Revisiting a Classic: The Iron Condor

Hello again everyone! I trust your Sunday has been a day of rest and relaxation before the week ahead. In church today we spoke about one of our members being given only weeks left to live. It was sad to say the least but we we’re all filled with the Holy Spirit as we came together. In those moments we were each reminded, that our God works miracles. He’s done them before, is doing them now, and will do them in the future. I know the miracle we each need is no more than a prayer away today!

Introduction

With that, I wanted to reach back into the past and pull out an options trading classic today. The Iron Condor Options strategy is largely why the Option Boxer website even exists. Prior to finding that strategy, I’d played around with long calls/puts and even vertical spreads but when I found out about the Iron Condor my options trading universe expanded.

At the beginning of my trading journey, while I was trading those initial strategies I was really just placing bets. I hadn’t the slightest clue what I was doing. However, the iron condor strategy allowed me to bet that price wouldn’t trade outside a given area. A nice trade for someone who barely remembers what they had for breakfast, much less trying to predict market direction.

Regardless, the iron condor strategy has been a staple of my trading career and while I’ve largely gone away from it I stumbled onto a website, DataDrivenOptions.com, that compelled me to look at it once more. If you’re an options lunatic like myself then I strongly encourage you to head over to that site to poke around. There are some interesting ideas to find but they are kind of hidden, so you’ll have to do some digging.

Lastly, before we get into it, I have to give 100% of the credit to whoever owns DataDrivenOptions.com for this iteration of the iron condor strategy. I have traded it this way before but never as meticulously as I’ll describe below. To that person, thank you for reminding me how simple but effective the iron condor can be.

The Iron Condor Options Strategy Overview

First, if you’re completely new to the iron condor strategy, I did a write up on the trade several years ago. You can check out my Short Iron Condor Education Page to understand the strategy more completely. If you prefer to learn from a more mainstream provider, here is a detailed post about the strategy from Investopedia.com, “Options Trading with The Iron Condor”. In either case, I’m just going to brush past the general idea of the strategy.

The iron condor strategy works best when an asset trades within a range because the position is neutral by design. Should the market trade directionally, the iron condor will suffer as one of the short strikes is breached. However, as we’ll look at below, learning to adjust the trade can make a world of difference but we’ll get to that later.

The strategy is the composition of two vertical spreads, a bear call spread and a bull put spread. Combined together to create an options strategy that benefits if price stays between the short strikes for those verticals. There are actually a number of benefits to the strategy that I won’t get into today but what I will say is, the trade profits as time passes. Also known as theta decay.

All this makes the iron condor strategy particularly helpful for those of us that don’t have the faintest idea which direction the market will trade next. The strategy has a decent win rate and the risk is limited, making it one of the better options strategies I’ve ever traded and particularly useful for someone just starting their options journey.

Iron Condor Strategy Back Test

I have traded or tested the iron condor strategy hundreds, if not thousands of times and this time wasn’t much different. As expected, the position needs price to stay relatively flat while the trade is open. Although, thanks to DataDrivenOptions.com, this particular test was considerably more focused and precise. Again, thank you to the proprietor of that site.

It just confounds me that I’d never consistently traded the strategy on this short a duration. Typically, I look to open an iron condor around 60 days to expiration and hold until the final week or two. However, in this test I narrowed that window down to about 30 DTE and maintained a constant position at all times. That made a remarkable difference.

Lastly, given the constant adjustments to this iteration of the iron condor I wasn’t able to back test using Tastytrade’s backtester or similar tools. I back tested each trade manually, using ThinkorSwim’s OnDemand feature. The data below is as reliable as that function allows. I’ll admit, sometimes not very.

Back Test Criteria

Initiate position at next standard monthly expiration (usually 30-45 DTE)
30 Delta or next further OTM $5 increment strike
$5 strike widths
Roll entire iron condor after 7 Days in trade if one side is being tested or has been breached
No adjustments after 10 DTE
Trades inside 10 DTE are day to day and largely by feel
Profit Target – $100
Stop Target – ($100)

Back Test Trades & Results

Iron Condor Management & Adjustments

Managing the iron condor strategy can be pretty simple. The real problem is not over managing because the commission charges for this trade are high. Too many adjustments will literally crush the position before profit can build into the trade. That said, let’s run through this logically, starting with entry considerations, followed by management, adjustments, and then exit criteria.

Entering an Iron Condor Position

First, I traded this strategy on the standard monthly expiration. I didn’t want weeklies or dailies. In no instance did an initial trade occur further than 45 DTE, with most of them nearer the 30 day mark. Additionally, my short strikes were always at 30 or lower delta. Let me explain that though.

I preferred the 30 delta strikes but I also wanted $5 increment positions. For example, if the 30 delta strike was $612 on the call side I would move to the next available $5 increment. In this case, the $615 strike, which was actually a lower delta value at 26. This wasn’t a problem for me because it provided a little more room inside the iron condor structure but it was a slightly lower premium.

Regardless, every trade I tested here, I entered based on this criteria. I wanted it close to 30 DTE and close to 30 delta but didn’t want to be overly rigid in the approach. To strict means I’ll rarely ever find a trade and I’ve certainly done that before.

Managing an Iron Condor

I want the underlying price to stay very near the center of the iron condor structure. Since I don’t want to over adjust the position I implemented a rule to only make trades every 7 days. As I mentioned, a real problem with this strategy is over managing the position and the costly commissions. At approximately 30 DTE and only adjusting every 7 days means at most I could only adjust the trade 4 times. Still not ideal but at least the adjustments are constrained by the limited time frame.

Because I only want to adjust every 7 days I need price very near the center of the position each week. This isn’t a problem when the trade is placed initially but if I wanted to hold the position for a second, third, or fourth week I don’t want price leaning too far in either direction. If the price stayed relatively flat, this is a perfect scenario. No adjustments and no commissions, just profit rolling in.

Lastly, and I’ll include this again below but I think it actually belongs under management. I was seeking a profit of $100 per trade or a loss of $100 per trade. This breaks down to about a 50% profit target and a 50% loss target. If you see this post and attempt the strategy yourself you may consider eyeing a larger profit target. Based on this test, I believe I could have achieved higher than $100 on many trades.

Adjusting an Iron Condor

Now, this is where this iteration of the strategy really makes a big difference. I won’t bore you with my previous adjustment techniques because they simply weren’t as simple or effective as this approach.

If a trade had been placed and 7 days had passed then an adjustment could be considered. However, the only reason I would want to adjust is if price moved too far in one direction or another. For example, If price breached the call side, I would adjust the entire position back to neutral using the same entry criteria. Back to approximately 30 delta with the shorts at the next closest $5 increment. I DID NOT change the expiration month when making an adjustment. Once a trade had been initiated in the May monthlies for example, I was riding that trade, adjustments and all until my targets were achieved.

In almost every instance, price had simply pushed to far to one side or another and I believe only breached once. Thus, when I rolled the trade back to neutral I actually did so with profit already in the trade. I can tell you, it’s comforting to have $40 of profit already built in when the trade is reset back to neutral.

The last, but maybe the most important rule I implemented was when not to adjust. For me, I didn’t make any adjustments once the trade had moved inside 10 DTE. I tried that, sometimes profitably, but the condor structure was just too narrow for my liking. Meaning, even relatively normal moves were pushing toward the boundaries and bigger losses. At that point in the trade, I was looking for the exit door at any profit or at a manageable loss.

Exiting an Iron Condor Position

As mentioned, I was seeking a profit on each trade of $100. In this test, I was able to achieve that goal on 12 of the 26 trades I placed. Yes, that’s less than I’d have liked but by implementing the rules I laid out above I was able to salvage, for a profit or a breakeven, another 5 trades. That means 17 of the 26 trades either made money or didn’t lose money. Which from my experience is all the difference.

Again, I didn’t want to lose more than $100 on any position. If the trade ever moved to a $100 loss or more I simply closed it and started again. In several instances, I was making adjustments when the trade was down by $90 or so. I was very rigid with that rule because I didn’t want to close a trade that could come back to break even or even a small profit.

Lastly, as mentioned, I was looking for any way out once the trade was inside 10 DTE. In most cases, as the trade neared 10 DTE I was very close to the profit target but again, was strict to only close when I moved above the $100 mark.

When to Avoid the Iron Condor

As I conducted this test a few things became ridiculously clear. There are times when the Iron Condor just shouldn’t be traded. Now, for testing purposes I just kept on going but in almost every instance the trades I made against the criteria below resulted in a lesser profit or an outright loss. You may notice that 2023 wasn’t nearly as kind as 2022 was and many of these characteristics were present at that time. Not every time but it could have saved me from some of the larger losses I took that year.

It may be best to avoid the iron condor trade if any or all of the following exists;

You feel constricted by the iron condor structure width
- As you trade this strategy and engage in the markets you’ll get a sense of the normal day-to-day price moves. When those day-to-day moves are too large or the structure is too narrow, the iron condor strategy fails much too easily.
You notice the premiums are unusually low
- Almost certainly a result of lower volatility as the market climbs higher and volatility contracts. This also contributes to number one above bringing the deltas closer to the money.
- Ideally, total premium collected will be above $2 at the 30 delta strikes. Better still is when the premiums are above $2.50 for this particular approach. Anything less would be a red flag that now may not be an ideal time for the iron condor.
Uneven or inconsistent strikes available
- This may or may not be something to keep an eye on, but for me, if I don’t see strikes every $1 or at least every $5 then I start to wonder what’s going on. Less strikes available also means less players in that market so it’s something to keep in mind.

I don’t expect this is an exhaustive list but had I declined a trade when one or more of those was present I would have been even more profitable. For this test, the final 3 losing trades should have all been avoided based on one of these criteria. I wasn’t tracking it prior but if only those 3 losses were erased I’d have saved $336.30 dollars of profit. Which would have brought my total profit up to $760.40.

Final Thoughts

In closing, the iron condor options strategy, traded this way was a success. More successful than previous iterations using my own rules, that’s for sure. Again, a big thank you to DataDrivenOptions.com for pointing me in this direction. I’m excited to see how it plays out in real time trading.

That said, I was able to achieve 42% return on capital over the 2 year time frame. I traded all of 2022 and 2023 which provided a bearish and a bullish market for view. Over the course of 2022, the better year for the iron condor strategy, I profited $561.20. In 2023, I lost ($137). However, had I avoided a trade in those instances where I believed the trade was destined to fail I’m confident I would have turned a profit that year as well.

In all, I like the strategy and will be looking to implement it in this way soon. Still, the real winner here is the brokerage because over the 2 years of trading I amassed $358.80 in fees and that was trading just 1 contract each time. If you multiply that by 10, the broker would receive $3,588 dollars with absolutely no risk. Kind of like taxes, I just don’t care much for that.

Until the next post.

God bless,

Jeff