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Iron Condors and Delta Neutral Trading


Was wondering if you would be able to comment on maintaining a
'delta neutral' portfolio. Particularly, when dealing with condors,
delta can become unbalanced as price approaches one of the wings… is
rolling the OTM spread closer to the money a legitimate strategy?



Condors, 'regular' or the iron variety, are held by traders who believe (or hope) that the underlying asset will trade within a range during the lifetime of the options.  That range is between the strike prices of the options that comprise the position.

Thus, the condor begins with a neutral outlook.

When trading 'delta neutral,' there is no universal definition as to what that means.  Traders with gigantic portfolios have computers dynamically hedging to neutralize as many factors as possible.  That's not for us.

You cannot remain delta zero – you cannot adjust every time the position gains or loses one delta.  Thus, your first decision is how far away from delta neutral are you willing to go before taking action to reduce risk. 

Next, how would you adjust delta?  Some traders prefer to adjust with stock, futures, or deep ITM options.  I understand why many people concentrate on the benefits of this method, but it's not even on my list of possible choices. 

Advantages: Avoids buying options with negative theta.  Premium sellers hate to buy negative theta. The deltas purchased (or sold short) are real, and provide a good hedge when the market continues to move in the same direction.

Disadvantages: Does nothing to solve the continuing problem of negative gamma.  Is subject to a substantial loss when the market changes direction

From my point of view, 'delta neutral' is not good enough when trading iron condors.  Andy, you point out that 'delta can become unbalanced as price approaches one of the wings.'  That's too obvious.  Of course delta is unbalanced when one of you short positions has a delta that moves towards zero delta as the other has a steadily increasing delta.

What you fail to mention is that delta gets out of balance because the position has negative gamma and that negative gamma is accelerating.  Too many traders look to delta as the dominant Greek and ignore the others.  That's why I prefer to adjust by buying options.  To clarify: options have positive gamma.

Perhaps that option purchase is the closing of all, or a part, of the position.  Perhaps it's buying calls or puts.  But please be careful.  It's important to buy options that are closer to the money than the short options in your iron condor.  [Farther OTM options look good, but that's deceiving.  When you know that you will be holding the position for awhile, those FOTM options are going to decay badly.  Unless there is a gigantic market move, they will be worthless when you need them most.]


Is rolling the 'good' side of the iron condor a legitimate strategy? 

Yes, of course it's a legitimate strategy.  The problem is that it does not help.  It's merely an illusion.  A very similar situation was discussed recently

Your 'legitimate' trade would transform a position with one serious problem into a position with one serious problem plus a second problem that's almost as serious.  Read the linked post and try to relate that situation to moving an OTM spread nearer to the money.

The fact that the position would be nearer to delta neutral is deceiving. It actually increases the probability that you will be in deep trouble soon.  Why?  Same answer:  It's a minor delta fix, but increases negative gamma – this time allowing you to get hurt on a decline as well as a rally.


Andy – here is one problem that I frequently encounter  but never previously mentioned.  As a true options rookie, it's natural to ask question one and then question two.  What you must understand is that many answers are connected.  It's important to understand principles and apply them.  The answers are good for more than the single answer to your specific problem. 

Connecting the dots…that's the way to understanding how options work.  


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