Following the Trade: CTM Iron Condors

Trading the CTM iron condor may be a bit uncomfortable for someone making this trade for the first time.

For most traders getting started with iron condors, it is easy to ignore the possibility of trading CTM iron condors. In fact, choosing to sell call and put spreads far OTM (where the option being sold has a single-figure delta), and which come with a high probability of expiring worthless, is most attractive. The fact that the cash premium is small is not a deterrent. This book argues that this ‘safe-looking’ iron condor is not a viable trade choice.

Why would you want to sell option spreads when there is a high probability that one of the options will move ITM? Those are the conditions where large losses are not only possible, but likely. When choosing options to trade, the iron condor trader tends to consider safety as the prime consideration. There is a certain satisfaction with having a high profit/loss ratio. However, when trading, the bottom line is not how often you have a profitable trade, but how much money you net. The goal is to earn more money without increasing risk. Trading CTM iron condors may appear to be especially risky (reminder: risk is defined as the sum that can be lost, not the chances of having a losing trade), and thus, are ignored as trade ideas. It’s only aft....