In our options training program, we spend a good deal of time working on high probability iron condor strategies. A high probability iron condor is one of the simplest and most popular options strategies, but it also, in my opinion, is one of the most dangerous.
As with most dangerous strategies, it is a deceptively attractive and simple trade. An iron condor is composed of a put credit spread, very far out of the money and a call credit spread, also very far out of the money. Statistically, the chances of the options spread trader pocketing the full credit he receives at the outset of the trade is over 80% if he simply allows the condor to expire after initially selling it. And if started 6-10 weeks out from expiration, the credit can constitute, easily 14-19% of the capital exposed. Not bad– an 80% chance of pocketing a 14-19% return each month. Right?
Wrong.
Here’s the problem– to allow a high probability condor trade to get even near the short strike on either side of the trade is foolish and potentially catastrophic. The most aggressive, risky, high probability condor adjustment technique that I know involves rolling the credit spreads out of danger when there is still a 70% chance that the short strike on that side of the trade will expire worthless. The problem is that as the market approaches the short strike, its value starts to exponentially increase. Before you know it the position is down multiples of an average monthly profit.
Of course we teach adjustment techniques to deal with these dangers and the high probability condor can be a very profitable strategy. There are many very solid veteran options traders who make a living trading them exclusively. But it is a strategy that is to be respected and handled very carefully.
In our training course we talk about the “perfect” high probability iron condor month. That’s when the market shoots off in one direction, allowing you to close the credit spread of the opposite direction, and then reverses, allowing you to close the remaining credit spread. This happens maybe one third of the time during a typical trading year. The rest of the months you need to do some work to make the trade profitable.
I’m often asked the following question by the satisfied condor trader, after he or she has closed a month early having “scalped” both credit spreads: Should I re-establish a new condor for the same month?
My answer is almost always an emphatic: NO. Why push your luck? To me that is the equivalent of asking: “Hey, I just ran across a battlefield and avoided getting shot. Should I take another run across the same battlefield? After all, I seem to be pretty good at avoiding bullets.”
If the market gives you the perfect condor month, accept the gift and allow your capital allocated to that trade to lie dormant until the next month’s condor trade is ready to be initiated. After all, you made a phenomenal return on that capital–give it a break. I don’t think it’s a good idea to expose that same capital, closer to expiration, with closer strikes and probably less income, to a very imperfect condor month, which could cost you all of your gain from the “gift” and then some.
Seth Freudberg
Director, SMB Options Training Program
The SMB Options Training Program is a twelve month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: [email protected].
