Why Iron Condors Are the Worst Option Strategy

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Why Iron Condors Are The Worst Option Strategy

 Written by Adam Beaty

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Popular Articles The title of “worst” may be a bit harsh, but it is well deserved. A lot of option traders see the iron condor as the holy grail of option strategies.

The Best I mean, who could blame them? Option Play For How many option strategies offer twice the return for low margin, give you limited risk, Earnings and allow you to profit over a broad range of prices? Few strategies fit that bill. 7 Factors That Affect Spiderman said it best, “With great power comes great responsibility.” An Option's Price It is true that the iron condor wields a lot of power, but it is the lack of responsibility in the options trader that makes it such a dangerous weapon.

Top 5 Too many options traders get into an iron condor thinking it is the key to riches, but too Option often they get into the position at the wrong time, manage it poorly, and then take on Trading Books (Plus significant losses. A Bonus Book) This must come to an end. We must return the iron condor to its place at the top. The How To Properly Enter An Iron Condor Complete Guide On We can look at “how to enter” in several different ways. First, we can talk about timing, Option both from a volatility and price perspective. Then we can look at entering from an order Theta type standpoint. Both will be keys to success, but timing is the most important.

Why Iron Most options traders enter iron condors because they think the stock price will remain in Condors a range, or, even worse, that the stock has run up, is overbought, and needs to come Are The down. Worst Option Strategy This is the worst possible thing you can do.

What you will soon learn, if you haven’t already, is that a stock can stay up longer than you can stay sane.

You don’t want to base your decision to enter an iron condor solely on the stock’s price. Instead, you want to focus mainly on implied volatility.

An iron condor’s structure is made up of two near money options that are short, and two deeper out-of-the-money options that are long. "Last year The Option We don’t care about the long options. They are there to limit our risk in the position. In Prophet absolutely the end, we hope that they expire worthless. transformed my trading account from one where The short options are the key. All options are going to be affected by the changes in monthly gains were often implied volatility. As implied volatility rises, our option prices will increase; as volatility uncertain and unpredictable drops, so does the option price. into one where a steady monthly income stream You want volatility to drop when you have an iron condor on. This is vital to your through OTM credit spreads success. bought amazingly steady This means you don’t want to open a new iron condor when volatility is at a low. Follow and consistent growth." me down this rabbit hole.

-Andrew B. Low volatility means your option prices will be smaller. With low option prices, you are going to have to bring your options closer to being at-the-money to generate any real return.

When you do that, the range your stock must remain in becomes very small. Once your position is that close to being at-the-money, it only takes a small move in the underlying to put your position at a loss.

This is the number one killer of iron condors, and portfolios, for that matter.

Most traders will place an iron condor without giving a second thought to volatility. This is especially true when you place an iron condor after the stock has run up to new highs. A stock that is running higher also has dropping or extremely low volatility.

Low volatility is not suitable for you, and neither is rising volatility. As we stated above, rising volatility increases option prices. If you already have a position on, your short option prices will go up, and it will result in a loss.

Ideally, you want high volatility that is falling. This is going to give you the best of both worlds. The high volatility will generate high option prices and allow you to get a position that is deep out-of-the-money. This will give you a wide range for your stock to finish in and increase your probability of success.

High volatility isn’t always enough. High volatility can continue to rise, or worse, it can bring on a lot of movement in the underlying. Volatility that is falling is a good sign that the stock is not moving. This is the perfect scenario for your iron condor.

When you have finally found falling volatility, it is time to place your trade. There are several ways you can do this.

First, you can place the iron condor as one big position, that is, all four legs at once. The pros of this method are that it is easy and can be cheaper on commissions. If you are placing one big trade, you set one price and execute the trade. From there, you sit back and wait to see if your order gets filled.

The other way to place an iron condor involves trading two spreads. Iron condors are made up of either a long strangle and short strangle or a bull put spread and bear call spread.

You don’t want to trade the iron condor as a long straddle and short straddle. Even though they make up an iron condor, straddles offer a very different trade than you originally intended. An iron condor is placed so you can make money if the stock doesn’t move.

