Why I Don’t Like Iron Condors

It’s certainly been a while since I’ve posted here but I like to post when I find topics that I think are relevant to what I’m seeing in the various trading communities with which I’m involved, including this one. I do put a good amount of time and effort into these posts and so I want them to be useful to other traders.

That being said, the point of the title is not to be click bait, I swear. I’m not here to say that Iron Condors are a bad trade or that there aren’t traders out there who make money with them. Those traders exist and more power to them. This is very much an opinion piece as to why I don’t like them and what I think new traders need to understand before putting them on. The inspiration for this blog is that several newer traders have reached out to me talking about wanting to do Iron Condors. I understand why. When you look at the risk graph, they look like one of the safest plays out there. Those wide break evens are a siren’s song to new traders. But none of this is to say that there are not strategies to handle the risks of this trade. Just about any trade can work with a solid plan and good execution. But I think it’s critical to understand this trade before jumping into one.

What is an Iron Condor?

Two simple ways to look at the structure of an Iron Condor are:

  1. Two out of the money credit spreads
  2. A hedged strangle

The width of the spreads is up to you, but the idea is that if the underlying stays roughly between the two shorts, by expiration, the trade wins. If not, the trade loses. So the biggest risk is a large move in the underlying. Typically the shorts are far out of the money and so this gives the underlying a lot of room to move while getting a net credit when the trade is put on. As these are credit spreads, the maximum gain is the credit received and the risk of the IC is the width of the spreads minus the credit received. If you aren’t familiar with credit spreads, I advise you learn about them before even looking at an Iron Condor.

The Appeal of an Iron Condor

Why do traders like Iron Condors? Primarily, it’s the room they can provide. You can put those spreads out as wide as you like. This can greatly increase your probability of success at expiration. It’s relatively simple to set up an Iron Condor that has a 90% probability of success at expiration. This “safety” is what I think lures new traders to this trade. Why not put on a trade that should almost always win? Those odds sound really good. And when they see the risk graph at the start of the trade it looks like a trade that you an pretty much set and forget. Easy money, right?

The Risks of an Iron Condor

As I stated earlier the primary risk of an Iron Condor is that the underlying moves beyond one of the short strikes. At expiration this would result in the maximum loss for the trade. Of course, you are not required to stay in the trade until expiration (in fact, I almost never do) and there are adjustment strategies that can help trades that are moving too far in either direction for comfort.


So, why does this trade look too good to be true? Why isn’t everyone doing Iron Condors? Who wouldn’t like a trade that can win 90%+ of the time? And this is on one of the reasons I don’t like Iron Condors or, more specifically, wide Iron Condors. As the two spreads get further apart, the trade gets more room to work and the probabilities get better, but the reward also drops while the risk really does not. This is because far out of the money options contracts have less premium to sell while the difference in the premiums based on the width of each spread doesn’t change much, certainly not in proportion to the drop in premium. And the net credit is the maximum reward of the trade. The best case for this trade is that all of the contracts expire worthless and you are left with the credit received. But the further out you sell the spreads to get more room, the less premium you collect. This can lead to pretty low returns which vs the risk of the trade.

Example: A High Probability Iron Condor

Let’s look at some real-world examples to try and make this clear. Here is an example of what I would consider to be a high probability IC:

In this trade, the shorts are opened at around a .10 delta on each side, and the spreads are 5 points wide. This yields a probability of success at expiration of nearly 90%. The net credit of this 3-lot is $198 which the most that it can make (note: this is after commissions of $12. If your platform does not charge commissions, you could get $210 but my point will still stand). But the total risk on this trade is $1302. So you are risking $1300 to make no more than $200 (using rounded figures). That’s over 6x the risk compared to the reward. And, remember to get that full credit, I have to go to expiration (which my readers will know, I don’t like to do, as the price risk can get crazy). In addition to far out of the money options having low premium, the theta is also low. So for this trade, my starting theta for this trade is less than $7/day. Theta is a big component of making money in this trade since I want both spreads to decay as quickly as possible. The range of this trade is very nice with about 200 points on the upside and 350 points on the downside. But it’s a 30-day trade. Given this past year, do you think those kind of moves could happen over the next 30 days? Iron Condors are negative Vega trades so traders prefer to open them when volatility is high because a vol drop helps the trade and with higher volatility comes higher premiums overall. But when volatility is high, the underlying tends to move more so there’s added risk.

