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Friday, February 4, 2011

Tip to close an Iron Condor (Part 2)

This is a sequel on How to Close an Iron Condor. The previous tip basically indicated that you open your Iron Condor position for some credit, and then you entered a closing limit order for the whole position, for a lower debit than the credit received. This closing order would be "Good till Canceled". From that moment on you become detached from the charts and ticks and your trade might automatically get triggered at the debit you specified should the market hit your limit price over time.

One technique that I find even more effective than that one is closing the Iron Condors by steps. This way you break your Iron Condor into two verticals spreads, and you enter two closing pending limit orders, one for each vertical at your desired price.

As usual let's go with the numbers to make it easier:

Let's say INDEX abc is trading at 100, and I enter an Iron Condor using the following strike prices 80, 85, 115, 120.

BUY 1 abc 80 PUT @ 1.00 (-$100)
SELL 1 abc 85 PUT @ 2.00 (+$200)
SELL 1 abc 115 CALL @ 2.00 (+$200)
BUY 1 abc 120 CALL @ 1.00 (-$100)


Every Iron Condor is composed of two verticals: a Bull Put Spread and a Bear Call Spread

As you may have surmised at this point, the Bull Put spread in this case is the position formed by the 80 - 85 PUTS, while the Bear Call Spread is the position formed by the 115 - 120 CALLS.

Each one of these vertical spreads is giving a credit of 1.00 point or $100. As a trader, you want to close each vertical for a debit lower than that credit. If you could close each vertical for 0.80 ($80), you are making a 0.20 ($20) profit on each one. In this case that means 0.40 ($40) for the whole initial Iron Condor. $40 on an Initial Risk of $300 means a 13% return.

So you enter two limit orders God Till Canceled as follows:

First limit order for a debit of 0.80 (We don't care about individual price of each option, only about the total for which you want to close the whole vertical)
SELL 1 abc 80 PUT
BUY 1 abc 85 PUT

Second limit order for a debit of 0.80
BUY 1 abc 115 CALL
SELL 1 abc 120 CALL

And that's it folks!! One order will eventually get triggered before the other, it doesn't have to be the same day. If abc goes up, chances are your Bull Put Vertical will be automatically closed for a profit and viceversa, after that, the other order remains alive until the market pulls back or volatility skews change till the whole position is closed. If you want a return better than 13%, you try to lower the debit in your closing orders, let's say instead of 0.80 you would aim for 0.75, or 0.70, or whatever.

I think this technique is superior. It is easier for a vertical to hit your closing price than for a whole Iron Condor which is made up of not 2 but 4 options. I think it also responds better to market swings and works better in keeping you out of trouble as soon as possible.

Stay tuned for the next one! I will be talking about long term investments, plus some Forex Strategies I have been able to automate. I will share back testing results and the source code as well.

Remember, to always do your own homework :)

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  1. That's extraordinary, thanks for sharing

  2. If using thinkorswim brokerage, can I just leave the write options expire and receive full $200 credit, and sell debits for a few bucks to save some money and generate a higher return? Another question, thinkorswim charges $5 for the commission fees per trade, in order to apply iron condor, it will cost $40 per trade. Can iron condor still with such a high expense?

  3. Hi maplenight,

    Good questions. Yes, you can let the options expire get the full credit and also save in commissions by doing so. As long as the options you sold are in the money, you get to receive the full credit. You can also sell some Out of the Money options to generate some extra income but be aware your profitability picture will change and the risk will increase if you get a sharp movement against the options you're short.

    As for the fees, yes that is one of the downsides of IronCondors, they tend to be expensive.

    Last thing I remember TOS charged 9.95 for the whole transaction and $1.50 extra per contract. That would be 9.95 + (4*1.50) = $15.95 to get in, and the same amount to get out. This pricing scheme seems to change form time to time, and it is also different for US thn for Canada. Other brokers are better in terms of costs for these multi-legged strategies, Options house, Trade king. They seem to be much cheaper.

  4. Sorry, I should have said
    As long as the options you sold are NOT in the money

  5. Should I say that I prefer the 1 solution for closing an Iron Condor trade.
    With the first solution you aren't any more in any trade.
    With the second solution you are still in risk with the spread who stay open.
    If the market don't pulls back and volatility skews don't change you will be in trouble.

  6. Hi there, how about just exiting the short strikes and leaving the longs as a simple lottery ticket sort of speaking. The short strikes are 80% of the time what really makes money, why not let the long which have no obligation attach to them expire worthless. The P&L will look ugly until expiration that it's not real...thoughts, just got off a TOS seminar and they mentioned, just seems too good to be true. I have exited my IC's as a whole and separately as you mentioned above but exiting only the short strikes seems to beat anything I have ever seen/heard or read.