A long straddle, on the other hand, needs a lot of movement in the underlying to be profitable. A short straddle requires only a little movement like the iron condor, but it remains unhedged and therefore it has unlimited risk.

It is best to trade iron condors as a bull put spread and bear call spread. If you were to place a bull put spread, but no the bear call spread, you still need the stock to remain above your strike prices. Your position is hedged and even though not an iron condor, it still has the same properties. The Truth About The Calls

Most the time you are going to lose money on the call side of your iron condor. This happens for several reasons.

First, the call spread will be closer to at-the-money than your put spread. This deals with volatility skew and the natural behavior of humans and their desire to protect their portfolios. Majority of investors carry long portfolios (they are long stock versus

Majority of investors carry long portfolios (they are long stock versus short stock), and they need a way to protect these portfolios from a market or stock crash. People will defend their portfolio with the purchase of put options. Put options gain value when the stock declines, so naturally, this makes sense. The purchase of options or stock will drive the price higher. This is the basis for skew and why you can trade put options further out-of-the-money versus call options.

This is the basis for skew and why you can trade put options further out-of-the-money versus call options.

Because the call spread will be closer to at-the-money you will have a negative delta when you open an iron condor. A negative delta means your position will lose money when the stock rises. Even though the stock price may still be within your range of prices or strikes, you will have unrealized losses on your hands. These losses will continue to add up as the stock, continues to rise.

This is terrible news for you because now the loses are climbing, and the stock price is getting closer to your strikes, which puts the whole position in jeopardy.

Second, and we alluded to this before, most traders place iron condors when a stock has risen for an extended period. They think, foolishly, that the stock has gone up too far too quickly and it needs to come down. If only that were true.

What usually happens is that a stock will continue on its current trend, giving no thought to how fast it has risen, or about your iron condor.

What can you do?

Don’t be afraid to place an iron condor when the stock has dropped. This will give volatility a gentle little push and allow you to trade call spreads further out-of-the- money.

Leg into your position. Remember, if you don’t want to enter a full position at once, trade the put spreads and then wait for a chance to trade the call spreads. If you never get that opportunity, you can still make money on the put side. Trading Earnings With Iron Condors

It’s okay, they said.

The position is protected, they said.

Most traders prefer to trade earnings with iron condors. Volatility is exceptionally high during these times so you can get a position that is deep out-of-the-money, and once an earnings report has been released volatility will drop like a rock, and you can laugh all the way to the bank.

Simple? Yes. Effective? No.

If this strategy were as easy as everyone seems to think, it would be traded exclusively. The problem with trading earnings is that it is a binary event. Binary events are either a yes or no, right or wrong, bank or broke.

When you trade iron condors during normal market situations, you are given plenty of time to reevaluate and adjust your position. Earnings trades don’t offer that luxury. When you wake up the next morning, you will either be a winner or a loser.

The secret to iron condors is that they allow you to sacrifice return versus risk for a higher probability trade. You will not have a good risk-reward scenario, but you will win more than you lose.

Earnings trades are going to lower that probability of success even more. You will still win more than you lose, but take the trade enough times and your loss will take away all your wins.

When you do place an earnings trade, and we know you will, trade them lightly and sparsely. Portfolios are not made during earnings; they are lost. Conclusion

We love trading iron condors, but we don’t love the people trading them. The strategy is useful for gaining more premium at less margin, which is a win-win.

The problem is too many traders place iron condors at the drop of a hat. An iron condor needs to be timed and nurtured to flourish. Placing iron condors when the stock has just made a big run or when volatility is at a low is a great way to set yourself up for failure.

When you can time your trade so that implied volatility is falling instead of rising, you are going to increase your odds of success.