Something else to consider with Iron Condors is how fast the trades can get into trouble. With those near vertical sides, as the underlying moves out towards the shorts, the delta and gamma tend to increase and the trade starts to become directional which is exactly the opposite of what you wanted when you put this trade on. If you want to pick direction, just put on a single credit spread and only take risk on one side. So while the Iron Condor gives you a lot of room on the expiration graph, let’s see what the curves look like 2 weeks later.

The slope is starting to get steeper as you move towards the edges, especially on the upside. This means that if SPX moves in that direction, you will become more directional as delta and gamma increase and each move up hurts the trade more. The downside certainly looks better but keep in mind as well that a sharp move to the downside will spike volatility and so the curve won’t be quite a generous ad the graph currently shows. So if you let the trade go to either side, you may have some white knuckles while you are holding on. Alternatively, you can adjust but most of these adjustments reduce the total credit of the trade which, in turn, lowers the amount of the win. If you over-adjust this, you may end up with no credit left and, at that point, the trade will just lose.

The most I can make on this trade is about 15% but I can’t get that until expiration. If I go to expiration and lose, I will lose $1300. I’m just not happy with the risk/reward ratio on this as well as the glacial speed of time decay.

Example: A Lower Probability Iron Condor

It is, of course possible to sell higher deltas. If I do this, I take in more premium, and get higher theta decay. What I lose is the room to move. Take a look at this example:

In this trade, I’m selling around a .20 delta on each side. In this case I sold a 4-lot to try and keep the risk close to the other trade. In this case, it’s a bit more at $1356. However, my credit is now $660 (or $644 after my expenses). This puts my risk/reward at about 2x. I certainly like this better. But the downside is my range is now 140 points on the upside and 176 points on the downside. That’s a significant difference and it brings my probability of profit down to about 66%. On the positive side, my theta is better at about $10.50/day at the beginning of the trade. If I had to trade an Iron Condor, I like this better than the first one. However, this puts your risk/reward closer in line with other trades that I like better.

Example: An Iron Butterfly

A butterfly is the most extreme condor in terms of width. Both spreads are selling the same short. While I prefer butterflies that are all calls or all puts, I’ll use an Iron Butterfly here because it is more similar to the Iron Condor (both have two credit spreads) so it will compare better to the Iron Condors.

With this trade, my range is very narrow compared to the Iron Condors. And, with this trade, the width of the structure is determined by the width of the spreads themselves rather than the distance between the shorts since that distance is zero. So why do I like this trade better? It’s not the range as, in this case, I have around 70 points in each direction which gives me an expiration probability of about 26%. But, remember, I have no plans on staying to expiration week, yet alone expiration day, so the expiration probabilities don’t mean as much to me. I’m far more concerned with the next week or two. Ideally, I’m out of this trade in 2 weeks or less. My total risk is between the two Iron Condors at about $1330. but I took in $5671 in credit. That flips the risk/reward ratio over to the reward side. Now, with any butterfly, the goal should never be to get the maximum profit as the underlying would have to expire on the exact short strikes which is akin to winning the lottery. But, I’m usually trying to make about 10% on these trades in far less time and having that large total credit gives me plenty of room to reach it, even if I had to reduce the total credit with adjustments. And if I was actively managing an Iron Condor, especially the lower probability example, if the underlying moved 70 points in either direction, I’d probably have adjusted the Iron Condor as well which means the work to maintain each is similar given similar market conditions. I also like the starting Theta of about $12/day even though my total risk is a bit lower than the lower probability Iron Condor.

So while the butterfly doesn’t look very appealing compared to the Iron Condor in terms of room and expiration probabilities, there are other benefits that help me make money with it.

My goal is not to encourage or discourage you from any particular trade. If you are comfortable with a given trade, have a detailed trading plan, and can execute that plan consistently, any trade can be a good trade. Rather my goal here is to show my preferences and the reasons why I prefer one trade over another. Have questions? Have a trade you really like? Feel free to reach out in the comments here or to me directly.

