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Trading Iron Condors. The opening trade Part I

Today's post covers an important and popular topic. Choosing the parameters of the original iron condor is a complex issue.  There are strikes and expirationn dates to choose.  Then there's the right underlying and  spread width.  For some traders, there's the timing element.  A fascinating topic and I have much to say.


Here's a recent series of questions:

Hi Mark,

Thank you for maintaining this blog.  your comments have been very helpful to me.

I have been trading condors since April by using SPY at 10 to 12 weeks from expiration, selling the short strike at a delta of .2, I target collecting a premium of $1.10+.  This results in long position at 4 points from the sold position (i.e. sell a 128 call buy a 132 call).

I make partial adjustments if delta reaches .35 by reducing the spread to two positions [MDW: I have no idea what 'two positions' means], reducing the position or converting to a calendar or even a vertical. I have been making money, but at times I feel as if I maybe making too many adjustments (two to four before closing).

I try to exit the positions at 4 weeks to expiration. I found that the $1 premium collected allows me to make adjustments yet still have a profit. My usual position size is 50 to 100 contracts per leg, but at this time, I believe [emphasis added, MDW] the 4 point spread range maybe too risky.

I am considering reducing my exposure from a spread of 4 to one or two. I am using the thinkorswim site and found that if I stay with a .20 delta for the short strike and choose a two-point spread, then premium would be about 70 cents.

To go to a .30 delta and a one-point spread, I would collect about 50 cents; or at a .4 delta the premium is 70 cents.

I am also considering multiple condors with same expiration month such as selling SPY 130/131 and 132/133 call spreads. [MDW: Frank then goes on to offer adjustment ideas, but that's off topic] 

I am most comfortable trading SPY.  I tried using SPX once and got burned by waiting to long to close the trade, and its not as liquid as SPY.

Mark any suggestions you can provide or other factors I should consider would be appreciated.
Regards,
Frank

***

Happy new year Frank,

I like the questions and the fact that you are seriously considering several alternatives. By the way, you got burned with SPX because you waited too long.  That has nothiing to do with preferring SPY.

There are two problems for me.  The answer you seek requires a great amount of detail, and could easily fill a couple of one-hour webinars.  I simply don't have the time to provide that much detail.

But more importantly, I would be responding from my personal perspective and you must truly trade something that fits within your comfort zone.

In responding to the questions, I'll take the path of offering advice – that I trust will help you find the answers. The comments go directly to your questions.

 

Experience

Let me begin with some comments:

  • If you believe it is too risky, that's the end of the discussion.  In this matter, do not let anyone try to convince you that your decision is foolish.  'Too risky' is not a fact.  It is an opinion, and yours is the only opinion that counts.  It so happens that I don't like your 4-point spreads, but more on that later
  • You have too little experience to be rock-solid with a single trading idea.  I don't care how much money you have been making or whether you have been a winner in each of these months.  You have not seen enough to understand how the markets truly behave over an extended period of time
  • Experiment now, as you plan to do.  If some of the experiments feel uncomfortable, then you have only two choices.  Don't trade them due to the discomfort, or use a paper-trading account for those trades
  • The fact that you have been trading 50 to 100 condors per month is irrelevant.  For most newcomers, that's far too much size.  if you are trading an account with $10,000 to $12,000 – then your size is egregiously large and you are in way over your head with risk.  On the other hand, if your account has one half million dollars in it, then your size is truly peanuts and you are indeed learning to trade on a small scale. What's more important than contract size is the percentage of your account value that is being tied up in margin for these trades.  I'm not asking you to disclose that, just trying to tell you that contract size says nothing
  • The item that I like best about your inquiry is that you show some fear, despite profits.  That's excellent.  One of the best ways to go broke in a hurry is to become overconfident.  I'm pleased to see that you seem to be avoiding that
  • While making these experimental trades, make it easier on yourself by cutting position size.  Maybe 20 to 30% fewer spreads.  Why? Less pressure while playing with alternatives.  Yes, less profit potential, but the learning experience should prove to be beneficial for a long time, and it pays to do it correctly.  With less pressure to succeed and more time to make observations, you get to study the alternatives in a calmer atmosphere

to be continued…

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