Three questions regarding selling iron condors

[farcis]

So I’ve been wanting to do an iron condor sell for a while now but I have a few questions that i can’t find answers to online

1. I know your supposed to sell iron condors when implied volatility is high, but if I’m selling IC based on the assumption that prices will not move then is it ok to sell ic when Iv is low? Not super low but maybe iv rank 20 or above at least.

2. I want to only hold the trade for maybe three to four days on the week of the weekly options expiration (possibly execute on Monday and take profit/loss Thurs or Friday). Is this a good idea? Theta does rapidly increase on the days before expiration which I thought help get me get quite abit of the profits. Or would it be better to sell ic two weeks out of expiration but closing it on the first friday? ( I’m a short term trader which is why I prefer to only hold for a few days or a week at the most.)

3. Almost every blog post or video online explains what an ic is or how to sell one but none of them go through the practical application of FA or TA to decide what to sell ic on. I found my own strategy that I wanted to try out but I was wondering if anyone can give me a little insight on what they use to decide when to sell ic on?

Thanks in advance!

 

[TheBigShort]

is it ok to sell ic when Iv is low?

What you are doing is trading the terminal distribution. So yet it is fine. Selling when IV is low however does not give you a good risk/reward.

Almost every blog post or video online explains what an ic is or how to sell one but none of them go through the practical application of FA or TA to decide what to sell ic on. I found my own strategy that I wanted to try out but I was wondering if anyone can give me a little insight on what they use to decide when to sell ic on?

When trading an IC you need to look at 3rd and 4th moments as well. I mean Lets say IV is high and you think the stock will be range bound. However when you go to look at vol surface, you notice that the "smile" is extremely convex.Then selling a IC would not make sense.

 

[farcis]

What you are doing is trading the terminal distribution. So yet it is fine. Selling when IV is low however does not give you a good risk/reward.

When trading an IC you need to look at 3rd and 4th moments as well. I mean Lets say IV is high and you think the stock will be range bound. However when you go to look at vol surface, you notice that the "smile" is extremely convex.Then selling a IC would not make sense.

I don't get what you mean in the second part. I do agree though that high iv gets you better prices for ranges and risk/reward.
Thanks though!

 

[tommcginnis]

One of the first Myths Of Retail Option Trading that you should kill is the idea that OTM theta is a geometrically-decreasing line. It's not. From ~45 days out, it's nearly linear. If way OTM, the actual decay rate will go to 0¢ as the IV stair-steps up: the thing is holding onto it's last few cents because, y'know, "vig"... This is how you get 10¢ options that last and last and last....

With an IC (or with one side of an IC), you've got additional spread mechanics going on: it will not be the smooth little line you see depicted so often. Before you go too far, scrape some data off of your platform, and plot it. Both sides. It will be illuminating. It will also vary by underlying (much as does the major driver: IV), so do a couple of 'em.

What you might want to do instead of selling weeklys to their expiry, is sell your ICs 3-4 weeks out, and hold them for 1 week. Harvest, Rinse&Repeat. Think in terms of (Margin) Capital slots, used on a rotating, max$return/day minRisk basis.

 

[Kim Klaiman]

Opening the trade on the last week will expose you to very high negative gamma. It is a very high risk trade.

More details:

• Why You Should Not Ignore Negative Gamma

 

[harryp]

Opening the trade on the last week will expose you to very high negative gamma. It is a very high risk trade.

Agree with what Kim said.

To the op, Iron condors can be quite risky if market moves heavily and when you are in expiry week, you sometimes hardly have any time to react. There are people who do not like iron condors, and there are people who do, but in general they are deceptively attractive and you may have months of good trades until you run up against a move that kills your position so bad that you do not know why you got into them.

Still I think we should learn all mechanics of options - it may not be our bread and butter trade - but it can be useful at times. Try to start small: position size as well as delta and time risk. And do not assume 3 or 10 wins makes you a master ... but once you have handled 10 drawdowns, then maybe.

 

[farcis]

One of the first Myths Of Retail Option Trading that you should kill is the idea that OTM theta is a geometrically-decreasing line. It's not. From ~45 days out, it's nearly linear. If way OTM, the actual decay rate will go to 0¢ as the IV stair-steps up: the thing is holding onto it's last few cents because, y'know, "vig"... This is how you get 10¢ options that last and last and last....

With an IC (or with one side of an IC), you've got additional spread mechanics going on: it will not be the smooth little line you see depicted so often. Before you go too far, scrape some data off of your platform, and plot it. Both sides. It will be illuminating. It will also vary by underlying (much as does the major driver: IV), so do a couple of 'em.

What you might want to do instead of selling weeklys to their expiry, is sell your ICs 3-4 weeks out, and hold them for 1 week. Harvest, Rinse&Repeat. Think in terms of (Margin) Capital slots, used on a rotating, max$return/day minRisk basis.

Thanks for all of that! This kind of trade idea works well with a short term trader like me would the same idea apply to long condors? Buying an expiration 2-3 weeks out then taking profit?

One of the first Myths Of Retail Option Trading that you should kill is the idea that OTM theta is a geometrically-decreasing line. It's not. From ~45 days out, it's nearly linear. If way OTM, the actual decay rate will go to 0¢ as the IV stair-steps up: the thing is holding onto it's last few cents because, y'know, "vig"... This is how you get 10¢ options that last and last and last....

With an IC (or with one side of an IC), you've got additional spread mechanics going on: it will not be the smooth little line you see depicted so often. Before you go too far, scrape some data off of your platform, and plot it. Both sides. It will be illuminating. It will also vary by underlying (much as does the major driver: IV), so do a couple of 'em.

What you might want to do instead of selling weeklys to their expiry, is sell your ICs 3-4 weeks out, and hold them for 1 week. Harvest, Rinse&Repeat. Think in terms of (Margin) Capital slots, used on a rotating, max$return/day minRisk basis.

Thanks for this! this idea of selling ics 3-4 weeks off and taking profit after a week sounds like what im looking for!

 

[farcis]

Opening the trade on the last week will expose you to very high negative gamma. It is a very high risk trade.

More details:

• Why You Should Not Ignore Negative Gamma

Thanks for the link! Ill check out the post.

 

[farcis]

Agree with what Kim said.

To the op, Iron condors can be quite risky if market moves heavily and when you are in expiry week, you sometimes hardly have any time to react. There are people who do not like iron condors, and there are people who do, but in general they are deceptively attractive and you may have months of good trades until you run up against a move that kills your position so bad that you do not know why you got into them.

Still I think we should learn all mechanics of options - it may not be our bread and butter trade - but it can be useful at times. Try to start small: position size as well as delta and time risk. And do not assume 3 or 10 wins makes you a master ... but once you have handled 10 drawdowns, then maybe.

I understand. Its why im not just wanting to get more insite on short ics but long as well.

 

[SmallFry]

What you are doing is trading the terminal distribution. So yet it is fine. Selling when IV is low however does not give you a good risk/reward.

When trading an IC you need to look at 3rd and 4th moments as well. I mean Lets say IV is high and you think the stock will be range bound. However when you go to look at vol surface, you notice that the "smile" is extremely convex.Then selling a IC would not make sense.

You can argue that selling IV low or high gives the same risk:reward since higher IV (more volatile moves in underyling) justifies the higher priced contracts you are shorting. I suspect OP is learning from Tastytrade or Option Alpha like I used to. IV Rank is something they mention a lot.