Why I Primarily Trade SPX

Those out there who follow my trades, especially my weekly series This Week @MidwayTrades will notice that I primarily trade one underlying vehicle: options on SPX, the S&P 500 Index. I occasionally do small spec trades in other underlyings but anything I do regularly and of significant size is always in SPX. This is not the way a lot of retail options traders operate so I thought it would be worth a blog post to explain why I spend so much time trading options of one underlying. Let me say up front, none of this is to say that there is anything wrong with playing lots of different options. I always say if you can consistently make money trading a different way, that’s the right way for you to trade. But in this post, I will spell out why I prefer to trade SPX whenever market conditions allow it (which is most of the time).

1. Liquidity

To me, liquidity is essential. Without liquidity, do you really know the worth of your position? I would argue no. Market prices are set when buyers and sellers agree on a price and if no one else is participating in a market, it’s tough to tell the actual price of something in that market. The CBOE (Chicago Board Options Exchange) tracks activity of nearly 3000 underlyings that trade options. I personally would only be interested in trading options in the top 100 in terms of volume. You can find this list here for your own inspection. This is for equities. I found stats on indices here. You will find that SPX is not only well in the top 100, but top 10-15 depending on the time frame. With all the available options out there to trade, why spend time and money fighting to get a fill on a low volume/open interest contract? Price slippage is very real and I rarely, if ever, have to give in more than $.10 of a reasonable mid-price for SPX, usually less.

Outside of good fills, good liquidity also gives far more options to trade (i.e. more strikes, and more expirations). SPX not only has Friday weekly expiration but Monday and Wednesday as well. I used to avoid the non-Friday expirations, but recently I’ve found that I get good fills on Wednesday as well. This makes it easier to put on multiple positions in a single account without stepping on other trades in the same expiration which can lead to confusion when closing or adjusting trades.

2. High Prices

I see lots of traders who head to the bargain basement because the option prices are cheap. It’s certainly tempting just as it is trading stocks. But there’s a downside to this. In stocks, it’s usually that the stock has a low price for a reason (low quality). But for options it means there isn’t much in the way of premium. As a trader who likes to sell premium, this means I have to trade a lot more contracts to generate enough premium to make it worth the risk. And while commission costs have come down significantly even this very year, they still add up vs the amount I want to make selling premium. A quick side note: when I say I sell premium that doesn’t mean just selling options or even that I open a trade for a net credit. In my non-spec trades, I am always selling more time premium than I am buying (thus being positive theta) and in many cases I am also selling more volatility than I am buying (unless volatility is extremely low as it is right now in which case I set up my trades to be positive vega and I’m a volatility buyer). But the price of the option starts with the price of the underlying. At the time of this post, SPX is a $3100 index. That means that even trading a one lot can involve over $1000 in margin. As I’m trying to make 7-10% of that as a successful trade, this means I can trade fewer contracts to make a decent amount of money on a trade. This is one of the reasons I prefer SPX to the ETF for the S&P 500 SPY which is priced at about 10% of SPX. Yes, the prices are lower, but I would need to trade 10 contracts for every 1 of SPX and that is 10X the commission to my broker. There are other reasons I prefer SPX to SPY that will come later. But the bottom line is, outside of unusual small spec plays, I prefer to trade underlyings above $80/share. Below that it’s tough to get enough premium to sell to make a decent profit.

3. Diversification

A nice feature of a large index like SPX is that it represents many different companies across different sectors by design. The S&P 500 consists of (to no one’s surprise) 500 stocks. That means that by trading this underlying I get a certain amount of sector diversification built-in. Is it perfect? Of course not. The index can get out of balance at times. But it’s rarely so out of whack that one stock or one sector will destroy it. I still have to be aware of what’s going on and be ready to take action if something does happen to move the index but it’s less impactful than say, earnings or news on one stock which can move it several standard deviations in a day.

And that’s another advantage: SPX doesn’t have earnings events in the same way that individual stocks do. Individual components have them all the time but they are spread out over many days so the effect is muted. That isn’t to say that there are no events that cause a move. The biggest one these days is Fed announcements. I do keep track of Fed meetings and am a bit cautious adding new positions right on top of them. There’s a nice site that keeps track of economic news on a daily and weekly basis called Econoday and it’s not a bad idea to keep a browser tab open to it on your trading station. Other news can move the index as well, the recent trade war has certainly moved the market and has been unpredictable at times, but I have found the risk to be more manageable than individual stocks.

