Trading Iron Condors: One Rookie’s Perspective

Hi Mark,

Thank you so much for this blog, and for your options education material; it is
greatly appreciated. [Thanks, and I appreciate hearing that]

I discovered that I learn best by doing, so in trading options I
am taking extremely small positions (compared to account size) and just
learning to trade by trading.

Please tell me if what I am doing so far
is acceptable in the long run, if the desire is to grow my account
I have several Iron Condor and several Double Calendar positions
for February's expiration (5 weeks to expiration).

I figured that
I will simply close these positions at a loss if they approach my short
strikes, or close them during the last week (or let them expire
worthless) if they are in clear profit.

The percentages of all these trades to expire worthless was above 60,
most of them were around 70. The risk/reward, if closing out for a
small loss before reaching the short strikes appears to be very good on
all trades, somewhere around 1.1.

So if I close them out at a small
loss, or allow them to take close to max profit, because of the
risk/reward, it seems that I will do well in the long run. This seems
too simple, and I wonder if I am missing something.
Obviously I am new, so I know I am missing a lot. I don't even know how
to "roll the position" yet, I only thought to simply close the trades
if they get close to the strikes, which is far less of a loss than the
max loss.

Any thoughts you have would be greatly appreciated.
Thank you again for this blog and education site.



1) Beginning with smaller size is the right thing to do.  Paper trading is not suitable for everyone.

2) 'Acceptable' is not the word I would use.  I'll voice my opinions, but only you can decide what is acceptable for you and your comfort zone.

3) Owning more than one position at a time may be difficult to manage.  But it you overcome that difficulty, it's an excellent method for gaining experience, and thus, learning more quickly.

4) Closing at a loss at some future stock price is sound practice.  It's usually better to consider adjusting the position, but that can wait.  Don't over-burden yourself by trying to learn too many different things all at once.  Taking the small loss is always a reasonable action.

One thing I want you to do is find a calculator that allows you to see the 'probability of touching.'  That calculator tells you how likely it is that one side of your iron condor will reach a specified price during the lifetime of the position.  If you choose positions that have a 60% probability of reaching your pre-determined exit price, then this methodology will not work for you.  You would be closing at a loss far too often.  You would have to either: make adjustments or choose options less likely to force you to exit the trade.

I'm just telling you to look at the numbers to get an idea of what you can expect.  One such (free) calculator is here, but its usage is limited.

If your options have a 30% of finishing OTM, you will find that there is a 60% chance that the underlying will touch one of the strike prices of an option you sold.  That may make things awkward for you.

5) Allowing them to expire worthless is a worthy goal.  Please keep in mind the risk you are taking for tiny potential rewards.

6) The original probability that the options will expire worthless is no longer relevant.  You considered that number when opening the trade.  Now pay attention to reality.  Time passes (good), the underlying moves (not good) and the probabilities change.

7) What you are missing is the inconsistency of the markets.  When markets are calm, that's the ideal iron condor market.  Sell the call and put spreads and buy them back later.

During the recent market debacle, that would not have worked.  In many cases you would have been stopped out of your positions a day or two after opening them.

You can expect to win more often than you lose – over the longer term.  But not all the time.  One bad period can claim a large portion of your account.

8) 'Rolling' is a position-shifting strategy that is used by far too many people and is inappropriate much of the time.

Forget it for now.  You are studying enough variables to keep you busy.  If you do want to add to your education, I suggest you look into 'adjusting an iron condor.'  Rolling is included in that category.  Please remember that those who tout rolling ignore the risks when explaining how it works.

Overall I like your approach.  There are no guaranteed profits and losses can occur over and over again.  Or you may trade for a whole year with gain after gain.  There is no way to know in advance.  My one warning is do not get overconfident if this brings you one profit after another.  Do not decide that you are ready – and then quadruple your trading size.  Grow gradually.  You are in this for the long term, and I guarantee you will run into some turbulence along the way.


6 Responses to Trading Iron Condors: One Rookie’s Perspective

  1. Steve 01/20/2010 at 11:22 AM #

    How about this online probability calculator?
    Usage pretty self-explanatory.

  2. Mark Wolfinger 01/20/2010 at 11:27 AM #

    It looks okay at a quick glance.
    Trade King offer one to customers, and so do other brokers.

