Strategy
How you can start trading SPX Iron Condors
I started trading my new strategy some time ago and my options ladder is already fully developed (meaning that now I have expiration every week and widening my spreads). If you’ve just subscribed to my newsletter, considering mirroring this strategy, and start trading it, this post is meant to help you as the newsletter may differ from what you can afford to trade.
This post will be about money and trade management to allow you jumping in our moving money making train or even jump ahead of us.
In this post I will show you how to find out how wide spread you can trade and how to adjust the trade idea from our newsletter.
· First, determine how wide spread you can trade
This is quite easy. Take the total amount you can or you want to trade, divide it by seven, then divide the result by 100 to find out how wide spread you can trade.
For example, you have $5,000 available to trade. Divide 5000 by 7. The result is 714.28. Divide it by 100 and the result is 7.14. That means that you can trade 7 dollar wide spread. But SPX doesn’t have such width. SPX trades in 5 dollar increments. So the nearest available spread is 5 dollar wide spreads.
If you have $30,000 available, you proceed the same way. Divide 30,000 by 7 = 4285 then continue dividing by 100 = 42 dollar wide spread. The nearest available will be $40 wide spread you can afford to trade.
· How to adjust Iron Condor strikes
As of this writing we are trading 10 dollar wide spreads going towards 15 dollar spreads. Our goal is to widen the spreads to 40 dollars, then we will start adding contracts. If, for example, we put our 10 dollar wide spread, but you can afford 40 dollar spread, the diagram below show how to proceed.
Basically, you use our short strikes as in the newsletter, but adjust the long strikes to yours by adding calls 40 dollar higher and puts 40 dollars lower than ours:
Now you know how adjust your trade both directions – narrowing the strikes or widening them.
· Start building the ladder
Now that you know how much you can trade and how to adjust the strikes, start building up the ladder. What does it mean? The ladder’s purpose is to create expiration every week. We want weekly income. We want trading weekly, but we want as high probability of profit (POP) as possible.
In the past I used to trade weekly options against SPX with 4 to 7 DTE (days to expiration). The risk was high and never I was sure how the trade ends up. Trading 45 DTE increased my probability of profit to 80% – 92%.
Every Monday evening you will receive a newsletter with our trade idea. Start selling one Iron Condor per week. Do not invest all money at the same time. Use only one trade. Every week you will be opening a new trade and at seventh week you will be opening a trade #7 while on Friday, your trade #1 will be expiring. From then you will have expiration every week. You trading will now simulate weekly trading. You will have weekly income money making machine on and running.
· Widening your strikes
Let’s say you have been trading for some time and cash is piling up in your account. It is a good opportunity to start widening your spreads. This takes some ahead planning. You do not want to widen your spread in one week and then have no money the next week to open a new trade.
Here is a procedure how to determine if you can widen a spread or not yet.
Look at your money available to trade for options (options buying power). Let’s assume we are trading 10 dollar wide spreads and thinking to widen them to 15 dollar. To find out check to following.
For example, your latest options BP (buying power) shows $773 and you will have a Friday expiration the next day. On Saturday, your BP jumps to $2248.
If we open 15 dollar wide spread next Tuesday, will we have money for the subsequent trades? Let’s do some math.
| Starting BP week #1 | $2248 |
| Minus $15 wide spread in week #2 | – $1355 (assuming we collected $145 premium, thus $1500 – $145 = $1355 |
| Remaining BP in week #2 | $893 |
| Friday expiration in week #2 | + $1000 |
| Mew BP for the week #3 | $1893 |
This shows that if we open a new trade with 15 dollar wide wings, we will have enough money for the next week trade. Thus it is doable to widen your spreads. You can continue counting this every week to see whether you should stay with your current width or widen it.
· Adding new contracts
My goal is to reach 40 dollar wide Condor wings after which I plan on start adding contracts. This goal may change, I may later on adjust to 50 dollar or 100 dollar wide wings if it makes sense. I do not know where the cut off of feasibility is, but once I find out, I will let you know. If it won’t make sense to trade 50 dollar spread because of credit will be same as with 40 dollar spread but risk larger, then it will be better add contracts instead of widening the spreads.
In this case, we will start opening new trades on Tuesday and Wednesday. We will open one contract on Tuesday and one new contract on Wednesday. So if you still have more money than us allowing you trading more contracts than us, you can go ahead and open more contracts.
For example, let’s say you have $150,000 available to trade. Using math as mentioned above you will find out:
$150,000 ÷ 7 = $21428
$21428 ÷ 100 = $214 wide spreads
But, you want to trade only 40 dollar wide spread and not 210 wide spreads:
$210 ÷ 40 = 5 contracts
Per this math, you can trade five $40 wide spreads. This will allow you opening two contracts on Tuesday and one contract on Wednesday and one contract on Thursday. Still all trades will have 45 DTE on Friday, but now you will be trading every day (we will not trade on Mondays and Fridays).
· Why avoiding Mondays and Fridays?
I do not have this empirically verified and only go with what I read other traders commented on this. It is said that on Mondays and Fridays the value of options decays the fastest and on Fridays, there is very little to no extrinsic value in options, so you are literally leaving money on the table.
As I said, I do not have my own experience on this, but I have seen many experience traders advocating and opening new trades on Tuesdays or Wednesdays and sometimes on Thursdays.
Because of that, I do the same, but do not ask me for a reason. Once I find out, I will let you know.
· The case for wide spreads
The last thing I want to mention is the reason for trading wide spreads and one contract rather than narrow ones with more contracts. There are two large benefits to this:
- It is cheaper.
- The probability of a full loss is lower with wider spreads.
It is cheaper
Yes, it is cheaper to trader wider spread than narrow one with more contracts. Try it for yourself. If you open for example a 15 dollar wide spread and three 5 dollar spreads, you will pay commissions for 15 dollar spread for one contract. It could be let’s say $11.00.
For three contracts of 5 dollar spread you will pay more, let’s say 21 dollars.
The probability of loss is lower with wider spreads than narrower.
This is the best and strongest argument for wider spreads. You need to understand how spreads work and when they bring the full loss.
You will experience a full loss when the underlying price slices through both of your strikes. What is your probability of full loss then?
Check the picture below then:
As you can see from the picture above, wider spread is actually protecting you from a full loss. While your 5 dollar spread is already losing everything, your 25 dollar spread may still be above your breakeven price and thus no loss. If you also move your calls down (converting to Iron Clad), you can offset any potential loss from this trade whatsoever.
The last benefit is that if you decide rolling the trade, it will be easier to roll the 25 dollar wide spread for a credit than the 5 dollar spread.
· Rinse and repeat
In this post I tried to show you how you can start trading Iron Condors I provide in my newsletter when you start late or have different money available for trading. I presented you with money management, how many contracts to trade, how wide spreads and why.
If you decide to give it a shot and trade, just follow the rules and be consistent. Do this every week and your account will grow fast and fat. And if you need to gain some experience first and see how the strategy works, then just paper trade it. Paper trade it as long as you see how it works, how the strategy makes money, loses money, and how you can defend it. Nevertheless, I give you a hand and help you if you want. But the decision is yours.
I wish you good luck and a lot of money :)
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Grt read
Very clear information thank you
I’ve read through the pages, but what are your typical parameters for your puts (i’ve seen different deltas and closing %) but i’m unsure if that’s part of your current strategy. Since you’re going ahead and using your credit to buy stocks, I assumed you were letting them expire worthless, but I was just looking for some clarification, thanks.
Moreover, when we start trading options in our challenge account, I will be explaining this process more in detail.
Thank you for your input and question. I have tried to write my rules or metrics when selecting strikes for a strangle in my latest report, hope it helps. Trading options is very flexible trading so no rules can be set in stone. But usually, I start with delta 10 to 15 to set my strikes and to collect at least 10% of the stock value (e.g. if the stock trades for $40 then 10% from 100 shares or $400 would be $40 or 0.40 credit I would like to get). The rest is pretty much mechanical. Then I monitor the trade and roll it if I do not want an assignment or need to release buying power.
Thanks. I just read that. I was curious about the closing mechanics (50%, etc) since you’re reinvesting that credit towards stocks, if you only reinvest half of your credit. Yep, i assumed we’d dive deeper as the challenge went on, but having a little extra capital to utilize, i was hoping to do a little more before our challenge got there. Thanks for the post and response!
Yes, I let the trade run to expiration and let it expire. I roll it if I see it may not expire safe OTM, then I roll it, but if it is safe, I let it expire. I reinvest the entire credit I received.
I think it’s smart to step away from 0DTE trades, they work until they don’t…you’re ‘staring down a train to pick up pennies’ as they say.
I agree. The problem is that when they stop working the losses are catastrophic compared to the gains. I tried to push it hard but failed. Time to trade what I know and what works for me.
Thanks for stopping by.
when you said in the monthly spx
1) DTE shall be 50 or more.
2) The IC width shall be 25.
3) The collected premium shall be $3 or more, the more the better
what do you mean by width shall be 25? the difference between the sell strikes (cal and put) to be 25? if you choose one side 10 delta, the other should be 25 strikes away? so if the sell call is 3555 and sell put should be 25 point away (3555-25 = 3530) but this will be ITM put and not OTM… just trying to understand how to construct it at 10 delta and get 3$ premium. any help is appreciated.
25 is the width between short and long leg of the option, that is 25 dollars, or 2500, So, if you sell 3000 put and buy long put, it is 25 below the short one thus 2975. Then the entire spread will be 3000 / 2975. Then you do the same on the call side. Let’s say you want to sell 3400 short call then you open 25 points call above the short one, thus 3425. The entire spread then will be 3400 / 3425 call spread. Both shorts (put and call) shall be at delta 10).
Martin,
I think I understand most of the statement above and makes perfect sense, except this part “Both shorts (put and call) shall be at delta 10).”
