Iron Condor The TradingCowboys Way

Note: We have traded the Iron Condor many times in the past with overall success. However, we used to risk +/- $900 per contract in an attempt to collect +/- $200 in premium per contract.  This was an intolerable risk-reward-ratio for us regardless of the win/loss ratio (commonly win 8 months out of 12), so we discontinued trading Iron Condors based on these previous parameters.  We are preparing to begin testing a similar strategy with a modified ratio of 1:1/1:2.

The Iron Condor is really just selling two options positions one over the current price action and one under it, then combining those positions with two other options positions that we purchase.  The combination part is just applying a hedge position to create a maximum (capped) loss, in case your position goes against you.  If you could be sure that the price would stay in the range between the Iron Condor wings (the sold positions), you would sell 1 position outside the range to the upside (a call, which would expire worthless in about a month) and 1 position outside the range to the downside (a put, which would expire worthless in about a month) and there would be no reason to combine the purchase of the call/put 1 or 2 strikes further out.  They are just there to cancel/cap some of the loss, if the position goes against you.

The following link goes through a typical setup using the thinkorswim charts and analyze tabs for an Iron Condor:

Iron Condor Rules:

Between 30 and 35 days prior to expiration, evaluate strike prices on the SPY, DIA, and IWM (also based on daily evaluation of pivots, support, resistance and current trends of the combination of the charts).

Use the call and put option strike prices with deltas closest to 0.10 and -0.10 respectively.  Set up a potential Iron Condor using these strikes as the sold options.  Move two strikes away (further out) from these strikes as our bought options.

Using the Analyze tab in thinkorswim, check the potential position for at least a 10% return on risk (i.e. if we are trying to collect $20, make sure the maximum loss is no more than $200, $100 to $1000, and so on), based on the price indicated at the nat.

Determine your acceptable risk (stop) prior to placing the trade either 1:1 or 2:1, based on your personal risk tolerance.

Make sure both sold strikes are outside the Bollinger bands (two standard deviations) from the current mean of the price.  Also, make sure the sold strikes are outside (or as close as possible, maintaining 10% ROR) to the standard deviation indicted by the 68% Probability ITM setting on the TOS Analyze tab.

If/when ALL parameters are met, place the trade try to sell at the mid instead of the nat.  Wait 20-30 minutes before adjusting closer to the nat to get a fill.  Many times, the price will move and fill at the mid price.

Monitor the position until it can be removed for a profit, including commissions.

Remove the trade if it goes against you in an amount greater than your predetermined stop on a closing basis.  DO NOT allow it to go beyond this point.  Take the trade off, preserve your capital, and wait until the next month to do it again.

Potential adjustments:  calendar spreads, butterfly spreads

We will continue to add to this section as we further develop our particular strategy.

Risk Disclosure:  Content on this site is provided for educational purposes only and is not intended to be relied on to call trades or to give specific guidance on making any trading or investing decisions.  Proceed at your own risk.  Please use your own judgment and/or consult your own financial advisor.  Past performance is not necessarily indicative of future results.