Tag Archives | delta neutral

Recent Iron Condor Trading Activity

Iron condor traders have faced some interesting decisions as the market continues to rally.  Those who adopted very bullish stances have fared well.  Those who trade market neutral iron condors have faced adjustment decisions.

I understand that my personal trading results differ from yours, however we may have faced similar decisions.  This is how I'm currently situated.

I own RUT iron condor positions with Nov and Dec expirations.  I own a very small January position because I decided to save my free margin for position adjustment, rather than for making new trades.

Each trade was initiated with a minimum premium of $300.

a) I bought all of my Nov put spreads when they became available at $0.15 and $0.20 per spread

b) I've already covered some Dec put spreads at the same prices

c) Not predicting, but fearing a large market selloff, I did not open fresh put spreads when covering those cheapies.  In retrospect, that has cost real cash, but it's not my style to sell new spreads when covering the original trades.

This (idiosyncrasy?) violates the principle of remaining delta neutral.  Thus, I have been trading with short delta as the market has been rising.  To avoid large losses in the rising market, it's necessary to stay ahead of the game and adjust positions.  In some situations, it pays to exit the trade and take the loss as the adjustment.

d) Thus, the bulk of my activity has been concentrated on protecting my call spreads.

Here are two sample (the volume mentioned below represents the lowest common denominator, not the actual trade volume) trades:

i.  Kite spreads. Here is one example

Buy one Nov 710 call; sell three 740/750 call spreads

This provides a much better upside, if the market surges.  It adds current + delta and gamma.  That's all good.  However, if the whole position is held into expiration week, the negative gamma becomes worse near RUT 740. 

This type of kite allows for the sale of four 740/750 spreads, but I'm selling only three to reduce risk

This trade was made when RUT was near 690

ii. Buy one Dec 730/740 call spread;  Sell two Dec 760/770 call spreads.  Traded when RUT was near 710

This type of trade is not appropriate for all.  It works under two conditions.  The first condition is that your account is not already exposed to major risk.  By that I mean that current risk – before and after the above trade is made – is within your comfort zone.

It is a poor risk management technique to convince yourself that although the 730 strike appears to be vulnerable – that 'surely the 760's are safe.'   When the market moves as it has been moving, you never know how far the move may extend.  There is no sense making predictions. 

Because I have extra room (by choosing not to open January positions), I'm using some of that extra margin (and risk) availability to make this trade.

Iron condor traders may choose among many types of trades to reduce risk,  Tomorrow I'll discuss some possibilities.



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Asymmetric Iron Condors

Previously posted at InvestorPlace (formerly) OptionsZone



Could you comment on my line of reasoning for the role of volatility in options pricing when choosing strikes of Iron Condors or

As a rule of thumb,
implied volatility of any underlying stock or index increases when the
underlying is down – much more so when it is down a lot in a short time.

steady increase of the underlying shrinks implied volatility.

Say an index is at 330 and has been moving up and down for
some time between 305-310 and 345-355 zones. I want to trade an IC at
290/300 put side and 360/370 call side, say 5 contracts, 2 months out.

As a scenario, if the underlying rises steadily, the short call spread comes under pressure, but only gradually. The price increase for
that call is offset by the implied volatility seeping away.
Not so for the put side.  If this index dropped at a similar pace, it would come with a rise in implied volatility. The short
put spread would rise more rapidly in price.

This makes protective actions
expensive, say buying a 305 put or closing the
entire put position.

Would it be recommendable to set up IC's that seem
asymmetric at first glance? Above example, choose 280/290 puts, or even lower. In terms
of the probability that either the short put or short call is touched,
this position would actually be more symmetric.

I feel making my IC
asymmetric offsets the asymmetry of volatility.
Is this a recommendable general rule or do I miss anything?

Thank you,

Best Regards,

Chris (Holland)


The slightly longer version of Chris' comment can be found by clicking here.  

1) Yes, as a general rule of thumb, your observations are accurate.

