SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Should You Leg Into Iron Condor?


The wings of an iron condor options trading strategy consist of two vertical credit spreads; i.e., a bull put spread and a bear call spread. The process of "Legging In" offers the promise of higher yields and enhanced probabilities of options trade success, but the question is whether it is worth the risk.

An example of legging into an iron condor is selling an OTM put spread and then selling an OTM call spread after the underlying has increased in price.

 

When the underlying increases in price, the short put spread moves further OTM increasing the trade’s probability of profit (POP). Unless there is a large expansion in volatility accompanying the underlying’s move higher, the short put spread also loses value and becomes profitable.

 

Is it worth the risk?

 

There are different opinions about the issue. This is what Mark Wolfinger thinks:

 

I do not like the idea of legging into iron condor trades by selling puts first.  It simply doesn't work as well as it should – when considering the risk involved. I know that's not good news for the trader who usually has a bullish bias, but there are good reasons.

 

When the market rallies, IV tends to shrink.  When IV shrinks, the value of the call spread that you are planning to sell also shrinks.  By that I mean it increases in value by less than you anticipate.  Often much less because it is an OTM spread.  I'm assuming that the iron condor trader is not looking to sell options that are CTM (close to the money).

 

It takes a significant upward move for that OTM call spread to increase in value by enough to compensate the trader for taking the leg. If you do sell the put spread first, and the market cooperates, it's often better to buy back that put spread, take the profit, and forget about getting a little better price on the call spread.

 

It's different with calls. If you correctly (i.e., you are correctly short-term bearish) sell the call spread first, then you have the opposite effect.  If the market declines, the put spread widens faster than expected and you have an iron condor trade at a good price.

 

Thus, unless bearish, I suggest not legging into iron condor trades.

 

ironcondor_alt727x285.jpg

 

Christopher Smith agrees:

 

Traders who recognize this theorize that they can achieve higher yields and better probabilities of success if they could sell one side of the iron condor and then sell the other side after the market has moved away from that initial spread.


An example would be to sell the bull put spread when the market has pulled back and appears poised to rally higher. Once the bull put spread is sold the trader would then wait for the rally to carry the market higher, at which time the bear call spread would be sold to complete the iron condor. The net result is that the trader probably has a wider, higher yielding spread than they would have had if they simply sold both sides at one time.

 

Easier Said Than Done


While this seems simple enough, in practice consistent legging into an iron condor is a difficult task to accomplish with an consistency. In fact, I typically recommend against the practice unless you happen to be an experienced directional trader.


The problem with legging into an iron condor is that most people begin the process with the mindset and desire of eventually opening an iron condor. What often happens is that they open one side of the iron condor and then look for the market to make a move the opposite direction so that they might open the other side of the trade - but they either miss the opportunity or the market simply does not give them the chance. Now they have a dilemma, because they wanted to be in an iron condor, but they're not.


Now they may be losing money on the initial vertical spread and struggle to decide whether they should sell the other side at a reduced credit, stay in the original position and "hope" for the market to reverse and save them, take a loss on the original trade, etc. In short, they have made a mess of the legging in process.

 

Are You a Directional Trader?


Selling bull put spreads or bear call spreads are directional plays. This is true even if you intend to eventually roll into a non-directional spread like an iron condor. Until you complete the condor by selling the opposite wing, you are a directional trader. Most iron condor traders attempting to leg-in do not recognize this and that is where their trading plan begins to unravel.


My recommendation is that if you want to trade iron condors, then trade iron condors and focus upon your risk management and trade management skills. That is where the money is won and loss. If you legging into the trade still appeals to you then it is probably better to re-tool your trading approach to that of a directional trader.


A directional trader will play the swings in the market. As the market pulls back and then begins its next swing up a bullish position may be taken. As a bullish peak is made and the market begins to oscillate lower a bearish trade may be opened. If these trades happen to be credit spreads in the same month and on the same security you just might find yourself in an iron condor.


The difference is that a directional trader does not start with the notion of trading an iron condor. They begin with the idea that they will get long or short the market. If, and that is a big "IF," the market completes its cycle and the opportunity presents then they may find themselves in a non-directional spread.


The question now is whether the manage the combined position as a single non-directional trade or whether they continue to manage the individual vertical credit spreads independently. This is a decision the trader must make well before entering the market as it presents another opportunity to create a mess.


