Some complex options trades can be broken down into legs. An iron condor is composed of two credit spreads, for example, a put credit spread and a call credit spread. An iron butterfly is also composed of two credit spreads, with the sold put and sold call at the same strike.

Even a regular butterfly, with the body and wings, can be broken into two separate spreads, one a debit spread and the other a credit spread. For example, a 1-contract call OEX 505 butterfly with wings at the 480 and 530 strikes is composed of 1 long 480 call, 2 sold (or short) 505 calls and 1 long 530 call. However, it can also be said that the butterfly is formed of one debit spread--the 1 long 480 and 1 short 505 call--and one credit spread--the remaining 1 short 505 call and 1 long 530 call.

Although I don't know of any traders who leg into butterflies--buying the debit spread and selling the credit spread separately--I do know of some who leg separately into each spread that composes that composes an iron condor. I know others who wouldn't dare take the risk that comes from legging in.

What is that risk? It's the risk of an adverse price movement after the first order is filled and before the second one is filled.

Coming from a technical analysis background, my preference was to set a time range for entering my iron condors, and to use any big swing up into possible resistance to swing into my bear call spreads and any drop down into possible strong support to enter into my bull put spreads. January 2009 offered an extreme example of an actual 30-contract iron condor I entered this way.

An Extreme Example of Legging In:

Theoretically, I guess, I had two separate SPX credit spreads that month and not an iron condor, since there wasn't any actual day when I ended the day with a complete SPX iron condor in that account. However, it was my intention to set up an iron condor and I was just lucky that I was able to close the bull put credit spread so early. I typically close my spreads when the cost narrows to $0.20, to lock in my profit and remove risk.

In this case, I was right about where the temporary support and resistance would be, allowing me to position my sold strikes 450 points apart. The high volatility at the time also aided me in getting those strikes that far away, of course. To recap, I was able to close the put side on the same day I legged into the call side. On February 12, I closed the call side for $0.20, locking in the profit on that side, too. The trade was over, the profit safe and risk removed.

However, when the markets bottomed last spring and started roaring to the upside, I found myself caught in two expiration cycles when I used a big bounce to enter the call spreads but there was never a pullback big enough to sell what I considered a safe put credit spread. Here's where one version of that movement risk that I mentioned earlier was coming into play. The markets kept shooting higher before I could get into my bull put credit spreads.

My income was cut in half on those particular trades, of course, but the eventual outcome was worse than that. Of course, if prices are roaring in one direction only, they're likely to blaze right up toward the adjustment point for the spread on that side. When I adjust, I adjust by buying back the spread for a debit and then, in the case of a call spread, rolling up. However, if I've taken in only half the credit I usually do, there's not as much money against which to cushion the loss from the spread that needed adjustment. The loss is bigger when I buy back for a debit. The roll, in this case, is not likely to bring in enough money, even if the size were doubled, to make up the debit paid for closing the spread that needed adjusting.

Iron condors are not high-yielding trades as it is, and function so well for income traders because the probability is typically so low that they'll need adjusting. When they do need adjusting, however, that adjustment can be costly. Cutting that initial credit in half meant that I took some losses late last spring, and bigger losses than would have been necessary if I'd had full credit against which to balance them.

Market conditions had changed. I changed my practice along with those conditions. The rest of last year, I entered the whole position at once. I don't like doing that because I can't swing my sold strikes as far away, but there are pros and cons to each method, as I've tried to point out in this and other articles about trading.

Since I represent the self-taught trader on these pages, I wanted to present two different examples from my own trading experiences from last year. The pros and cons of different choices are perhaps more apparent when you're looking at real-life examples. When making the decision whether to leg into the separate spreads or put on the entire iron condor at once, traders must evaluate what is best for their trading style, their account size, their temperament and the current market environment. I wish there were one right way as that would better suit my personality, but there's unfortunately not that one right way.

One further note: I have occasionally heard traders asking about legging into each of the four options that compose an iron condor separately rather than just leg into two separate spreads. I wouldn't suggest doing that unless one has much experience with iron condors and with trading options in general. I've been trading iron condors for many years, and I don't even consider legging into the four separate options.