prediction software there.

    this needs more testing, [MDW: Agree]

    Kind Regards,


    • Chris-O 03/10/2011 at 4:09 PM #


      Sorry columns look even worse when posted. Not a usefull exercise. Sorry again.


  2. prabhakar mesta 01/04/2014 at 3:59 AM #

    Strategy can be adopted with small change.
    Keep both strikes same. This will considerably reduce risk and still better(net premium is better) than going for long with one strike lower in the same month
    Pl comment!

    However, when both strikes are the same, the position is no longer called an iron condor. It becomes an iron butterfly.

    That is just nomenclature, so if you prefer to trade the iron butterfly, there is nothing wrong with doing that. Just recognize that the probability of earning a profit is decreased.


  3. Prabhakar Mesta 01/05/2014 at 11:46 AM #

    Dear Mark,
    Thanks for quick reply.
    Looks like I have not put it right.
    In the example above, instead of

    Buy X INDX Jul 1050 calls
    Sell X INDX Aug 1040 calls

    Buy X INDX Jul 880 puts
    Sell X INDX Aug 890 puts

    if I go for following trade

    Buy X INDX Jul 1040 calls
    Sell X INDX Aug 1040 calls

    Buy X INDX Jul 890 puts
    Sell X INDX Aug 890 puts
    I imagine this will reduce when you have to exit near to july expiry if index goes beyond 1040 or 890 and the net premium received will be better than going for actual Iron Condor with buy/sell in the same month.
    If it doesn’t make any sense pl ignore.

    Thanks & Regards,

    First, there is nothing wrong with the trade that you suggest.

    However, this example is not something that traders (especially rookie traders) think about often. Buying options that expire earlier than the options that we sell is just too expensive (high margin requirement) for most. It is also difficult to manage the risk.

    Nevertheless, we can talk abut the example that you posted. When it comes time to exit (no later than at the July expiration), yes, if the market moves far beyond the 1040 or 890 strike, then the spread should reduce in value, leaving you with a profit. However, if the implied volatility is much higher – and that can happen when the market falls below that 890 strike, then the August options can carry some very high time values, making the value of the position very much higher than when we made the original trade. That results is a substantial loss.

    Plus, if the market settles in near either the 1040 or 890 strike, then our July options can expire worthless and the at-the-money August option will be costly. Once again resulting in a losing trade.

    Bottom line for me is that is can be profitable (as can any trade), but the high margin and the scenarios in which a loss will occur makes this trade unsuitable for me. Sure you can try this type of trade if you believe that you understand the risk and reward potential, but I do not recommend it. The ‘regular’ same month iron condor is far less risky.

  4. Prabhakar Mesta 01/06/2014 at 12:53 AM #

    True. We do not have significant margin benefit for spreads here but I fully agree that risk is better managed in regular Iron condor.

  5. Prabhakar Mesta 01/07/2014 at 8:03 AM #

    Consider following 2 Iron Condors:
    Sell X index march 6600 Call
    Buy X index march 6700 Call
    Sell X index march 5800 Put
    Buy X index march 5700 Put

    Sell X index march 6600 Call
    Buy X index march 6800 Call
    Sell X index march 5800 Put
    Buy X index march 5600 Put
    Underlying:6200 for both. Lot size 50

    Maximum risk: 5000 for trade-1: 10000 for trade-2
    Premium collected: Approximately 5000/3 in trade-1 & slightly less than 10000/3 in trade-2
    Considering only the trades allowed to expire, it requires 2 winning trades for each lost trade in both the options. But earning in trade-2 is almost double.

    Considering overall risk factors which trade is preferred & why?

    See blog post on Jan 9, 2014 for a complete reply.

  6. Prabhakar Mesta 01/09/2014 at 11:54 AM #

    Thanks for detailed blog which answered all my questions.