If you happen to be a skilled directional trader, then it might make sense to trade vertical credit spreads and leg into an iron condor if and when the opportunity presents. For those who want to trade non-directionally, the better practice is to open the iron condor as a single trade from the start.

 

What do you think? Share your feedback. Visit our Options Trading Education Center for more educational articles about options trading. 

 

Related Articles:

 

Trading An Iron Condor: The Basics

Trade Size: Taming The 800-Pound Gorilla

Trade Iron Condors Like Never Before

Why Iron Condors are NOT an ATM machine
Why You Should Not Ignore Negative Gamma
Can you double your account every six months?
Can you really make 10% per month with Iron Condors?
Exiting An Iron Condor Trade
Iron Condor Adjustments: How And When
Iron Condor Adjustment: Can I "Roll" It Forever?
Is Your Iron Condor Really Protected?

 

Start Your Free Trial

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Trading Earnings: The Myths and The Reality

    Nothing impacts stocks prices more than company earnings reports. There are many way to trade those earnings announcements. You can take a directional bet if you believe the stock will move (higher or lower). Or you can play it with some of the non directional strategies.

    By Kim,

    • 0 comments
    • 74 views
  • Delta Hedging Your Options Strategies

    All traders begin with an introduction to call and put options.  However, it's rare (apart from short puts) that an experienced trader would use these contracts by themselves. Instead, we primarily trade options spreads. There are many benefits to spreads. The variety of spreads are targeted to various market criteria and market environments.

    By Drew Hilleshiem,

    • 0 comments
    • 279 views
  • Allocating on Blind Faith

    Almost all passive investment strategies are based on the assumption that younger investors should hold more equities as a percentage of their total portfolio. Likewise, as they age and get closer to retirement, the allocation to fixed income assets should grow while equity holdings shrink.

    By Michael Lebowitz,

    • 0 comments
    • 217 views
  • Are Weekly Options a Form of Gambling?

    Options traders do not have to act as gamblers … even though many do. There may be a thin line between trading and gambling, and that line is obscured when it comes to weekly options. If you utilize options to reduce risk, it is smart trading. But if you treat options trading like a bet on red or black in a roulette game, then you’re not hedging; you’re gambling.

    By Michael C. Thomsett,

    • 0 comments
    • 354 views
  • How To Profit From PayPal Volatility

    Many of SteadyOptions members are using the CML TradeMachine backtester. The Trade Machine allows to identify patterns that have repeatedly turned a profit over and over again, then see those results with no room for confusion or doubt. This is how traders profit from the option market — it’s preparation, not luck.

    By Kim,

    • 0 comments
    • 377 views
  • Lessons From Facebook Earnings Disaster

    Last week Facebook (NASDAQ:FB) had the biggest one day drop of market cap in history for a single stock. It erased $120 billion in market value. Of course, the odds of a such a big move are pretty small, but the result can be devastating. We saw that with Facebook. As options traders, what can we learn from this event?

    By Kim,

    • 0 comments
    • 496 views
  • How To Trade Apple Earnings with Options

    Last week Apple Inc (NASDAQ:AAPL) stock reached a one Trillion dollar valuation. A remarkable achievement. Of course there is nothing wrong with just buying the stock and holding it "forever". Today I would like to describe a different way to trade Apple using its options. It will also provide some insights into our trading process.

    By Kim,

    • 0 comments
    • 643 views
  • Revisiting Anchor (Thanks to ORATS Wheel)

    Over the past two months, we have been working on developing a put selling strategy to implement through Steady Options, using Anchor as a partial hedge against market decline.  However, back testing has been quite a pain, at least until I was directed to ORATS Wheel software.

    By cwelsh,

    • 0 comments
    • 392 views
  • The benefits of diversification

    What is the real benefit of diversification? Sometimes it's not completely intuitive to investors. Let me provide an example, using historical data of 2 Vanguard mutual funds, VFINX (S&P 500) and VUSTX (Long term treasuries). For fun, we'll compare the end result to Warren Buffett's performance as well, just to further drive the point.

    By Jesse,

    • 0 comments
    • 425 views
  • Option Trading – Science or Gambling?

    Traders focused in stocks, ETFs, and mutual funds may avoid options for several reasons: Perception of high risk, complexity of the market, dizzying levels of specialized jargon. These concerns are part of the learning curve and can be overcome – if traders look at options trading as science and not just gambling.

    By Michael C. Thomsett,

    • 0 comments
    • 601 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoticons maximum are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs