Iron Condor Trade Management: Tips for Maximum Profit

If you’re looking to generate maximum profits from your Iron Condor trades, then you need to focus on mastering trade management. This is an important aspect of trading this strategy. In this blog post, we will discuss some tips and strategies for managing your Iron Condor trades effectively. By following these guidelines, you can maximize your profits and reduce your risk exposure!

We will discuss:

1. What is an Iron Condor?
2. How do you place an Iron Condor Trade?
3. When do you manage an Iron Condor?
4. How do you manage an Iron Condor?
5. Should we layer Iron Condors?
6. When do we close Iron Condors?
7. Conclusion

What is an Iron Condor?

An Iron Condor is a directionally neutral, defined risk strategy that profits from a stock trading in a range through the expiration of the options. It benefits from the passage of time and any decreases in implied volatility.

It is constructed by holding one long put and one short put with different strike prices, and also holding one long call and one short call with different strike prices. The different strike prices will create 4 different “legs” or options contracts.

Directional Assumption: Neutral

Setup:

– Sell OTM Call Vertical Spread

– Sell OTM Put Vertical Spread

Ideal Implied Volatility Environment: High

Max Profit: The maximum profit potential for an Iron Condor is the net credit received. Maximum profit is realized when the underlying settles between the short strikes of the trade at expiration.

How to Calculate Breakeven(s):

– Upside: Short Call Strike + Credit Received

– Downside: Short Put Strike – Credit Received

How do you place an Iron Condor Trade?

Iron condors are a type of options trade that involves selling both a put vertical option spread and a call vertical spread with the same expiration date. The strike prices of the two spreads will all be out-of-the-money.

We look at the options for Iron Condors with about 30-60 DTE days to expiration.

Here is an example of selling an Iron Condor

Taking a look at Target, the stock has been hit and is trading in a range. The IVR is also high so there is good premium in the options which bodes well for Iron Condors.

We look 54 days out at the September options, and collect $300 buy selling in the 130/140 Put Spread and the $180/190 Call Spread. The max loss is $700 since it is $10 wide and we are collecting almost 1/3 the width of the strikes which is my rule. This provides a huge amount of movement the stock can have while we still remain profitable.

As long as Target stays between the 140 and 180 short strikes we keep all of the $300 collected.

When do you manage an Iron Condor?

Iron Condors should be managed when one of the short strikes is breached.

How do you manage an Iron Condor?

Iron Condors are managed when one of the short strikes is breached or tested. We manage iron condors by adjusting the untested side, or profitable side of the spread. To do this, we roll the untested spread closer to the stock price to collect more premium. We can go as far as rolling our untested spread to the same short strike as our tested spread, which creates an iron fly.

How far I go with rolling depends on a couple of factors:

How far did the stock price breach the short strike?

If the stock price breached the short strike by a lot, then I will go ahead and roll all the way to the tested short strike. We don’t want to go further than that as it will introduce new risks into the trade.

If the stock price just barely breached the short strike, then I will likely roll the untested side about halfway down to the tested side. I still want to leave a fairly large room for the stock to move and possibly bounce back.

How do I feel about why the stock price moved and do I think it will bounce back?

If I feel that the price move was not deserved and the stock will bounce back then I will be less aggressive with my roll staying further away and maybe only cutting the deltas in half.

When I’m at the point of having to manage an Iron Condor options trade, this is the time that may I look to place a second Iron Condor trade in the same underlying at new strike prices centered around the current price.

Should we layer Iron Condors?

Yes, we can layer Iron Condors. This is a good strategy to use when IVR spikes and you want to take advantage of it by collecting more premium.

While the existing trade may be a loser, or at least no longer centered, the new trade will likely help to balance out the trade at the new strike prices. This allows you to collect additional option premiums to decrease a loss and/or increase profit.

If you do choose to layer Iron Condors, make sure that you manage each trade separately and don’t let one losing trade affect the other.

When do we Close Iron Condors?

When we get to the 15-21 DTE days to expiration, then I like to close out all of the positions and move out the next month re-centering. Of course, this is only if IVR is still high so that a good premium may be collected.

Conclusion

Iron condors are a great way to collect premium in a high IVR environment while still having defined risk. By following these tips, you can maximize your profit potential and decrease your losses. Just remember to always manage your trades and don’t let one losing trade affect the other. Happy trading!