Trading iron condors for a living: 2018 strategy guide

Iron condors can prove to be a very reliable source of income. However due to illusion of lower risk of wide strike iron condors traders can forget about risk management. Today on our blog we will talk about trading iron condors for a living. Be sure to read the word of caution in the end of this article. Let’s get started.

What is an iron condor

For the purpose of this article we are going to assume that our readers already know about iron condors. However if you don’t know this strategy here is an article from Investopedia to explain. We are going to focus on iron condors with wider strikes rather then tight ones. Think this:
Picture presents iron condor strategy graph with wide strikes
Not this:
Picture presents iron condor strategy graph with narrow strikes
Okay that has been an extreme example and we don’t want such a small premium but more on that later on.

Back to reality

If you are serious about sustaining yourself with just trading options then you should have at least 100 thousand $ of funds put aside. Potentially even more if you want to have a high standard of living or have a family to provide for.  Obviously if one lives outside of United States in some place with very low cost of living maybe less will do but we wouldn’t recommend even thinking about living from options trading without 100 thousand dollars. That is because aiming for more then 20% income yield (preferably after adjusting for inflation) is extremely risky! Greed is the biggest enemy when trading iron condors for living. This strategy is not supposed to make you an overnight millionaire.
Here is a video that does a decent job at showing what profits to expect:

Also be warned that broker commissions and bid-ask spreads are very often to big to make iron condor trading sustainable. Liquidity is also very important. For those reasons stick to big options markets like SPY options (watch out for early assignment as those options are american style).

Time frame consideration

Don’t trade iron condors that have less then one month to expiration at the time of opening the position. That is it. End of story. No discussion here. You won’t be trading iron condors for a living that way. In the contrary you will live to trade iron condors and keep losing your money to cover the losses suffered due to all those bid-ask spreads and broker commissions.

How much capital to risk

This largely depends on how much income yield you want to generate. But remember the higher yield you aim for the bigger the risk and bigger the percentage of capital you have to commit to a single trade. We already said that aiming for more then 20% annual yield is not a great idea as it will give you to much risk.  Let’s introduce a second rule of thumb. Never risk more than few percent of your total free capital on a single trade. Common recommendation is below 1% and 3% would be pushing it. The exact relationship between percentage of capital at risk and your expected annual return / income yield depends mostly on the instrument you trade and volatility.

Risk management

Okay  your trading plan is ready, you have established your goal and overall risk appetite. You are ready to start trading iron condors for a living right? Wrong. You still don’t know which strikes to choose and what to expect once you enter the trade. It’s time for risk management.

Assignment risk

First of all every options trader should be aware of assignment risk. If you are trading american style options (for example stock options) then know that the holder of option can execute at any time prior to expiry. When trading iron condors for a living this could be a risk since you have short legs in the position. It happens rarely but if your short legs are in the money pay closer look to the position and be ready for settlement. If you are sticking to rules mentioned above in the paragraph about capital you should be able to meet any settlements. However sometimes brokers may charge additional penalty fees when there are problems with delivery of cash/securities so please be careful and know your brokerage rules.

Picking the trade

In general you shouldn’t be trading to narrow iron condors. It’s hard to give exact guidelines as what is narrow and what is wide will depend on the situation. But focus on higher probability of success rather then high maximum profit/maximum loss ratio. As trades with such ratio will have much bigger probability of losing money. When trading iron condors for a living this is especially important since you want more reliable streams of income.

Word of caution

It’s getting harder and harder to find profitable iron condor opportunities. That’s because so called “premium selling edge” is vanishing. It’s true that options still tend to be a bit overpriced in terms of implied volatility vs realised volatility. However the gap is narrowing. When trading iron condors as a retail trader this “edge” is almost always consumed in whole by brokerage premiums and bid-ask spreads. That is why you should approach iron condor trading just like any other trading activity. The odds are against you know that. Good timing, luck, “gut feeling”, research whatever you call it may help you get an edge but don’t be fooled high probability of success in every trade is not magical because when you lose you lose big. Just take a look how CBOE benchmark iron condor preformed in the last few years. Despite this benchmark assuming no transaction costs!

If you want to learn more about options please try out our course for dummies.

Here is also a pretty good video explaining iron condors role in passive income generation:

And here is another good video which serves as a good iron condor strategy guide:

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