Hello traders, its time again to consider using Thinkorswim iron condor trades. In the following paragraphs I’ll share my thoughts as well as my best practices for this too long forgotten strategy.

Admittedly, iron condors are one of my all time favorites. Which, you may have determined from the Core Iron Condor course I’ve made available for purchase. Out of respect for those that have purchased the course I won’t include the secrets I’ve included there in this post.

Why is now the time to trade Iron Condors?

Well, truthfully, now may not be the time. Only time will tell. However, with the coronavirus pandemic fear mostly behind us and a new President firmly in office it just feels like we may be seeing the markets settle down from their face melting declines or rocket fueled advances. In addition, the Federal Reserve has also gone on record to suggest they’ll be easing off the fiscal throttle and turning up interest rates, again. Should that come to pass without a catastrophic decline I’m of the belief we’ll see more range-bound markets ahead. Furthermore, without a significant selling catalyst, I believe the probability for flatter markets increases exponentially.

Building a profitable Thinkorswim Iron Condor

Step 1 – Time horizon

This will be unique to each trader but I prefer 30-90 DTE. I believe this level offers traders a nice balance between premium received and time decay(theta) without tying up capital for too long. It also allows for adjusting the trade, should that be required.

Step 2 – Delta/Probability OTM

Closer to the money means higher reward but also lower probability of success. Again, balance becomes the determining factor. I opt for about .30 delta or around 70% probability out-of-the-money(OTM). This is typically about 1 standard deviation away from the current price or just inside one standard deviation.

Step 3 – Implied Volatility

IV must be considered for every options strategy. Employ a great strategy with improper IV and you’ll learn quickly what I mean. I prefer to see IVRank above 40 but not over 80. This market climate offers enhanced premiums while typically avoiding the wild price swings.

Step 4 – Strike Width

Is unique to each trader and their risk tolerance. I elect to start at either $1 or $2 dollars wide so that if adjusting becomes necessary I can widen the trade to maintain a credit on the roll. No perfect science here just using my personal experience.

Step 5 – Trade Entry

I always enter the trade 5 to 10 dollars higher than the current market price and set it as Good-til-Cancelled(GTC). Virtually every trade I’ve ever made goes against me at some point by $10 to $20 dollars. Why not just get filled at that point rather than right away? I may miss a few trades but this also allows me to forgo a trade altogether if the market moves against my assumption.

Step 6 – Trade Maintenance

I don’t always like to adjust trades but its always nice to know I can. That said, the truth about adjusting is this;

  1. Accept more risk for little reward
  2. Eliminate little risk and more of the reward

It isn’t ideal, but it could be the answer to a successful or unsuccessful trade. The best advice I could provide with regard to adjustment would be, don’t adjust to quickly or too often.

Rather than adjust a single trade, I typically look to position delta and the greeks for determining next steps. Additionally, I beta weight my options trades against SPY. Please know the beta weighting function doesn’t work inside the ThinkorSwim OnDemand tool so I’m unable to do so in the example below.

Suppose I had the following iron condor trades open;

ThinkorSwim Iron Condor - Position Delta
Iron Condor position Delta – ThinkorSwim

From the image above you can see that 2 of the 3 ThinkorSwim iron condor trades have moved negatively. At this point I’d have the choice to adjust the original trade or add to the overall position. While either can be beneficial I’m going to adjust by negating some of that positive delta, which currently sits at 16.17. To do this, I prefer vertical spreads but you may find better value elsewhere. In this example, I’m going to use bearish vertical spreads on the two trades that have moved against me, with similar entry requirements to our original iron condor.

Here’s the “adjustments” I made;

ThinkorSwim Iron Condor - delta adjustment
Iron Condor Delta Adjustment – ThinkorSwim
Adjustment to position delta
Position Delta Adjustment – ThinkorSwim

As is shown, I’ve managed to lower the delta from 16 down to 3. While these new trades may prove unprofitable, they are sound decisions at that moment and are directed by concrete data. Again, just be careful not to over adjust or add too many new positions. For those curious, the above positions ended up resulting in a $68 dollar gain at expiration. Not bad for a collection of trades that ultimately moved against me.

Step 7 – Taking Profits or Accepting Losses

I know personally, I struggle to accept losses. I’m just not wired to throw in the towel, but I also know that to be a consistently profitable trader and investor sometimes I must do just that.

I usually throw in the towel when I’ve exhausted a predetermined buying power threshold. For some, that may be $200,000 for others that may only be $500. Obviously, the more you have available to “play” the more adjustments can be made to account for moving markets.

Normally, I aim to use no more than $2,000 worth of buying power for ThinkorSwim iron condor trades. This amount will vary dramatically for everyone but it is the point that I’ll begin closing positions at a loss. Said another way, I no longer want to commit more risk trying to recover a trade and my capital is more useful elsewhere.

Many traders will tell you to close at 50% profit and while that is great advice it isn’t typically that effective for me. I usually like to let trades run their course. The only exception to this would be if something happened and I could realize a large profit quickly. My thoughts are simple. I don’t want to pay more commissions for a new trade when 50% of the value is still available on a trade I’ve already paid to make. My win/loss percentage may take a few hits along the way but I’m also not giving money away with no opportunity for reward either, so I’m ok with the trade off. That said, should you trade using one of the commission free brokers the 50% rule becomes much more attractive.

Closing thoughts

Time and Mr. Market may ultimately prove my range-bound prediction wrong but using the tools described above you’ll see iron condors as a strategy not to be ignored. Some positions will require multiple adjustments, some may require none, some will prove you’re a genius, and yet others will prove you know absolutely nothing. The hope however, is to use capital efficiently and effectively in every trading situation while also avoiding the trap of emotional trading. Using position delta to guide individual adjustments or additions to a portfolio solves this all to common pitfall.

Ultimately, its up to each of us to make our trades and turn a profit. Should we fail to do that, its also our responsibility to review and adjust. Fortunately, I can help you with that as well using a spreadsheet I created to track the endless number of options strategies I trade. The OptionBoxer Analyze and Journal spreadsheet is a tool for analyzing virtually everything. I do hope you’ll take a look at the demo video posted and consider purchasing. You’ll be surprised at all it can do!

For those interested to continue their study over Iron Condors please do check out this options strategy guide from OptionAlpha. The guide is short but includes everything a trader needs to know about Iron Condors.

God bless,
Jeff