4. Cash Settlemement

Equity options are generally settled in shares of the stock. Options that expire in the money are usually automatically assigned and shares of stocks change hands as a result. But indicies like SPX do not have actual shares so their options are cash settled. This is another difference between options directly on the index and ETFs (like SPY) based on an index. SPY options are settled in shares of SPY.

Now, it’s reasonable to think that as long as I close my position before expiration, this isn’t really an issue. Except that with share settled options, there is always a risk of early exercise. The buyer of the option, most of the time has the right to exercise their right at any time during the life of the contract (this is known as American style). But since there are no actual shares to exercise, options on indicies do not have early assignment (this is known as European style). I will use SPY as an example since it is an ETF based on the S&P 500. SPY has a dividend based on the dividends of the stocks in the index. One of the reasons that options get exercised early is to capture a dividend. Another can be a buyout. This happened to me once in my early trading days. I was writing covered calls against a position and the company got bought out for a higher price than the strike price on the calls I was writing. The next day, my shares were called away. The SPX doesn’t have real shares and, therefore, has no dividend and, while buyouts can happen to companies in the index, the index itself can’t be bought out so there’s no real advantage to early exercise which is why it’s European style.

5. Tax Treatment

This is US specific so if you are not in the US it may not apply to you. But in the US we have capital gains taxes as part of our income tax system. The basic idea is that selling something for a profit generates income that falls under our income tax. But the US tax code distinguishes long-term capital gains (meaning you held something for at least a year) and short-term capital gains. Most options are held for under a year unless you are dealing exclusively in LEAPs so any profits made by them would be taxed at the short term rate (which is my regular income tax rate vs the long term rate of 15%). But options on “broad-based indicies” (which includes SPX) are treated differently. Any profit I make on SPX options where I held it for less than a year (which is all of them in my case) is taxed 60% at the long term rate and 40% at the short term rate. While this is not a huge advantage for me, it’s a nice bonus. This tax treatment does not apply, however, to ETFs like SPY. Of the 5 points made here, this is the least important, but I thought it is still worth mentioning as a reason to trade options in big idicies.


There are multiple ways to make money in options. My style is mostly around non-directional plays on big indicies. SPX isn’t the only big index out there with options. I have traded options in the Russell 2000 (RUT) which is based on smaller companies than SPX. It tends to be a bit more volatile, but it is quite trade-able and all of these points would apply. As is the NASDAQ index which is priced even higher than SPX. But at the end of the day, each trader needs to find out what works for that particular person. There’s no one right way to trade. But I thought this discussion of SPX may, in addition to helping some folks learn more about options, could lead to other discussions of trading ideas. Feel free to comment below or reach out to me privately at midway@

Good Trading!

Comparing Directional Plays

A lot of folks like to use options because of the leverage and lower costs vs buying and selling shares of stock, especially on high-priced stocks and indices. While I usually use options to trade non-directional strategies that rely on time decay rather than price movement, there are times when it’s fun to get a little directional. Sometimes (like right now), it’s tough to be non-directional because the market is moving all over the place and price movement makes it tough and not worth the risk. So, I thought I’d compare a few strategies for directional trading. The first few you’ve probably seen before, and one that you may not have seen but I think is really interesting.

For the purposes of this post, I’m going to be bearish on Tesla. No particular reason, this is just an example, not trading advise. I actually have no real opinion on Tesla, but it’s a high-priced stock (around $235/share) so it makes for a good example. Of course shorting the stock is very risky and expensive because while a stock can only got $0, there’s no theoretical limit to how high it goes so shorting is a dangerous and expensive game, IMHO. However, I fully believe that retail traders can use long PUTs to go short on a stock without the undefined risk. Since you are in a long or covered position, your risk is defined and so you know how much you can lose and your broker won’t ask for you first born in margin. It’s one of the cool things about options.

Strategy 1: But Long Puts

This is the simplest strategy and probably one that most folks who know anything about options would understand. So if I’m bearish on TSLA, I could buy a put at-the-money (10 days out) for about $665 (plus commissions, of course). Not bad for a $235 stock. And way less than what your broker would want you to put up to short 100 shares of TSLA. Your total risk is what you paid for the put (so $665/contract) and you can scale your up to whatever level at which your are comfortable. The trade looks like this:

Buying a single $235 put 10 days out

In this trade, my break even is if TSLA hits $223.35 since I need to cover the cost of the put. And because we are only 10 days from expiration, I’ll need it to move soon as I’m losing about $30/day in time decay and this will increase a bit each day. I could always go out further in time to allow it more time to work, but I’ll pay more. For example, at 31 days to expiration that same put would cost $1208 which means TSLA needs to get below $222.83 (similar) but I’m only losing $18/day to start to time decay since I have more time.

