The Best Timeframe to Trade Iron Condors

[Voltrader 10]

Selling the iron condor has become a very popular strategy amongst retail traders. It seems like every time I open my gmail account, I’m getting offers about passive income trading with high probability condors from sales vendors.

 

The truth is that the Iron Condor is a much more nuisance strategy than most people would like to admit. Iron Condors consist of two vertical spreads: the put vertical and the call vertical. These spreads can be sold near the money or farther out of the money. The goal obviously is to buy the trade back for a small debit.

 

Expressing a view of volatility

 

What most retail traders fail to realize is that the Iron Condor is not a price only trade. It is primarily a vega trade. Vega is the trade’s sensitivity to changes in implied volatility. The biggest misconception that a lot of practitioners have is that the only threat to the trade is delta and/or gamma. It has been my experience that selling Iron Condors every month mindlessly has a negative expectancy. Failing to take note of this can drive you crazy, and have you locked into the trade until the day of expiration. Since volatility is mean reverting, the goal should be to sell condors into rallies in Implied Vol.

 

Timing

 

Options, as we all know decay. They shed value each and every day. However, all options do not decay at the same rate. It is really important that retail traders understand this concept. Out of the money options decay at much different rate, than options near or at the money. Here is a graph that my buddy andrewfalde posted on his site:

 

 

As you can see, when you sell OTM( out of the money ) options inside of 30 days you are basically locked into the trade until expiry week. The majority of the theta decay has already taken place by the 30 day mark. The real sweet spot for capturing pure theta is between 60-55 days from expiration. Your delta and gamma exposure is much smaller, and you can take advantage of the otm options shedding their value.

 

Keep in mind, everything in options trading is a trade-off. There is really no right or wrong way of doing things. If you are a highly technical trader, then selling inside 30 days to expiration may very well work for you. The truth is that whatever strategy you choose, you must educate yourself on the pros and cons. Personally, I like to sell .15-.28 deltas 60 days out only when IV rallies. That’s a personal trade plan decision that I made based on my own risk tolerance levels. We all have to do what is best for our OWN trading accounts. Hope this helps.

 

Green Trading everybody!!

Voltrader

[OptionsTrader 10]

Thanks for sharing your approach to trading Iron Condors. I have been quite successful trading Iron Condors, however I have a strict set of trading rules when making these trades. I like to take sell .10-.15 deltas 30 days before expiration. Any more time allows for too much price risk. I also don't hold until expiration. I take profits at 50 percent of the total profit potential. Some may consider this to be overly conservative, but it allows you to take consistant 5-10% per month profits while mitigating price risk by closing positions no later than 7 calandar days before expiration or before the underlying price starts to move against you. Check out optionstradingresource.com for more on strategies and trading rules. Every experienced trader will tell you that trading rules and money management are the most important aspect of trading. Again, thank for the input.

 

Happy trading!