2) I have mentioned the idea of asymmetric iron condors previously.  The way I see it, most traders want to own a market neutral position when opening IC trades.  And most people assume that being delta neutral fits the bill.

However, there are alternatives. 

It's perfectly reasonable to elect to be 'distance neutral.'  That means the short put and the short call are equally far out of the money, regardless of delta.  The iron condor may appear to be asymmetric, but that is only true if you look at deltas.

Another choice is to be 'dollar neutral.'  That means the trader collects an equal premium when selling the call spread and the put spread.

Then, there is the idea you are suggesting.  I would call that 'risk neutral.'  Making your best guess as to how the market will price the options (i.e., guess what implied volatility will be), choose an iron condor so that you lose the same number of dollars if and when the iron condor moves up or down by a certain amount (points, percentage, or standard deviations).

Chris, it's fine to set up an iron condor that meets your criteria for owning a neutral position – and especially a position that fits within your comfort zone.

There is even the opportunity for a 'bias neutral' iron condor in which you allow a market bias to dictate whether you accept more risk on the put side or the call side.  This is not really 'neutral' but if you have a market opinion, this is one way to play it.

Symmetry is often in the eyes of the beholder.  If you believe the position meets your criteria for risk and if you manage risk according to those criteria, these asymmetric iron condors should help make your trading more efficient.


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Quandary: The Logic of Trading Iron Condors

This post originally appeared at The Options Zone


I'm an iron condor (sell call spread and put spread with
same expiration date
on same
underlying asset
) trader.  I understand the risk and reward potential for these positions and recognize that skillful risk management is crucial to my success when trading these negative gamma positions.

The best part of trading iron condors occurs when the markets are calm and no adjustments have to be be made.  In those rare situations, I eventually cover my shorts and bank the profits. 

In the current volatile market, there is little peace.  Depending on the strike prices chosen, iron condor traders are making frequent adjustments to their positions.  That thought took me down a strange path.  Looking ahead by a few days, it occurred to me:

  • It's very likely the underlying asset will move sufficiently so that the iron condor is no longer delta neutral (due to negative gamma)
  • If that happens, the position will have lost an unknown number of dollars

That leads to this quandary:  Why should I trade the iron condor today, when it is very likely to trade at a higher price soon?  Why not simply wait for that higher price to enter the trade?

If I were to follow that unusual line of thought, I would proceed as follows:

1) Choose a specific iron condor and estimate the premium I can collect now

2) Do not enter the order.

3) Wait until that trade is losing money: i.e., I can collect a higher premium 

How much higher?  How long to wait?  I don't have answers to those questions.

4) Open the trade and collect that higher premium.

Obviously this trade is no longer delta neutral, nor is it likely to be the trade i would select at the future date.  But it's the position I would normally open today.  By waiting I get to make the same trade at a better price.  Doesn't that have to be better than owning it at a worse price?

By the time I enter the trade, the position may require a minor adjustment. No problem.  Open the slightly adjusted position in place of the original. 

To adopt this idea, I cannot allow much time to pass or I may miss a profitable trade opportunity.

Thus, the quandary:  Why trade now?

5) By collecting that better price: 

I have more risk than I prefer when making a new trade, but to compensate, I collect additional premium.  The bottom line is: I would be facing this extra risk had I already owned the position, so why not own it several days later – with the same problem, but at a better price?

Another point to ponder:  Is this truly taking on more risk?  By not opening the position sooner, I had zero risk of loss (or profit) during the time that I had no position.  The easiest method for avoiding a disaster is to be out of the market.   Is the benefit of a few days on the sidelines enough to offset a bit of extra risk when the non-neutral position is opened late?   I believe it is.

6) And if that quandary is not sufficient, why not take an additional step?  Instead of waiting, open an unbalanced iron condor right now.

I would be forced to make the trade with a choice of extra upside or downside risk, rather than allowing the market to force that decision upon me. 