Buying a single $235 put 31 days out

You could go further up or down in price and time and the number would change, but you get the idea. This is a very simple strategy that is bearish on TSLA but gives you limited risk. Nothing wrong with it, but what if we could do it cheaper?

Strategy 2: Put Vertical Spread

So one way to reduce our risk and still be bearish on TSLA is instead of just buying a put, also sell a lower cost put against it. This does a couple of things for us. It reduces the risk since we are getting a credit for selling something, and it reduces our time decay (and can even get time to work for us). So to keep it consistent to start, let’s do a 5-point vertical spread buying the same $235 put 10 days out, but also selling a $230 put against it.

Buying a 10-day put vertical ($235/$230)

Look at what happened. First, we have reduced our total risk to $205 plus commissions per spread. That’s a 70% discount to just buying the put. And on top of that at the start of the trade, time is working for us instead of against us as we’ll make $.40/day to start and if TSLA goes down that will increase significantly.

Now, there’s no free lunch so what have we given up by doing this? The big thing we give up is because we sold a put along, we cap our maximum upside to $293. That’s about 140% of the risk where if you look at the long put, it can make a lot more if TSLA goes down hard. With the vertical, even if TSLA went to $0, the most we’ll make is $293. That’t still a really good gain and I’d probably get out before it ever got there, but it is a limit so if you’re shooting for the moon, you may not like this strategy. However, I like the idea of the reduced risk if we’re wrong and the initial positive theta which means we aren’t losing money to time decay (unless TSLA goes up). And, of course, our commissions will be a higher since we are trading more options so keep that in mind.

But what if we could make this even cheaper?

Strategy 3: Directional Butterflies

Here’s a strategy you may not have seen before, and it may not be to your liking, but I really like it for certain situations. It’s a bit more complex but it’s REALLY cheap. It’s called a directional butterfly. What’s a butterfly? Well, if you’ve never seen a butterfly before, check out my Options Fundamental Series, particularly my episode on Butterflies. But, in short, a butterfly is 2 vertical spreads with the same short strike. So a single butterfly will typically follow a 1-2-1 pattern which you’ll see below. In this example, I’m going to keep the same vertical spread I did above, but add a second vertical even lower to reduce the cost even more.

Buying a TSLA directional butterfly. Buying 1 put at $235, selling 2 puts at $230, and buying 1 put at $225

Wow! I put on this trade for $55 plus commissions! That is the most I can lose. And I have even more positive theta so at the start of the trade I’m making $2.67/day. Too good to be true? Again, what am I giving up? In this case, if TSLA goes way down, I can lose money again. I have some risk on the downside as well as the upside. So TSLA has to go down, but not down too far too quickly. And because this trade has 4 contracts, my commissions will be even higher than the vertical. I can scale this up by adding more butterflies, but watch the commissions as it’s 4 contracts per fly. On the plus side if TSLA only moves to around my short strikes ($230), I can make quite a bit more than the vertical. I get that in exchange for having risk on the downside as well. I can tweak this around by moving the fly up or down for more or less money as well as adjusting the width of the “wings” (say 10 points instead of 5). Here’s an example of the same fly starting at $235, but with 10 point wings:

A 10-point directional fly

As you can see, the profitable area of my fly (the “tent”) is wider, but my cost is $182.50 rather than $52. So I get more room and higher starting theta, but I’m paying up for it. But $182.50 is still better than the put and the vertical with respect to risk.


So, what’s the best way to do this? There isn’t a best way. All three strategies have pluses and minuses. Risk vs reward, time decay, and area of profitability are all factors in choosing a strategy. The point of this post isn’t to sell one strategy over another, but rather to show that in the world of options, there are multiple ways to do things and the more tools you have at your disposal, the more you can decide what kind of trade works for you.

Any questions or comments? What kind of directional plays do you like? I’d love to hear from you so feel free to leave a comment here or reach out to me on Gab @MidwayGab or on my BitChute channel MidwayTrades. I’d love to talk about what people are doing or even try to explain some concepts if that helps. I’m always learning as well so let’s talk options!