I'm fairly new to options trading. Actually, my first experience with options trading started about a month ago when opened some May iron condors on RUT. I’ve since closed
them for a net credit (I'm sure you mean net profit, not net credit.)of 1.20 after commissions. So, although I understand the basics of calls, puts, and spreads, I could use some pointers on recognizing good risk/reward ratios as well as loss mitigation. Iron condors is not often the first strategy adopted by an options rookie, but right now it's my favorite strategy (it changes as market conditions change).
Which brings us to my first question:
Do you have a target net credit that you're looking for when you open/close iron condors? Yes, but it's not that simple.
Maybe I should phrase this question differently. In your experience, what net credit is too low to justify the risk and what net credit is simply too risky? For example, if your target net credit is 0.91 and you have a maximum loss one month, it would take (10.00 – 0.91) / (0.91) = 10 successful attempts to recover. So, in your opinion, what net credit is generally too little for the risk involved? It depends on too many factors to give you a simple answer. But, I'll make the attempt.
There is no 'best.'
Different investors have different risk/reward tolerances. They have
different comfort zones. Your goal is to find an iron condor that
allows you to rest easy. That means you are happy with the potential
reward and the risk is not too large to cost you sleep at night.
Remain in your personal comfort zone (you'll find yours as you gain
Obviously the difference between the strikes is crucial. You are using
10-point spreads. Collecting that 91 cents on a 50-point spread is a
far different risk than collecting 91 cents on a spread when the
strikes are 2 1/2 points apart.
The volatility of the stock or index is a major factor. Obviously the
more volatile the underlying, the more risk that the options move into
The time plays a big role. You must collect a significantly higher
premium to move to a further out month.
Lets's assume you want to write spreads in the front month and that you
do it on expiration Friday. That means your new positions will have a
maximum lifetime of four or five weeks. I say maximum because I
suggest clsoing your short spreads when the price gets low enough so
that the potential reward is not justified by the risk.
The further out of the money you go, the less your reward, the greater
the probability of earning a profit, but the greater the risk (size of
the potential loss). Thus, there's obviously a price that is too
small. Finding it is not simple. To me, your 91 cents is just a bit
too little for a 10-point spread on RUT. But, it may not be too little
for you and your comfort zone. I'd prefer to collect about $150 when
possible. But, I would not force it. If the strikes are too near the
money for my comfort zone, then I definitely accept a smaller premium.
Please believe me when I tell you there is no best answer to your
question - and it is a good question.
Also, what net credit would simply be too risky? None. If you collect $750 for an iron condor, the
chance of earning a profit is not large, but the risk is only $250.
It's not a question of being to close to the money for risk - it's more
a question of comfort. I don't like managing the risk of positions in
which my short option is heading into the money. Thus, I, like you,
prefer to collect smaller credits. But there are sound reasons for
trading options that are closer to the money, and some traders use that
And should the price of the underlying stock / index trend towards
one of your short options, at which point do you close out the entire
Do you wait for the net debit to equal some percentage
or multiple of your net credit? No. Here's
my advice, but I must tell you that most people disagree because they
have a blind spot: Once you own the position your original credit is
immaterial. Your decision must be made on the current price of the
spread, the current risk of the spread, your outlook for the market -
if you have an opinion and if you are willing to bet on that opinion (I
never do that). The price you collected means nothing. The spread
should be closed or it shouldn't. And that decision should be based on
current risk parameters. Would you add to the position at
current prices? If 'yes', then don't clsoe it. If 'no' then decide
whether to hold or close.
Do you wait for the short option’s delta to reach some value? A better approach. I don't do it that way because I
have many overlapping iron condor positions, not just one or two.
Thus, I manage risk of my whole portfolio, not each individual spread.
An alternative that I recommend is to consider how much you would lose
if RUT were to move X points or X% in one day. (Your broker may supply
some risk-monitoring software, so ask.) When that number gets
uncomfortable, it's time to reduce or close the position.
One note: When you pay up to close (for example) the call spread, it's
usually a good idea to get rid of the now cheap put spread. No sense
letting that sit there to bite you if the market reverses. Sure you
want the extra cash to make up for the loss, but you are usually
better off opening a new iron condor in the next month. No sense
Perhaps you could use a real-life example with credit / debit numbers,
strike prices, and expiration dates so that I could get a better
understanding of your thought process. I'd
like to help here, but that simply takes too much time. Because my
decision is never based on my original credit, the numbers you seek
wouldn't apear in my reply.
There is a very thorough discussion of iron condors (with detailed
examples), plus five other strategies in The Rookie's Guide to
Options. If you send an e-mail, I'll give you a discount code).
Thanks in advance. :-)
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options