What To Look For With An Iron Condor
Anyone who’s driven a minivan knows they need plenty of room to maneuver. So much so that when you make a right turn, a camera will tell you exactly what’s going on on the starboard side. (Yes, that’s a ship reference for this bus-like creature.)
Moms around the world hit the gas with confidence thanks to this feature.
Everyone else can get out of their way. Despite their utility and raw capability, minivans are often overlooked – in favor of other options. The same is true for many new options traders when considering the Iron Condor.
In reality, it’s much simpler than most people think. With the Iron Condor you have three very important decisions – which can be made in a matter of seconds before hitting the gas.
They involve choosing the right instrument, selecting a high probability range and giving yourself plenty of time before expiration.
Picking an instrument that you can count on.
Like a minivan – you just need to get the job done. Whether you’re looking at a stock, index or commodity. In general, you’re looking for something that has low event risk.
Specifically an instrument that isn’t likely to be turned on it’s head by a rogue CEO, bad earnings report or a failed clinical trial. When those market moving events take place – everyone runs for cover. With this in mind, you’re likely looking for an index – and one with extended periods of extension followed by contraction.
Check out the XLB Materials Index below. The trends are fairly smooth, with projectable periods of extension (the arrows up) followed by contraction (the ranges). These are the conditions you’re looking for with an Iron Condor.
Sure, like any instrument, the XLB index has its moments – but their more contained and range friendly. Contrast this with a stock that is very susceptible to an event – like earnings, or a failed clinical trial. Here’s a perfect example of another muscle stock that laid an egg with earnings.
Forgetting the fact that this stock (DTE) has seen more action than a Mustang on a Friday night when dad is out of town… it’s not friendly for an income producing Iron Condor. This is because one swing could bust up the range for the condor and put the trade in trouble.
Giving yourself plenty of room to maneuver.
Since an Iron Condor is a combination of a bull put spread (that sits below current price) and a bearish call spread (that sits above price) – you need to choose the right range. Preferably one that gives price the widest berth possible – while still generating income.
You can give yourself plenty of room going into a trade, without the assistance of a camera, simply by putting the bullish and bearish credit spreads far enough apart with your iron condor trade.
A wide spread becomes even more attractive when coupled with a low volatility index.
Here’s an ‘Odyssey-like’ setup using a condor’s good friend, the SPX. Going out to the November expiration, you take positions above and below price with at least a 100-point spread. In a market that’s trending up, you can give your bearish spread (on top) more room – and go out as far as you like.
Now you just need to do what any practical, risk-averse driver would do. Find the cheapest way to execute the trade in a way that will generate the most income. This is where choosing expiration comes into play.
The window for profit, loss and management.
No one would ever admit it, but you really don’t need to change the oil with a Honda for the first 100,000 miles. Toyota’s are the same way. They’ll go for tens of thousands of miles before a light of any kind comes on.
Something you could never pull off with a classic car… nor would you ever want to try. But there is a friendly calm that comes with knowing that you have plenty of time before having to worry about dealing with a check engine light or brake pads.
Properly set up, Iron Condors are the same. In addition to giving yourself a wide enough range – it’s imperative that you give yourself enough time before contract expiration. At least 30-40 trading days.
In addition to breathing room – this will help increase the credit you have coming with the condor from the start. Take our XLB condor and note the difference between the November expiration and the December expiration.
You don’t need to be a hedge fund rock star to know that a credit of .23 is better than .05 – with more time to spare.
Additionally this will allow you to do three critical things after entry:
Manage either side of the condor if price goes against you.
Avoid upcoming event risk that may surface on the horizon.
Take profits as early or as late as you need to.
Now all you need to do is enter and manage your risk.
Piloting your condor to profits.
Any mom or dad who’s piloted the Odyssey will tell you the drama can come from anywhere, once the ship has left the station. Because of this, you need flexibility and space to keep dogs, older brothers and grumpy two-year-olds alike pacified.
The same is true with the iron condor.
Thanks to the risk analyzer within ThinkorSwim, you can take a 30-second look at an iron condor and know exactly how much you stand to lose or make with the iron condor’s range.
In this case, we’ve moved from the SPX, to its much more affordable counterpart – the SPY. Now working with a fraction of the cost, we can enter a condor with the same price range and a target working-man’s income of $360 at expiration.
A quick look (below) tells the story. As long as price stays within the green box, you’re in good shape.
As the journey towards expiration advances, you have any number of moves you can make should price start applying pressure to either side of the trade. In this case, if the market were to make a big move up, you can simply apply a butterfly to give yourself more room to breathe – on either side, or both.
In any event, you’ve given yourself exactly what an income trade needs: time, space and flexibility.
Limit the speed, risk and drama your account faces by adding iron condors to your trading package. It won’t be as glamorous – but you’ll pay some bills along the way.
Like any minivan filled with kids and groceries, there are any number of moving parts and variables. Having a system and a process to managing this trade will make all the difference.
Imagine being able to evaluate, execute and manage an Iron Condor basically with your eyes closed. It’s closer than you think. And so are the steady profits that will follow.
In exchange for drag races and head turning moments – you can now build a foundation where you pay bills and manage risk. Save the Ferrari or the Mustang for the summer months and date night.
Start taking profits home every night with Iron Condors.