I can go even farther by opening half the trade with an upside bias and half with a downside bias.

The real question is:  does it make sense to open an iron condor position at the time I am ready to trade, or is it better to either:

  • Wait for a better price
  • Open two unbalanced IC now, in place of a single, neutral IC


Opening positions that are not neutral when lacking a market opinion feels wrong.  Yet, the probability is very high that I'm going to have that position anyway. And soon.

Why not take advantage of that by opening those two non-neutral iron condors at a better price now?  (I do that by choosing an iron condor that is already unbalanced.  Because it is no longer neutral suggests that it is losing money.)

Bottom line:  It appears that I can take advantage of the fact that whichever iron condor I choose is likely to be a (hopefully temporary) loser at some point in time.  By waiting for it to become a loser and delay initiating the position until that time, a better premium is collected.

Logic tells me this is not sound reasoning.  Yet, I cannot find the flaw(s) in my argument.   A quandary.



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Delta Neutral Stock Replacement

Hi Mark,

If wanted (roughly) the same potential return of a stock with limited
risk, and the ITM option's delta is 80, would raising my position
size by about 25% do that?

To be clear, I'm thinking in terms of options' implied leverage and
their implied stop loss as an alternative to buying stock and entering a
stop loss order. So if I would have bought 1000 shares of stock, I
would be buying 10 options instead, and am wondering if buying 12 or 13
would bring the delta up to 1000, as it effects my account.

Hope that makes sense.




Yes Josh it makes sense. Owning 12 or 13 options with an 80% delta gives you almost the same 1000 long deltas.  Most stock replacement strategies replace 100 shares with a single call.  Your plan provides the obvious benefits on a rally or a big decline, but there is an added benefit (the 'implied stop loss').

So to have
'roughly' the same return (measured in dollars not in
percentages), you can substitute the calls for stock.

I'm sure you recognize that these deltas change as the stock price changes, due to positive gamma.


Every so often, on a rally, the plan should be to sell one call to reduce delta back to 1000.  Obviously, you would have only 10 calls remaining when the delta reached 99 or 100.


But it's not quite the same on the downside.  If you buy calls on a decline – to get back to 1000 delta, you will fare poorly when the stock continues to go lower.  I would not buy extra calls.

Is this a smart idea?

The negative:  you must pay for time decay. 

The positive: That time decay is your cost for reducing downside risk.  Only you know the value of that risk reduction, but it seems to be a good idea to me.

There is one HUGE advantage to using a long call option instead of a stop loss order.  With the stop, you are out on a decline.  With call options, you are still in the game if the stock suddenly reverses direction, after ticking the stop loss price.  And there is no whipsaw and no extra cost.  You bought the calls – and this is one of the benefits of owning calls in place of stock.

This advantage makes it worthwhile to pay that theta decay.  And this is truly much better than the traditional stop loss.  I'd be willing to pay a bit extra in daily decay to own this position.

Good question.


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More on delta neutral trading

Continuing the discussion on whether delta neutral trading is truly as 'ideal' as its adherents claim it to be.

Hi Mark,

If I recall correctly, there's some empirical research out there
suggesting that being short volatility on the index has an
edge, I would think that staying (roughly) market neutral is the
simplest way to express that edge without introducing too many
variables. Trading long I think would mean abandoning that edge, maybe
that's what makes you uncomfortable? 

Jason T,

Over the years, implied volatility on indexes has been higher than realized volatility. There is no way to know if that
will continue to be true.
  However, being short index volatility has resulted in the seller having an edge.   

Some try to exploit that edge and still remain vega neutral.  They buy individual stock options (obviously choosing appropriate, lower IV vs. realized volatility stocks), and short index volatility.

I don't see how taking a lean of a few hundred deltas equates into giving up that edge.  If I choose, I can remain fairly Greek neutral, except for that small delta 'lean.'  At this point, it's merely a discussion, not something I plan to do.

