- Sell short Call and short Put with delta approximately 15. If a 15 delta is not available, it is a trader's choice whether to sell a higher or lower delta. More aggressive traders may choose to sell a higher delta, resulting in more credit, but more risk also as the short strike will be closer to the underlying. More conservative traders may choose to sell less than a 15 delta, resulting in less credit but further away from the underlying.
- Buy long Call 25 points above short strike, and buy long Put 30 points below short strike.
The screen shots below will illustrate the different deltas of the short strikes, as of this writing. These will likely not be the same strikes or deltas at the time of entry, but intended for illustrative purposes to outline the structure of the trade entry.
This first graph below shows the call strikes for the May cycle, which is the next cycle for entry:
SPX May Call Options
As you can see from this graph, there is not a 15 delta available, Being a more conservative trader, I would recommend selling the lower delta, or the 1645 strike with a delta of 13.
The next graph below shows the put strikes for the May cycle:
SPX May Put options:
As this illustrates, a 15 delta is not available on the put spreads either, at the time this screen shot was taken. On the put side, I'm usually a bit more flexible selecting the strikes, because the Iron Condor trade by nature is negative delta. In this case, I would most likely select the 1580 put as my short strike, with a delta of -16.
Based on the strikes illustrated above, an example of the order entry for this position is:
SELL May 1645 Call
BUY May 1670 Call
SELL May 1580 Put
BUY May 1550 Put
As of today, the credit for this position is $3.05. The total risk in the position is the margin ($3000) less the credit ($305), or $2,695.
The graph below illustrates the position using the above strikes:
SPX Sample Iron Condor
Please note that this position is not intended to be a trade recommendation; it is only for illustrative purposes.
- Target gain: 60% of credit received. Using the above example, the target gain would be $183.
- Max loss: 100% of credit received. Using the trade as illustrated, max loss would be $305.
Some traders may choose to target less than 60% of credit for target gain; however, it is recommended to also decrease the max loss amount if your target gain is less to keep the ratio in balance. An example might be a 50% target gain, max loss 90% of credit received. This could result in more target gains, but with a smaller gain per trade. I have not back tested this alternative.
Adjustment plan: No adjustments, exit the position at target gain or max loss. Exit no later than Wednesday of expiration week.
I felt it important for you to see the whole 52 week period of testing; so to make it easier to read I've broken down the year's results into three periods. The first period is below:
SPX Iron Condor Back testing results for period 1:
This period includes a total of 17 trades; 11 reached target, 6 exited for max loss.
The second test period is below:
SPX Iron Condor Back testing results for period 2:
This 17-week period included 13 trades that reached target, 4 exited at max loss.
The third test period is below:
SPX Iron Condor Back testing results for period 3:
This 18-week period included 14 trades that reached target, 4 exited at max loss.
A summary of the results is below:
Of the 52 weeks tested, 38 trades reached target gain (60% of the credit received, 14 were exited at max loss, (100% of credit received). This represents one loss every 3.7 weeks of the year on average. Based on trading one contract every week, the average gain per week was $189.67, 7.3% of the average margin per week.
From my back testing, most of the trades that were exited at a loss were due to a gap/large market movement. In these cases, it's best to exit the trade immediately to avoid it going past the pre-set max loss. Gaps can hurt any strategy, so it's best to practice keen risk management as always.
I traded this strategy one time live a few weeks ago, and reached target gain. I wanted to complete my back testing before I placed another live trade. If market conditions are within the guidelines, I will place a live trade on Tuesday, May 7, for the May 3 cycle. A trade update will be posted Tuesday. I do not recommend trading this live yet, but you may want to begin to paper trade the strategy to get a feel for the weekly Iron Condor as an alternative and/or in addition to the weekly Iron Butterfly.