  3. Don 01/20/2010 at 1:25 PM #

    Hi Mark, really been enjoying the posts! Have a questions that applies to some of the discussion from the last few days around profits, risk etc…
    I am sure that their is a formula that is used to help assess risk but I am not sure of the equation and was wondering if you have exposure to this;
    Lets say that after looking at a probability calculator you have this choice: a 62% chance that your IC trade will be in the money and you receive a credit of 2.12 -or- a 47% chance that you will be in the money but your credit is 4.05. Knowing the equation and how to apply it to this scenario to this would seem to be an asset when analyzing risk/reward in an IC trade.

  4. Mark Wolfinger 01/20/2010 at 2:03 PM #

    I like the question, but I must make assumptions because you left out the details.
    1) I assume you are referring to an iron condor trade – lacking any description.
    At first I assumed that you were writing about the probability of finishing in the money – and replied per that assumption. I have not changed the reply because they are just numbers and you and replace them with better, more accurate numbers.On later reflection you must be referring to probability of touching. That’s a huge difference.
    If you sell a 10-point iron condor and collect $2.12, and if the probability of finishing ITM is 62%, just donate your money to charity. You have zero chance of winning this game. [If instead, these are probability of touching you are in better shape, but do make the calculations to see if you have a reasonable chance to profit]
    But for the sake of argument, let’s use your numbers (a more realistic number would be <20%)
    2) You want to calculate your expected return. When you place the same wager many times, your results should resemble that expected return.
    Of course, these calculations assume you make zero adjustments. That's because such adjustments change the math
    Calculate the max profit and multiply by the probability of collecting that maximum
    lets assume you make this play 100 times.
    a) 38 times you get max profit:
    38 * 212
    b) you did not mention but let's assume max loss occurs 54%, not 62% (that's the probability that the wing finishes ITM, not the option you sold).
    54 times you lose the maximum:
    54 * 788
    c) The other 8% of the time, the closing price is between the strikes. For a rough estimate, let's just assume the final spread value is $5
    8 * 288 additional losses.
    Add the gains and losses; divide by 100 and that's your expected return. As you can see this is a disaster.
    Then compare with your alternative and compare the results. That allows you to see which has the greater expectancy.
    But in the real world, you would be adjusting trades, and if that's true, you want to keep in mind that the fewer adjustments the better. That does not suggest that you delay adjustments. It means these calculations are destroyed when you change the positions.
    It's good to begin with to a higher profit expectation. But NOT if you would have to adjust so often that your chances of earning money are tiny.

  5. Don 01/20/2010 at 2:22 PM #

    Hi Mark,,,sorry about the ambiguity in my question- I was not factoring in the adjustments because of the changes to the math (as you noted).
    1. I was discussing an IC trade
    2. In (A) you receive 2.12 and 62% of the time that trade expires with you making the 2.12 and 38% of the time losing it all.
    Compared with…
    3. (B) where you receive 4.05 and 47% of the time that trade expires with you making the 4.05 and 53% of the time you lose it all.
    Here is what I was considering – it is obvious that losing anything over 50% of the time loses all you money- I just wanted to see if the equations would help to calculate this. A second issue that arises with the 2.12 is that if you lose all of your money the remaining 38% that will eventually cause catastrophic losses.
    The primary driver through all this is to limit losses, either by exiting or adjustments.
    That’s what I was thinking-EXPECTANCY- that seems to be the determining factor in whether a trader is successful or not.

  6. Mark Wolfinger 01/20/2010 at 3:12 PM #

    First your percentages are incorrect. These an outcome that is neither ‘make the entire premium’ nor ‘lose it all.’ You should not ignore that possibility (finishing between the strikes).
    True – expectancy is what determines your long-term results. Expectancy determines whether you are entering into a trade that is mathematically sound. But we know that the curves have ‘fat tails’ and that the unusual happens more often than predicted. That makes the expectancy worse than your calculations.
    But over and above expectancy, risk management is of such importance that it dominates. Pick your trade on expectancy if that suits you. Nothing wrong with that. But unless you plan to close your eyes and accept whatever happens, the adjustments you do and don’t make will determine whether you succeed or fail as an iron condor trader.
    NOTE: It do not agree: ‘it is obvious that losing anything over 50% of the time loses all your money.’
    If I collect $750 for any wager, and keep all of it 40% of the time, I’d be thrilled to lose $250 the other 60% of the time.