So on the example above the IC will look like this:
Buy 3425 Call
Sell 3400 Call
Sell 3000 Put
Buy 2975 Put
#1 Question: How did you derive the 10 delta? (can’t quite wrap my head around that part)
#2 Question: I see the width between selling 3400 Call vs selling 3000 put is $400 dollars…. Did you come up up with this number based on the support/resistance for the 1-2 months ?
Currently using Robinhood for the options at the moment.
Thanks again Martin for this take!
The option chain should show you current deltas. So you just go and find deltas 10 for each short option. See picture below for 57 DTE trade. So, if you find delta 10 you get your short legs, Then buy 25 points wide long legs. In this example, you will get a 750 points wide Iron Condor body with 25 points wide wings and collect 4.40 (or $440) credit.
Amazing! Thank you so much for explaining that Martin. Now it makes sense.
Also how do you usually best define the Short Call & Put Positions….let’s say for Weeklies ending in Friday and for Monthlies?
I was thinking support/resistance based on last 30-40 days.. thoughts?
I do this solely on delta but depending on the market outlook I may skew the trades to the market direction or omit one side completely. For example, in a strong bull market, I may choose higher delta on puts and skew calls higher or omit calls whatsoever.
Hi Martin,
I’ve got some doubts concerning your new strategy. Rolling untested side when the tested side reaches delta 30 is a no-go in practice. The untested side is so deep out-of-the money that you can’t trade it. This is particularly challenging for your 3-day strategy.
Could you please clarify it a bit?
Keep up great work !
Paul
On the contrary. When you roll untested down (calls) or up (puts) you collect more credit and offset the potential loss. At some point you end up having an Iron Fly strategy when your puts and calls (short) are at the same strike. I also use the credit to roll the tested side, these days. Works well. With SPX I do not have any problem rolling untested side closer to the tested one.
Thank you for all the work and guidelines you post here for free.
I had a look at the champions list and found it still needs a lot of screening as many stocks just don’t have enough option activity to be worth considering for put selling.
The champions list is mostly for purchasing the dividend stocks, so yes you need to screen them for being optionable. It is however difficult to find good optionable stocks. Those worth selling options on are in my Watch List.
Really cool website this.. have been reading a lot. I notice in your strategy rules above that there is only one that mentions any technical analysis. You mention looking for getting in around supports etc. What tools would you use for that? Just drawing lines or do you use any indicators at all?
Hi, I use Fibonacci levels and then draw supports and resistances based on the market behavior.
Thanks Martin, keep up the great info!
This is fantastic. Thank you!!
Thank you. Found your blog and it has been immensely informative.
Thank you. Hope it helps others to avoid my mistakes…
What are your thoughts on selling puts on a 3x fund such as TNA?
I guess it would by like trading any index. I would have to watch it for some time to see how its options react to the market moves. The only thing I do not like is that it is not marginable so trading June contract 60 strike you make 53 premiums and you will need 5,346 margin to trade it. Too much money for not much music.
Hello,
I’ve just found your website and read several posts. You’ve done a wonderful job of sharing and imparting your knowledge in a clear and concise read. Kudos for your commitment to assisting others in their efforts to trade options profitably.
One question I had though in your SPX trading strategy relates to the 40 dollar wide strikes you use. Your discussion of the logic in using the wider strikes seems to neglect one important metric in designing trades and that is margin impact.
If I choose to trade a Nov1 15 iron condor in SPX with short strikes of 1700/2200, using your 40 dollar wide strikes I get a trade that looks like this – 1660/1700/2220/2260. Using TOS, I right click on the trade, hit “confirm and send” and a dialogue box pops up which shows me I will get a $202.01 credit after commissions with a resulting buying power effect of ($3,797.99) which equates to a 5.31% return on risk.
If I then use the same short strikes but make the strikes 5 dollars wide, I get a trade that looks like this – 1695/1700/2220/2225. Now I adjust the number of contracts so it comes as close to the buying power effect above of ($3,797.99) and I get 8 contracts. Again, opening the dialogue box which summarizes the trade, it shows a credit of $246.01 after commissions with a resulting buying power effect of ($3,753.99) which equates to a 6.55% return on risk.
Isn’t that getting me more bang for my buck? Please consider the above scenario and see if I’ve missed something.
Keep up the good work.
Steve
Hi Steve, thank you for you kind words.
To you question, it is a matter of priorities. Yes with 8 contracts you get about $44 more or 1% more, but your risk losing entire credit is a lot higher than mine. As I tried to describe in the post, 5 dollar spread has a higher likeliness of the price smashing thru both strikes than 40 dollars spread. It is the same with 50% credit capturing strategy. When I receive $180 credit, why liquidating it at $90 and not keeping the entire credit and letting the trade expire worthless? Well, the numbers are against you and you will be better off with a wider spread and closing it at 50% credit although it looks better otherwise at first look. And actually it is not. Trading 5 dollars spread is OK if you do not have that margin available (I do not have it, so I only trade 10 dollars spread and working towards 40 dollar spread goal). So the entire spread width meaning lays in probability of success and not the immediate gain. I personally would prefer lesser gain but lower risk and higher probability of success than 1% more gain and a chance that if the trade goes against me I have higher chance of losing the entire risked spread.