John Jagerson

Trading Iron Condors -- Part II

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See Part I of the Trading Iron Condors series.

An iron condor can be designed to accommodate your risk tolerance and account objectives, but those adjustments will always have a trade-off.

As with most option selling strategies, this means there is an exchange of a higher probability of a successful outcome and lower premiums, or higher risk and larger premiums.

Most iron condor traders opt for a fairly wide spread between the two short strikes to increase the probability that the underlying exchange-traded fund (ETF) won't close at expiration beyond those prices. This obviously reduces the premium paid and should not be taken to extremes.

How far apart those short strikes "should" be is a difficult question to answer.

As with trading any stock or option strategy, the answer probably depends on your personal risk tolerance. Getting to know what kind of risk you can tolerate within a trade like this requires some experimentation and paper trading.

We have spent a fair amount of time talking about the trade-off between probability and premiums so that you will understand the importance of appropriate expectations. Managing risk is a function of position size, as well as the choice of strike prices. Getting into a position that is too large for your peace of mind can be a disaster.