Do you truly believe that being just a little long (or short) delta removes the edge gained by being short index vega?  I don't see why that should be true, and remain unconvinced.

From a more personal experience, a couple of folks I know who trade with
a directional bias very very well tell me that entry is a key
determinant in making money. I'm absolutely terrible at timing these
things, and every time I've tried I've lost money. I don't seem to have
any edge in that area, and no real reason to think I will develop a
sustainable one anytime soon.

I am confident that while having to
constantly adjust/roll my positions is painful, I think I have an edge
that I can focus on.
It may also be a time-frame thing, most directional traders I've seen
seem to operate on shorter time frame (daily, hourly, sometimes even
minutes) than I'm comfortable with outside of having a machine do it for
Goodness knows that if I were smarter/more skilled I'd be swinging
directionally, but as Clint Eastwood said, a man's got to know his

Very appropriate quote.  Suitable for anyone who participates in the markets.  Know your limitations.

Traders who trade with a directional bias tend to be very short-term traders for good reason.  The bias tends to be short-lived.  They see a chart pattern or some other data that suggests the next mini-wave of trading will be on the buy or sell side.  They play it, and it ends quickly.  In that scenario, the timing of an entry is critical.

Do you remember that old Merrill Lynch adage: 'I'm bullish on America'?  That's for investors.  No trader can have a multi-year opinion and expect to use it profitably. 

Other directional traders may have a longer-term horizon and follow the trend.  Trend following is an entirely different approach that I do not discuss at Options for Rookies because it pays to be 100% long or short when playing the trend.  As has been pointed out, most of the time the trend is too short to be profitable. 

The big decision when 'trending' is understanding when the trend has ended – and not stubbornly holding onto directional trades.

I agree that I have no edge in the area of timing an entry, and don't pay a lot of attention to that aspect of trading.  I know that's heresy to those who follow charts and use technical analysis.  

A trade either does, or does not, meet my requirements.  If it does, I enter the order and must rely on money management skills to protect my assets.  That's certainly less fun that making a trade, taking the profits and looking for the next trade opportunity.  But you and I know our limitations, and make no serious effort to time entry points. 

Eric Falkenstein at Falkenblog has a theory that risk is
actually relative, and the biggest risk is not that we underperform our
markets, but we underperform relative to others (or even worse, people
we think less of). Do most of the folks you talk to trade directionally
or market neutral? When markets are one way like this, I always think
about going directional, and when markets are stuck, the trend traders
all think about going market neutral.

This is a key psychological factor.  Perhaps the only factor.  As a market maker, I always said that all I want to do is make my share of the money.  I wanted to earn a living and it doesn't matter how well any other traders in the pit perform.  But I'm very competitive, and when I did not make the most money every year (and possibly I didn't in any year, despite a couple of good ones), something was missing.  That's a bad attitude!

But I get it.  Bull markets are enjoyable for the vast majority of traders, yet for my entire trading career (as a market maker), I prospered in bear markets (1987 being an exception) and lost money during bull markets.  That's sad.  But, it's one good reason for being market neutral, now that I'm an individual, trading from home.

But I look at the recent huge bear market, followed by a large bull market and I took advantage of neither.  How can that be a good result?  When RUT moves 34 points in two days (Mon and Tues), a 200 delta lean may not be big money, but it represents about $6,800.  And, if not stubborn, the potential loss is far less.  At some point, I'd give up those 200 deltas.

Don't get me wrong, I would not have been in at the bottom and may have even sold out most of those extra deltas along the way.  But why struggle with iron condors when it's easy to take a lean?  When the upside already looks risky for my portfolio, an extra few deltas is cheap insurance.  

Buying a kite spread or extra call option gives me positive gamma and negative theta, but it does provide a good upside boost over most price ranges – at little cost.  What's so bad about that?

To me this entire discussion evolves abound a situation without a good solution.  So neutral I remain.

PS Outside this blog, I don't have
detailed conversations with many traders, so cannot answer.


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