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Trading Iron Condors. The Opening Trade. Part II

Part I

Continuing my reply to Frank's questions:

We are discussing SPY iron condors and making choices about the options being traded.

 

2) The delta of the sold options is important to the probability of success and the probability of reaching a point that requires making adjustments.  It also plays a role in the cash collected.  Thus, it's a key element when constructing the iron condor.

You currently sell options with a 20 delta and one of your complaints is that you adjust too many times before being able to close the trade.

Do not even think about moving from 20 to a higher delta, unless you KNOW it will be comfortable.  You already 'make too many adjustments,' and thus I believe moving beyond 20 delta would be a big mistake at this point in your learning process.

When this experiment is over and you have drawn some conclusions, that's the time to think about (and hopefully discard) the idea of moving to 23 or 24 delta.  Moving to 30 is NOT going to work for someone who already believes he makes too many adjustments.

 

3) Spread Width plays an important role when choosing your iron condors.  From your questions I can see that you don't have any idea how to make a good strategic choice.  You allow time and premium to be the deciding factors when choosing the iron condor to trade.

You decided to trade 10-12 weeks spreads, chose to sell options with a 20 delta, and decided that the cash premium should be roughly $1.10.  Satisfying those parameters gives you no choice in choosing the iron condor.  Thus, for you, it's 4-point spreads.  That is not an efficient method for choosing trades.  It completely eliinates any judgment on your part.  It ignores your comfort zone (which is something you now realize). Let's see if I can help you make better decisions.

Here's a nuts and bolts idea of how to select your spread width, along with some commentary:

  • Did you know that the 4-point spread is equivalent to owning each of the adjacent 1-point spreads?  in other words, when you trade the 128/132 call spread 50 times, you really traded:
    • 50 of the 128/129 call spreads plus
    • 50 of the 129/130 call spreads plus
    • 50 of the 130/131 call spreads plus
    • 50 of the 131/132 call spreads
  • The only difference is that you save the commissions of trading each of these four spreads by trading them all at one time.  You MUST understand that this is true.  

You cannot trade options without grasping this basic concept:  Trading each of the four spreads is equivalent to trading the 4-point spread.  The risk/reward is identical. 

When you understand the truth of the above, then I hope it becomes clear that choosing the four-point spread is almost guaranteed to be a big mistake. Why?

I understand choosing a spread based on how much premium is collected.  However, people who do that (me) already know the desired spread width.  They do not allow the need to collect a certain premium define the spread width.

In relative importance, spread width comes in far ahead of premium. 

You are not thinking about the position. You made your 'line in the sand' requiements and tht's the end of the thought process.  Trading by rote or very strict rules is not viable – unless you already know that you will like the position forced upon you by the rules.  Clearly that is not the case here.

  • Look at each of the four spreads as an independent trade
    • Do you want to sell the 128/129 call spread?  I know you chose it because the 128C has a 20 delta.  But do you really want to sell this spread?
      • Is the premium sufficient for the risk?
      • Next, do you really want to sell the 129/130 spread?
      • Next, do you want to sell the 130/131 spread?  The premium is getting fairly small
      • Last, do you truly want to sell the 131/132 spread?

I cannot answer any of these questions.  My point is that it is highly unlikely that you want to sell each of these spreads.  If that's true, then sell only the spreads you WANT to sell. Do not sell any other spreads just to get the premium where you prefer it to be.  It forces you to make a BAD trade (BAD because you do not want to own it).

Instead of focusing on a 4-point spread to collect the 1.10 premium, concentrate on the spreads you want to have in your portfolio.  You may decide to stick with the 20-delta and sell only the 128/129 C spread.  Or you may prefer the 128/130.

You also seem to have latched onto the .20 delta option as if it were a requirement.  Perhaps you would feel more comfortable choosing only the 129/130 spread or the 129/131.  You would adjust less often, and that may solve your combination of problems.

Please give serious consideration to each spread that makes up the call and put portions of the iron condor and then choose to trade only the spreads you like.  For margin and risk purposes, it's best to keep the put and call spreads at equal width.  But it is not mandatory.

4) Multiple iron condors with same expiration

You must understand that you already have multiple iron condors in your account.  However, the fact that you don't 'see' the equivalent positions in your account leads you to believe that you own a single iron condor trade.

Nevertheless, I understand what you mean.  If you sell the 130/131 call spread and also sell the 132/133 call spread (and something similar on the put side), then you 'see' two different iron condors.

There is nothing wrong with doing that.  I do that all the time.  However, I initiate the preferred iron condor.  Then if I want to add to my portfolio, I'll choose a spread that is appropriate at the point of entry.  Many times that's an iron condor with different strike prices.  If you plan to open them simultaneously, be absolutely certain that you WANT to own each position and that you are not making the trades because you like the idea of owning a variety of spreads with the same expiration.

 

Bottom line: I cannot overemphasize that it is bad policy to choose spreads that fit some preconceived notions. 

As a rookie trader, you have to observe more trades as you gain the needed experience.  But you can, and I strongly recommend that you do, trade positions with the risk/reward that places each trade squarely within your comfort zone.  When you are more experienced, you can try to expand that zone.  But not now.  Now you are learning to trade options and your primary goal is to survive.  It's great to be earning money on a steady basis.  But this game is not quite that easy and I'm pleased that you are not getting overconfident.

Thanks for the excellent questions.

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