Delta Neutral Trading: Iron Condors

In this post, I gave a quick introduction to delta, one of the option greeks.  This is a measure of how an option or spread will respond to a price move in the underlying.  The put credit spread structure we used in our first strategy is always +delta. That is, it’s partly a short option trade benefitting from time decay – the insurance company model, and partly a bet on the market going up.  That strategy is described in this post.  Today, I’m going to talk about a delta-neutral trade.  This is a structure that lets us benefit from time decay without taking a directional bias in the market.

Call Options

To begin, let’s talk about call options.  We’ve been looking at put options so far.  These easily fit my analogy of selling “insurance”.  A put makes money when the market goes down past it’s strike price.  As the seller, we do not want that to happen.  Call options are the reverse.  A call option makes money when the market goes up past it’s strike.  Selling a call would be like selling “upside insurance”.  At this point, I’m going to drop the insurance analogies and start introducing more of the options market vocabulary for things.

Just like we can sell a put or a put credit spread, so too can we sell a call or a call credit spread.  A put credit spread is always +delta, as mentioned.  In the same manner, a call credit spread is always -delta.

Delta Based Strike Selection

Now we have learned about delta, let’s take a look at that again on the put side.  Notice delta gets smaller the further away the puts get.  That is, puts that are lower risk (as a seller) carry lower delta.  Many option traders use delta when picking which strike to sell.

Let’s do a put credit spread with the short option at the 16 delta.  I’m going to use 68 DTE in SPY ($426) and I’ll pick a width around 2-3% of the underlying ($10).  This is my same 1% per month guideline I’ve suggested before.

OK, so that’s the put credit spread we’ve been talking about, so hopefully everyone is pretty comfortable with that. It’s a great trading strategy and if you don’t mind the +delta I’d be happy to trade it as is.

What does the call side look like?  Let’s sell a call credit spread using the same 16 delta, 68 DTE, same width.

Not too surprising, it looks like a mirror image of the put credit spread.  It has -delta as all call credit spreads will.  I would note the credit is a lot less than what you get on the put side – just notice that for now.

Trade Setup – Iron Condor

I don’t normally trade call credit spreads on their own.  What I do like is combining a call credit spread with a put credit spread.  This gives you two trades that benefit from the time decay edge in option selling.

This setup is called an iron condor.  It is makes money when the market remains inside of the two short options at expiration.  Like the put credit spread, I prefer to take these off early.  Iron condors can be placed as a single order.

With the put credit spread, our maximum loss was the width of the spread minus the credit received.  With an Iron Condor, we can’t lose on both sides at the same time.  So the maximum loss here is just the width on one side minus the total credit from both sides.


I want to introduce another option Greek now, theta.  Theta is also shown per option but normally we look at the total net theta of the combined position.  Theta is the models estimate of how much money this trade will make in 1 day.  That estimate assumes everything, such as the underlying price, stays the same.  In the real world your day to day P&L will feel almost random, but it is worth being aware of that theta value.

Recommended Underlyings

Like with the put credit spread, I encourage you to experiment and find what you like.  Some underlyings I recommend for Iron Condors include SPY, IWM, QQQ, DIA, TLT,  and GLD.  You can also trade Iron Condors on stocks, but it will be easier if you focus on high priced stocks like AMZN or AAPL.  I recommend 60 DTE or farther and sticking to 20 delta or less for the shorts.  I also recommend at least $3 wide wings and to collect at least $1.00 credit.  I usually take these off at 50% of the credit for a profit.  Stop loss exits are optional since, with the 16 delta shorts, your max loss in this trade is usually going to be capped around 3x the initial credit anyway.  You can also choose to exit if either short strike is breached by the underlying during the trade or if theta goes negative.  I would consider getting out if the trade gets down to 21 DTE or less.  Keep the quantity low enough that the max loss for the trade is under 5% of the account size and I recommend only using, at most, half the margin available for all of your trades combined.

If you start trading iron condors, or any strategy, start a spreadsheet and record all of your trades.  Here is my spreadsheet of Iron Condors I’ve done in these ETFs and some stocks.  These are all live real-money trades, but I do recommend paper trading for a while first to see how these feel and if you like them.

If you’re interested in how Iron Condors perform, there is a fantastic set of backtests on S&P and Russel index iron condors on this trader’s blog (no affiliation).


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