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Iron Condors: Risk Management and Position Size


My query relates back to your post on trading iron condors for a living which I found very informative. Without going over old ground, I am interested to know how traders who do choose to trade 100s of ICs each month on a single underlying manage the risk.

I ask because I found articles such as this one and also remember your having mentioned in the past that you traded much larger size. Any thoughts on this would be great.



This simple sounding question opens the doorway to a wider discussion.

When trading, choosing an appropriate position size is a crucial factor in the trader's ability to practice sound money management.  However, I don't believe size matters from the perspective relating to your question.  The requirement is that each trader use size that is appropriate for his/her account size, experience, track record etc.

If you trade 10x the size, adjustments would also be 10x larger.  You can easily make minor changes to achieve the desired result.  For example a 2-lot adjustment for a 10-lot position  may not be exactly 20-lots for a 100-lot position.  If its 18 or 23-lots, that's merely the effect of rounding.

Let's assume that a trader who has been using iron condors has opened a separate brokerage account that is used exclusively for trading iron condors, and that it has $20,000 in cash.   Important note: This is the amount that our trader is willing to place at risk for this strategy.  It is not his/her entire investment portfolio.

If we trade 10-point iron condors [The call spread is 10-points wide and the put spread is 10-points wide.  The distance between the calls and puts is not relevant], the margin requirment for each is $1,000 [although some brokers require $1,000 for each of the two spreads, and this practice may become more widespread].  The maximim position size for this account is twenty of these iron condors. [Some brokers allow customers to use the cash generated from the sale of iron condors to open more iron condors, but I believe this practice is being phased out].

Go all in?

Let's assume this trader frequently goes 'all in.'  That should not result in a portfolio of 20 iron condors.  It's essential to have cash available to make adjustments.  Adjustments are vital to your ability to prosper over the long term, and many traders (your reference for example) believe that adjustments add to profitability.

With this size account, I prefer to trade 16, or no more than 17 iron condors (and 14 to 15 is a lot more conservative), leaving $3,000 to $4,000 to meet margin requirements for some types of adjustmens.  Some adjustments require extra margin and some do not. Being prohibited from making necessary trades is equivalent to being placed in the penalty box and being forced to close positions (to generate margin room) or wait through expiration.  Most of the time when an adjustment is made, the entire iron condor is not involved.  The half iron condor that is at risk is frequently adjusted while the less risky portion is left as is – at least for the moment.

Don't allow that to happen.  Maintain enough free margin to provide freedom to trade.  Those readers who use portfolio margin instead of Reg T margin ($100,000 minimum account) should always have extra room.  If you use your entire margin allotment with portfolio margin, you are trading size that is far too big for your account.

More cash = more size?

Next, consider the trader with a $200,000 account.  If this trader wants to go all in I'd recommend doing approximately the same thing, but 10 x larger.  Keep in mind that if this trader feels that $200,000 devoted to iron condors is too much, then cash could be transferred to another account.

So to me, size trading depends on more than counting the number of contracts traded. If you have the ability to fund the account, are comfortable trading 160 iron condors simultaneously, don't feel uncomfortable with the money at risk, and have a successful track record of trading iron condors, then this is appropriate size for $200,000 account holders.

Joe, I don't believe there is any true difference.  When the trader can comfortably handle the size traded, and meets the criteria mentioned above, the risk is not too difficult to handle.  The smaller trader's $2,000 risk is the bigger guy's $20,000 risk, but each should feel about the same pressure when that amount is on the line.  The only warning I would give to the larger trader is to be certain that the underlying has enough liquidity to handle his orders. 

It's not enough to say that RUT is very liquid.   I have discovered that OTM 3-4 month options have far less liquidity [I've had several instances for which I was able to buy only one-lot of 3-4 month RUT iron condors.], and would not be comfortable trying to trade 100-lots of a RUT December iron condor today – unless I were willing to trade closer to the money options or accept a less than desired credit.

Worth repeating

I would NOT advise a person with a one million dollar account who is first learning about options to place significant money at risk.  That is true for any rookie.

I'd recommend using no more than $25,000.  In fact, I'd suggest paper-trading to give the new trader some much needed practice.

Joe, once you decided that trading $X is appropriate, and as long as the underlying has the liquidity needed, and if you adhere to the guidelines above, position size should automatically be at an acceptable level. The larger trader is not at a disadvantage.

Extra note:  I have some disagreement with the advice offered in the article that you referred to above.  The major one is this statement: "Condor manageĀ­ment requires adding size when rolling."   Adding size is increasing risk, and is only appropriate under certain conditions.  That's a topic for another time.


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