The majestic Iron Condor, a Delta neutral strategy designed to take advantage of Vega and Theta. The sheer dynamics of this strategy will assuredly not all be placed in one blog, but I’ll give you some insight into the potential dynamics and how this strategy is incredibly malleable.
The Iron Condor in its most simple form is combining a Long Call Vertical and a Long Put Vertical, or a Short Call Vertical and a Short Put Vertical. By combining these 2 segments you can potentially do a highly specific trade based upon your vision and the various forecasts at your disposal.
For example, lets say Implied Volatility is structurally low and you wish to be long and submit an Iron Condor. The Close Forecast states price, according to the model prediction, will be increasing over the specified duration to the expiration date you wish to trade. What you can do is provide a slightly Long Delta Iron Condor, by using the Long Put Vertical as more of a hedge on your Long Call Vertical than being a neutral hedging party.
By doing this you will create a finite risk, long delta iron condor, where your main risk is time.
For these types of trades contingent upon time you must be disciplined and exit according to both profit target, stop loss, and have a time function. For the more seasoned trader, you can convert the trade based upon updated Forecasts and roll contracts and verticals accordingly.
For beginners I would add that rolling is a beneficial strategy for taking profits off the table and specific moments; hedging with future verticals or naked contracts, but going off script should not be taken lightly for the novice trader. The best traders are trading a decision tree: If this happens, then that, and never going off script.
Preparation is the key to success, you must have a plan, and be prepared for the worst case scenario. Luckily with options, the majority of the time, the worst case scenario is defined.
Now to placement… Where do you place your strikes?
Well it depends, you can be Long the Iron Condor or Short, you can be Delta Long or Delta Short. Let’s go through the former.
You want to get the most bang for your buck on the combination, but it’s really up to the trader to determine where to place these specific strikes due to risk tolerances etc. but I will provide hopefully a helpful guide.
The more confident you are in the long delta position, the further ITM your Long Call is and the farther out your Short Call is, but too ITM poses a risk; and the further you push out the Short Call, the less it is a hedge.
You can use the High Forecast for the Short Call, and if the Close Forecast is above price, you use the ATM option, exiting when price breaches either the Close Forecast or the High Forecast, and then hedge for anomaly risk using the Low Forecast and a Long Put Vertical!
