Q and A. Iron Condor Set-up

I received this question from a twitter friend:

"Do you tend to establish Iron Condor positions based on deltas of short options, distance between shorts, minimum credit amounts, other?"

I'm assuming that choice of underlying has already been made because that's a very important consideration. 

Each of these topics is worthy of a separate discussion. 

Delta of short options  

I decided not to use delta as the basis for choosing which specific options to sell.  Instead I decided to focus primarily on something different – the cash credit. 

I want to emphasize that choosing strikes by delta is a sound idea.  It also makes it easier to manage risk, especially for those who prefer to make adjustments in stages, rather than adopt an adjustment method that is basically: hold 'em or fold 'em –

a philosophy that tells you to hold the position until it reaches the limits of your comfort zone, then exit the trade.  I adopted that style in the early days of my iron condor trading.  I now prefer to make several small adjustments, as needed.

When choosing iron condor options to sell based on delta, adjusting may become simplified: if you sell calls and puts with a 10 delta (8 to 12), you can make a stage I adjustment when delta reaches 20 (or any other  number that suits), and then another depending on how uncomfortable you become when holding the position, choose to adjust again every time your short option moves another 5 or 10 delta.  But at some point, there are no more stages, and it becomes time to fold 'em.

Distance between shorts

Some sophisticated iron condor traders believe this is important, but it's something else I chose to ignore.  I prefer to have my short options as far apart as possible, as long as I can achieve my minimum credit requirements.  I want to emphasize that I am not dismissing the importance of concentrating of the distance between the shorts, but I prefer to keep my trading as simple as possible for two reasons. First, it works for me.  Second, this is the easiest path for teaching rookies about trading options.  Once the basics are understood, anyone who wants to take the time can study some of the finer points. 

Expiration month

This is one of my prime considerations.  When implied volatility (IV) is high,
I prefer to buy iron condors that expire in 13 weeks.  I open three-month positions on Monday – after the third
Friday (expiration).  When IV is low, I trade the two-month options. 
Unlike the majority of iron condor traders, I avoid trading front-month
positions because they have too much negative gamma to suit my comfort zone. Yes, they have the most rapid time decay – and that's the major deciding factor for most.

Minimum credit

This is the main driving force for me when choosing specific iron condors to trade.  If I were to put my trading rules into writing, my rule would be: Collect $100 per remaining month per iron condor.  That means when I open a 13-week position, I want a credit of $300.  Sure, I'll take $280 if those strike prices are more appealing.  And when IV is especially high, I may collect $350 instead of moving farther OTM.

But, my general style is to collect $300 and I choose strike prices that provide that sum – going as far OTM as possible.  Obviously there are going to be choices.  You can choose spreads that pay about $1.50 each, spreads that have equal delta, or spreads that are equally far OTM.

I prefer to begin my life as an iron condor owner with spreads that are equally far out of the money.  But, if you have a market bias, this is the time to put that bias into play.

One of the reasons that being exactly delta neutral is not essential is because you can counter those unequal delta by:


Choosing strikes that provide more neutrality


Selling more put spreads, or more call spreads to even the delta


Ignoring the fact that you are leaning slightly long or short


Buying pre-insurance (if you believe in this method) to provide         protection where its needed

There are other factors that can be considered, but as you gain experience, you will discover that it becomes easier to select iron condors that work for you – and that means holding positions that feel right.


4 Responses to Q and A. Iron Condor Set-up

  1. Dear Mark ,
    I really apreciate your post, because it´s clarifier, but there are some thigs that surprise to me.
    Fist is that you allways try to catch the same amount of cash despite the volatility conditions. That means that when IV is too high (last year p.e.), you have less probabilities of finishing your trade OK. I allways have the idea that to adapt to the enviroment was an important thing in trading, so my logic tells me shoult be a good idea trading wider strikes, what means earn less credit but to have more chance.
    For the same reason it seams you should trade more long expiration IC´s when IV is low, but you tell you do it when IV is higer.I think I really need aclarification…
    Wait you had peaceful Memorial day,

  2. Mark Wolfinger 05/25/2009 at 5:11 PM #

    1) When IV is high, like last year, I was able to coose options that were farther out of the money – and still collect the same premium. That made the probability of success about the same as it was when I V was lower.
    2) I agree that to feel more comfortable a trader can always move a litter farther OTM ad accept a little less premium. But this is a choice. Antonio – I’m sure you understand that each of us has a different comfort zone – a place where we feel safe. No one is ‘right’ or ‘wrong.’ You may accept lower a level of risk and a lower posssible reward with every trade. And if you are satisfied with both, then the trade is a good one for you. Another trader may prefer to sell a different strike price.
    3) You don’t need clarification. I trade what feels comfortable for me. If it doesn’t feel good to you, that’s not a bad thing. There is no ‘best’ way to trade iron condors, or any other strategy.
    When you own an iron condor, you are short vega. The long expiration has more negative vega than the shorter-term iron condor.
    I prefer to take a position that has more negative vega when IV is high. This goes along with the idea of sell high and buy low. If IV declines, I’ll earn a good-sized profit quickly. Not every position is opened with the plan of holding for a long time. So, if I am going to close the position early, that reduces the possibility that the iron condor will move into the money.
    The bottom line is that I sell volatility (vega) when IV is high and I buy it when IV is low (double diagonal speads).
    It was peaceful. Thank you.

  3. JCVictory 05/25/2009 at 9:21 PM #

    This is an excellent post. I like having the foundational information that comes from your book and the analysis of the various ways of trading you have in it. But it’s also nice to be able to (in a certain sense) peer over your shoulder and see how a veteran trader makes decisions on opening and closing positions, and the guidelines that inform those decisions. Thanks again for the great post!

  4. Mark Wolfinger 05/26/2009 at 8:24 AM #

    Thanks James,
    I’m sharing what I do so others can modify those actions to find ideas that are suitable for their individual comfort zones.