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Iron condors: Bigger vs. wider

Iron Condors: Bigger vs. Wider
Iron Condors: Bigger vs.

In our quest to understand trading options for income, we often consider Iron Condors. Once we determine the position of the short strikes, the next issue is the width of the spreads. Many chose spreads separated by one strike, then increase the number of Iron Condors to increase premium; others will widen the width of the spreads, then keep the number of Iron Condors limited. The question is: which approach improves the P&L?

An Iron Condor is an option strategy comprised of two OTM (out of the money) credit spreads: one Put credit spread (often referred to as a Bull Put spread), and one Call credit spread (often referred as a Bear Call spread).

Tasty Trade conducted a test of the following underlying ETFs: FXY, EWW, and DIA. The test criteria was as follows: when IV Rank rose above 50 percent, two trades were initiated both collecting 45 percent of the width with close to 45 DTE (days till expiration). The first trade was two Iron Condors with 1 point wide spreads (to bring in 45 percent of the spread); and the second trade was one Iron Condor with 2 point wide spreads (to bring in 45 percent of the spread). Note: for the second trade, if the premium was unable to obtain 45 percent of the spread, then the Put credit spread was moved closer to ATM, and if needed, the Call credit spread was next moved closer to ATM. The test period was conducted over a 5 year period.

The results: The 2 point wide spread Iron Condors brought in more premium for all three ETFs than the 1 point wide spread Iron Condors. In addition, the percent winners were also higher for the 2 point wide spreads for DIA and EWW, and the same for FXY. The ETF that benefited the most from the 2 point Iron Condor was DIA, in which the P&L more than doubled.

In conclusion, the 2 point wide spread Iron Condor required less options while improving P&L for approximately the same capital at risk. The problem with this test is that the location of the short strikes may vary for the 2 point wide Iron Condor trades; this affects the POP (probability of profit). A better approach would be to keep the position of the short options the same. This occurred with FXY (both had the same Winners), and the result was the 2 point wide spread Iron Condor improved P&L by more than 20 percent; a clear indication that increasing the width of the spread is preferred over increasing the number of options.

If you would like to learn more about options, and how to generate consistent weekly income trading options, go to Options Annex.