Iron Condors form the core of my options trading strategy. I won’t explain the basics here, you can learn about the basics in this free course. What I want to talk about today is legging in to iron condors. We’ll look at how to do it and is it worth the risk.
IRON CONDOR SETUP
Iron Condors are set up as two vertical spreads, a bull put spread and a bear call spread. Some traders will enter this trade in the brokerage account as one order, but most trader like to set up the orders as two vertical spreads.
When I’m entering an iron condor trade, I like to wait until one of the verticals gets filled and then quickly make sure the other one gets filled.
Legging in is the process of selling one of the verticals and waiting for the stock to move (hopefully in your direction) before entering the other vertical.
Legging in to an iron condor offers the potential for higher returns, but it also comes with higher risk.
RISKS OF LEGGING IN TO IRON CONDORS
There are risks with any trading strategy and the same goes for legging in to iron condors.
If a trader is bullish they might start by selling a bull put spread. Then, if the market declines, that spread is placed under pressure with no offsetting gains from the declining price of the bear call spread.
However, the opposite is also true. If the market rallies, the trader makes all the gains from the declining put spread with no offsetting loss on the call spread.
Mark Wolfinger doesn’t think legging in to iron condors this way is a good approach. Here’s what he thinks:
I do not like the idea of legging into iron condor trades by selling puts first. It simply doesn’t work as well as it should – when considering the risk involved. I know that’s not good news for the trader who usually has a bullish bias, but there are good reasons.
When the market rallies, IV tends to shrink. When IV shrinks, the value of the call spread that you are planning to sell also shrinks. By that I mean it increases in value by less than you anticipate. Often much less because it is an OTM spread. I’m assuming that the iron condor trader is not looking to sell options that are CTM (close to the money).
It takes a significant upward move for that OTM call spread to increase in value by enough to compensate the trader for taking the leg. If you do sell the put spread first, and the market cooperates, it’s often better to buy back that put spread, take the profit, and forget about getting a little better price on the call spread.
It’s different with calls. If you correctly (i.e., you are correctly short-term bearish) sell the call spread first, then you have the opposite effect. If the market declines, the put spread widens faster than expected and you have an iron condor trade at a good price.
TRADE SETUPS TO LOOK FOR
I typically like to look for high quality, blue-chip stocks that have been beaten down. I run a scan most days for the most oversold stocks in the Dow Jones Industrial Average which can unearth some good opportunities.
A recent example was in June 2019 when AAPL was trading below $175. I sold the put spreads, waited a month or so and then sold the calls spreads once AAPL hit $210.
PERFECT FOR SWING TRADERS
Legging in to condors is a perfect scenario for experienced swing traders who are moving in to the world of options.
Those that have a consistent track record in directional trading will much prefer legging in to iron condors instead of trading the traditional method.
Legging in to iron condors provides the opportunity for higher returns, but it also comes with higher risks. Beginner traders should stick to the traditional method and focus on trade management rather than trying to leg in.
Experienced directional traders should use their swing trading skills to their advantage by legging in.
What do you think? Let me know in the comments what your experiences are with legging in to iron condors.
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.