What kind of iron condors do you use?
Q: What kind of iron condors do you use?
A: Mainly I use two types of iron condor. One type of IC is to look out for a 1:1 or nearly 1:1 risk/reward. We normally do this on liquid ETFs such as SPY, DIA and IWM. Examples of these type of iron condors will be the IWM iron condor initiated on 23 OCt 2007. We are risking $1.05 for a potential profit of $0.95. This is nearly 1:1. Obviously, probability of success will be near 50% as well. With so high a probability of success, we can afford to be a bit more patient and optimistic.
However, we also like to limit our losses should the position turns against us. We’ll set our stop-loss at about 20-30% of our potential profit. For example, if we are risking $1.05 to make $0.95, our stop-loss will be around $1.20 to $1.30. That is, we’ll close up or roll up the trade when the position is trading at $1.20-$1.30. Alternatively, we’ll look to closing it during the last 2 weeks before expiration or when the position is trading at $0.20 or less.
The other type of iron condor we put up here is the 1-standard deviation type. Around 30-35 days before expiration, we’ll put up an iron condor on RUT or SPX. The biggest problem with these indices is getting them filled. These iron condor will not offer 1:1 risk/reward but they’ll have very good probability (1 SD is 68%). In fact, the risk/reward for these type of iron condor is very bad. For example, we sent out an advisory on RUT IC on 8 Oct 2007 for a $2.30 credit (we are risking $770 to make $230). But we have a probability of about 64.61%. These type of iron condors require constant care. The moment the underlying moves too close to our short strike (usually around 10-15 points), we’ll close up the trade immediately. At no time we’ll allow these type of iron condor be ITM. The risk is simply not worth the credit we got. Furthermore, because it is so difficult getting these iron condor filled, we have to set our buffer bigger. Indeed, we normally place a mental alarm when the underlying is trading 30 points away from our short options.
