I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Thursday Thinker, I share a smart idea or theory.
Today I’m exploring a new options trading approach: iron condors on index options. I’m not going to cite any specific thinkers on this, because I’ve gathered ideas by reading the Reddit sub r/thetagang. I figure posts there should largely stay there, not necessarily surfaced in a random blog somewhere else.
My options wheeling in which I start by selling puts on stocks and ETFs I like and wouldn’t mind holding (e.g., $CRM, $XLE, etc). This earns premium, but I only actually realize a profit on the short put if the underlying price stays the same or goes up. So this is a neutral-to-bullish bet. Sometimes the underlying’s price goes down, as with $XLI (a sector ETF for S&P 500 industrial companies), and then I may get assigned the shares to purchase. I purchase them, pocket the premium for the put I sold, and then I begin selling calls. These calls are covered in that I own the stock that I would have to sell should I get assigned to sell it. That’s a second way to make premium. It’s still a neutral-to-bullish bet, because my hope is that the stock will recover enough that I sell the shares and pocket the call premium, so I can go on to wheel that or another ticker with the capital that was used to secure the short put and purchase any assigned shares.
After running the wheel for six months, here are things I like and don’t like about it:
- I like the regular booking of profit, sometimes on a daily basis.
- I like looking at my trades as they play out, moving from no profit up to 55%, where I have automatic orders that close the position and free up capital for a new short put. But I dislike watching short puts go against me, and my rules just have me watch the losses grow sometimes leading to assignment at unappealing prices.
- I like thinking about what new trades to put on — what ticker, what expiration, what strike? But I dislike the idiosyncratic risk of individual stocks, and I dislike the small premiums for sector ETFs like XLI and XLC.
- I like how active it is, compared to buy-and-hold.
- I like that the cash I use to secure my short puts earns monthly income in a money market fund.
- I dislike that my bets are all neutral-to-bullish and don’t work in neutral-to-bearish environments (such as has been the prevailing regime in the AI trade for a couple months now).
Iron condors are a more complicated trade than wheeling. An iron condor consists of four legs, basically putting together a bear call credit spread and a bull put credit spread, together which express the belief (the hope?) that the underlying will remain range-bound, possibly in a very wide range. I won’t get into exactly how to construct one here, as there are plenty of tutorials online about it, and you need some basic understanding of options to do so.
Based on reviewing other traders’ approaches on Reddit, my general plan is to use iron condors on index options such as SPX, NDX, and RUT. I will start with the mini S&P 500 index XSP, or perhaps with SPY which might have more options volume and better spreads than XSP. I will likely enter them with 30-45 DTE (days to expiration), with a stop-loss at -100% (meaning I can lose 2x the credit), and a close at 55% of the credit earned. I will look to place the short legs around a 16 delta, and use, at least for XSP, a width of 15 to set the long legs.
I’m going to continue wheeling for now while I spin up this new trading practice on the side.
My plan is to begin placing these on a regular basis, one each week so I’ve laddered them across time, and, as time progresses, I will be regularly closing them, ideally at a profit or at the stop-loss, or because they’ve already reached 21 DTE (the time stopout for such a trade). Starting next Monday I’ll open one iron condor on $XSP with 16 delta short legs, 15 wide legs, and a mental stop-loss at 2x the credit received.
With things looking more volatile in the U.S. and global stock markets, I might use lower deltas to start. I could also place directional bets with, for example, bear call spreads.
We’ll see where things are next Monday.