Are you ready for CTM iron condors?

[Kim 7,943]

From Mark Wolfinger, Options For Rookies

I have to say, the CTM condor is an increasingly appealing trade to me. I know you are recommending trading the traditional condor first. I am wondering where I might start researching this trade. What are the “Basics” I might start with? For example, a 25 delta short, adjust at short strike, what type of adjustments — do you favor rolls or other types of adjustments etc…

Thanks,

Nate

Although I had an anti-CTM mindset for many years, I now believe that trading CTM (close to the money) iron condors is a winning strategy and offers better results than trading the more traditional iron condor. In this context, the term ‘more traditional’ refers to the typical iron condor that any trader prefers.

I prefer making CTM iron condor trades two or three months prior to expiration. For me, CTM is typically a position in which the short options have a delta of 25 to 28. Those delta should not be taken as a recommendation because ‘CTM’ is a relative term. It simply means that the trader moved the short option delta higher.

Concerning the points that you raised:

1) I do not specifically recommend trading the traditional iron condor before tackling the CTM position. Here is how I see it: It will be very difficult to handle the required risk management decisions when the trader is uncomfortable with an iron condor with one of the short options at the money. Therefore it is necessary to have some experience trading iron condors to recognize your personal comfort zone and your ability to make good risk-reducing trade adjustments.

Traditional iron condor traders (short delta ~ 8 to 15) should be uncomfortable when one of the options gets near to being ATM because those positions would be significantly underwater (and at risk for additional losses) at that time. For that reason, traditional iron condor traders learn to adjust risk well before the underlying asset moves that near one of the strikes.

When we trade the CTM variety, the cash collected is much larger. Because of that extra cash, the trader is well-placed to ‘buy his way out of temporary trouble’ by rolling down the short call or put spread to farther OTM strike prices (same expiration). Knowing that the cash is on hand; knowing that the cost of rolling down the troubled spread has already been accounted for in the trade plan; the trader recognizes that there is no need for discomfort. The position is not at risk of incurring a large loss (immediately). In fact, the maximum theoretical loss is less than with other iron condor types.

If you are comfortable with that knowledge, then go right ahead and make CTM trades. However, if owning an ATM short spread frightens you, then there is no way that you can handle CTM positions. This is a real mindset difference.

Mindset difference

Mindset 1. I will not own any iron condor where the short option is near ATM. When the option is ITM I will already have lost money, plus it is possible to lose a bunch more in a hurry. One other point: it is unlikely that I will be able to get out of this trade with an overall profit. Good conservative risk management required that I exit or adjust sooner, but I have to do something now.

Mindset 2. I am willing to be short ATM options, but only when the original cash credit was sufficient to pay for the first adjustment and still leave the possibility of earning a good-sized profit. For example, when I collect $450 for a 10-point index iron condor, I know that I can spend $200 to $300 on a roll down and still like my position. There is no urgency to take defensive action when the short option is just a little ITM.

2) I prefer the roll down as an adjustment. First, I feel better when the trade remains with the same expiration. Moving out to a later expiration month (rolling down and out) may be appropriate. However it is an abused adjustment method and I suggest staying away from that alternative. Second, this adjustment has already been planned and paid for. That’s one reason for opening the CTM as the original trade.

3) There is not as much ‘research’ to do as you may suspect. If you can handle traditional iron condors; if you understand why the CTM is DIFFERENT; if you will not be afraid to spend some of that extra cash on a roll down; if you will not panic and can avoid being afraid; you can trade the CTM iron condor.

I suggest looking at this video as a good starting point.

4) Your starting point: I suggest that you choose your delta based on what has been a traditional iron condor for you. Moving the short delta up about 10 points ought to give you a decent place to begin getting some experience. Then you can determine whether you are comfortable with the whole trade process (it you become afraid, do not get macho. Back off and try something that is less frightening. Think comfort zone.)

When to adjust: near 50 delta. It is okay to allow the trade to move a little ITM – maybe a point or so. This is not a critical decision. The important part is not to adjust too soon (unless you have a market bias) nor too late. It is not the delta that is the most important factor. Instead it is the cost of the roll. When IV is higher, it costs less to roll down and I have no objection to doing that when my short option has a delta near 50. When IV is lower, the roll is more costly and less attractive. I may decide to wait a little longer (52-55 delta) before rolling down. This is more a matter of style than following strict rules.

Please expect to make an adjustment. When you begin with two 25-delta short options, you can anticipate that one of the options will be ITM prior to expiration with almost every trade.

When to exit: Difficult decision. I usually am willing to make two adjustments to a CTM iron condor, knowing that the profit opportunity will be small or non-existent after the second. I am seldom willing to make a third adjustment, but it does depend on circumstances.

Here is a point I have not previously put into writing. However, it is important:

Once you roll down a CTM position, treat it as if it were a more traditional iron condor. You no longer have that large cash cushion and thus cannot afford to allow either of the short options to get too near ATM

Mark Wolfinger

Options For Rookies