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David Margrave • 5 months ago Enjoyed reading it and thanks for the explanation of why you want low delta - avoid unrealized losses before expiration. Easier to get out of a loser if the hole is shallower. 1 • Reply • Share ›

peter h oltersdorf • a year ago let's say the stock goes up and keeps rising which leg of the iron condor do I exit? 1 • Reply • Share ›

Bob > peter h oltersdorf • 7 months ago You should roll up your put side. This involves closing out the put spread (which is now cheaper) to gain a net credit and then buying a new higher put spread. This will offset some of the losses you will make on the call leg. • Reply • Share ›

easyofficephoneblog • 2 years ago • edited No mention in this article about management of the trade. So you are going to trade one iron condor and hope that you win? Give me a break. Do you have a beta weighted portfolio of credit spreads? Are you averaging the market? For the probabilities to play out you need a lot of spreads on. I have 50+ spreads on SPY at the moment. Someone is selling those options, and they are not doing it to lose money. 1 • Reply • Share ›

Sturg • 5 months ago So how is it possible to lose more than the max loss... I currently am and confused because the word "max" led me to believe I couldn't lose more than the spreads minus the net credit... Anyone? • Reply • Share ›

TKJohnson1948 • 6 months ago Looking for answers to the following two questions. Hoping to hear from experienced iron condor traders (at least a year of experience): 1. What do you estimate your annual rate of return is when trading iron condors? (Factor in all costs and losses, of course). 2. How much time do you have to spend on implementing this strategy (e.g. hours per week)?

I have never traded options. Given the way that broad-based index funds have done over the past year, I'm skeptical that options trading would do as well as the 20% annual returns I've seen in some of my ETF and mutual fund investments. None of these have required much of my time to monitor, and I sleep well at night. Thanks in advance. • Reply • Share ›

Trader Joe • 9 months ago Yes volatility is the key. I am lucky: because of my frugal living arangements, can write iron condors with very wide bodies and small wings, and pocket premium more often. Yes there are the earnings based trades: but the pre volatility based trades are effective as well. • Reply • Share › peter h oltersdorf • a year ago Kyle, just see where the condor is going and then exit out of the loosing legs [using appropriate indicators]: Keltner band set to 5 MA,macd set to 5, MFI set to 7 or 14,RSI also to 5 • Reply • Share ›

Kyle Cheung • a year ago If I placed an iron condor with 50 DTE on an earnings date, will IV still rise enough to negate theta decay? • Reply • Share ›

peter h oltersdorf > Kyle Cheung • a year ago Hi, please tell me why IRON CONDORS are the worst trade Thank you 2 • Reply • Share ›

OptionsNuBee • 2 years ago After living in the Matrix of tastytrade's iron condors, this article was the "Woah" moment for me. Thank you for the blue pill Morpheus. • Reply • Share ›

Michael • 2 years ago "The problem with trading earnings is that it is a binary event." Isn't it possible to roll the iron condor to the next month and do an adjustment? • Reply • Share ›

atbeaty Mod > Michael • 2 years ago Michael, You will not be able to roll your way out of that whole. You are looking at a total loss on the position (probably), and rolling for a favorable price would be extremely difficult. Plus, you will have to add a lot of leverage (increase size) to make the position work. • Reply • Share ›

Mack Chaffin • 2 years ago Where do you find the iron condor chart for the etf you want to trade? • Reply • Share › Stupid_Trader • 3 years ago Excellent article with very valid points on Iron Condors • Reply • Share ›

atbeaty Mod > Stupid_Trader • 3 years ago Glad you enjoyed! • Reply • Share ›

Martin Makowitz • a year ago horrible information and very inaccurate. An Iron condor at 65% probability has about a 90% probability of reaching 50% of max profit. THAT is how you play iron condors. 1 • Reply • Share ›

walsh lahey • a year ago Hello there, reach me via whatsapp +447537183764, I tutor and trade binary options, with my strategies In binary/Forex trading I have been able to find an amazing strategy that has been able to lift my trades accurately giving me wins of about $8000 weekly and $17000 monthly. With my one on one masterclass system and with enough proof to show, you would save time and fund wasting if only you are prepared to learn and trade. 1 • Reply • Share ›

walsh lahey • a year ago Winners of today's market are not those who hope on change of luck nor those who pray to God. Stop gambling with your money, take your hand out of your ass and capitalize on this opportunity. You can make consistent profit trading binary with the help of the CEO Pro Invest Trade trading company Mr Walsh Lahey's guidance and most especially his strategy. You can reach him/us for guidance at [email protected] or contact them via WhatsApp +447537183764. I am forever grateful to him. 1 • Reply • Share ›

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