Iron Condor Option Strategy When Legging In to the Trade

The Iron Condor option strategy and butterfly spreads are very sensitive to option volatility. For the trader, this means that if you're trying to leg in to this strategy (i.e. enter your call and put credit spreads separately), the volatility in the underlying market can make it difficult for the one side to get filled at the desired price.

If you don't get filled on one side of the iron condor, for whatever reason, such as the market moving against you while you're waiting for your trade to be filled, my advice is "don't chase it". What I mean by that is, don't keep reducing the amount of the credit you're prepared to accept, because if you do, your payoff diagram will suddenly not look so appealing anymore.

Here's what you can do.

You can buy one futures contract in the underlying - this is the equivalent of adding 100 long deltas to your position.

So let's imagine that you're employing an iron condor option strategy on the Russell 2000 index and your approach has been to "leg in" to it. You have been successful for the call "leg" but can't get the price you want for the put side. Being a credit spread, the call side would be short deltas, but by adding one long futures contract, you immediately gain 100 deltas, thus helping to neutralize the position temporarily.

Your risk graph would now look like the one below:

iron condor option strategy

It may not look like the best risk graph but that's not the point. What you have done here, is to give yourself time to get a better price on your put credit spread and you've also bought yourself some time in case you don't get filled that day. You also have time to re-evaluate your contract sizes and strike prices while you wait for the underlying to come back to a place where you can get filled for the price you want.

The key here, is that it helps you avoid chasing prices.

The other advantage with using a futures contract, is that they can be placed after normal trading hours. This means that should your put side (in our example above) not be filled on the trading day, you can hedge your risk after hours.

For any iron condor option strategy, ideally, you want your deltas to be 20 percent or less, of your theta.

Adjusting Iron Condor Option Strategy Positions

Once your Iron Condor is established, consider using a "gear", so that you don't have to move the credit spreads up and down. You can control your position with a small number of contracts. Adjusting your credit spreads leaves you exposed to slippage, particularly if your positions involve a large number of contracts.

Let's say you were in the early days of a trade involving 20 contracts on each side of your iron condor option strategy but are now concerned about the upside of this trade because the underlying has moved north.

You could place a debit spread of just 2 contracts at strike prices within the upper boundary of your risk graph. This will immediately neutralize the delta exposure without taking anything significant from your theta (theta is where you make your profit - on time decay).

Your risk graph would now look like this:

iron condor option strategy

As time progresses, you can choose to increase or decrease the level of your "gear" to balance your position. You can also do the same on the put side of your trade, if this is threatened. Using "gears" allows your to use small position sizes to neutralize your delta exposure without having to roll up or down your original large credit spreads.

When should you enter an iron condor option strategy? The further these positions are to expiration, the more susceptible they are to the effects of option implied volatility. So if you've been trading in a low IV environment and during the course of your trade, the IV goes up and stays there, your profit will sit underwater for weeks and you'll be forced to stay in the trade much longer than you want to be.

The Iron Condor strategy is one of the "monthly income" trades covered in the popular Trading Pro System options video course.

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