Managing Short Iron Condors or Strangles

8 min readDec 7, 2021

If you are reading this article you are probably aware of what a Short Iron Condor(SIC) is. And if you are looking to improve your trading performance and having a tough time laying down the rules to do so, this post is for you. Instead of giving you all the rules in made up scenarios, I will:

point out the set of all possible “moves” you can make
detail the impact of these moves on the risk/reward
elaborate on how to change the parameters of these moves under various market conditions

The goal of this post is to equip you with a generalized framework which you can tune to best fit your risk appetite.

All my examples pertain to BankNifty index weekly options traded on NSE, India. You can use this framework on any instrument provided there is enough liquidity. This post assumes that you are aware of option greeks and the interaction among the greeks.

I like to visualize SIC as a strategy game with an element of randomness in it like Catan or Poker. You have a set of moves to control the outcome or rather, the probability distribution of outcomes as the market moves. However, this post doesn’t get into the math part of it. I will only try to give intuition behind the moves.

Understanding the “Game”

You are selling both OTM PE and CE which gives you a flat payoff on expiry if the market stays within a certain range. Let’s call this range the SIC window or SICW.
The premium you collect will be higher if the SICW is smaller and vice versa.
If the SICW is smaller, you will be at a higher risk of the trade ending up outside the breakeven or a high MTM which can hit your stop loss.
So it all boils down to adjusting your positions while managing the risk and keeping it within your comfort levels depending on the market.

I’m a risk averse trader most of the time so I focus more on minimizing the risk than maximizing the profit. However, this is a personal choice.

Trade Setup

Starting the trade

Enter the series which has a maximum of 6 calendar days till expiry to avoid illiquid periods. However, you can use the same framework to adjust the positions if there is enough liquidity to have a low slippage.
Do not start a trade if there is some external event that is causing uncertainty in the market.
Do not deploy more than 1/3rd of your capital at the beginning of the trade. I will explain the reason for this in a later section.
Define your stop loss and target profit. I currently take 3% as my stop loss and 2.5% as my target because the instrument I trade in is fairly volatile.

I currently make 5% RoC on average in a month.

Exiting the trade

End the trade when you reach the target profit or loss.
If there is any macro economic event that you are afraid of then exit the trade immediately.

Money Management

There are two ways in which you can lose your capital:

A single large loss
A bunch of consecutive small losses

To avoid losing your capital, define parameters that will act as objective indicators on when you need to retrospect your strategies.

Parameter 1: The amount of capital you can lose on a single week’s trade

For example, if you start your trade on a Friday and by Wednesday you lose 3% of your capital, either stop trading in that week’s expiry and move on to the next week’s expiry with 1/3rd of your capital.

Parameter 2: The amount of capital you can lose in consecutive trades

If you are losing small amounts of money for consecutive weeks, stop trading and try to find the reason for the losses. For example, if you lost 6% of your capital in three consecutive weeks, do not trade for the next week. But rather introspect what went wrong.

Adjustments or “Moves”

You have the following moves:

Shift the SICW without altering its size
Compress the SICW
Expand the SICW
Deploy more capital
Exit the trade

You can do any of the 5 moves or a combination of any 2 of them. You have to decide which combination to choose at any given time. This decision will be based on your risk/reward trade off at any given point of time.

It is difficult to objectively measure the risk during the live market so I use some Risk indicators to get a consistent and reasonably objective measure of risk.

Risk Indicators

Two indicators which are currently being used:

SICW
Delta of the short positions

SICW

This indicator gives you a risk allowance on a given day. For example, the minimum distance of the strike from the spot on each side should be as follows:

Friday: 1500 points(4% OTM)
Monday: 1300 points
Tuesday: 1100 points
Wednesday: 1000 points
Thursday: 700 points

You should try your best to not exceed your risk allowance which is easier said than done during the live market.

Delta limit

This indicator will tell you if your position’s delta is out of balance and if there is a need for rebalancing. And it is important that the position delta is balanced. So make sure the delta of your CE and PE lies between a pre-defined lower and upper limit.

For example, on Friday, Monday and Tuesday make sure the delta on each side between 0.1 and 0.2. For Wednesday and Thursday, have the limit as 0.25 and 0.1. If these limits are exceeded you need to adjust your positions using either move 1 or 3 or a combination of both.

Reasoning behind these indicators

In an SIC, your goal should be to incur the least amount of losses while staying within your defined risk boundaries. In the meantime, the time decay of the options will be contributing to your profits.

The SICW will define the maximum risk allowance for a given day so that you don’t compress the window too much to compensate for any MTM losses as the market moves towards the breakevens.

The delta limits will tell you when you need to make any of the 5 moves in an objective way. It is important to make the moves at these predefined limits because the effect of gamma can result in large MTM loss bookings when you are making a move. This is a tricky point so let me know in the comments if you did not understand this.

Intuitive understanding of each of the 5 moves

Move 1: Shifting SICW without altering the size

When to do it? When the deltas are breaching your pre defined limits on one or both sides.
This move is a loss making move. Because you have to book a larger MTM loss on one side than the MTM profit on the other.
But the trade off is that it will not increase your risk.

Move 2: Compressing the SWIC

When to do it? When you think that you can take on more risk and increase your reward.
This move will increase the premium collected but the trade off is that it will increase the risk. So it is important that this move adheres to SWIC risk indicator as mentioned above.
Usually you can do this one or two times a day depending on the volatility.

Move 3: Expanding the SWIC

When to do it? When you are not comfortable with this risk you have taken so you want to reduce it or you foresee that the situation is going to become unmanageable. For example, if you have compressed your SWIC too much that deltas on both PE and CE are approaching the upper limit.
This move is also a loss making move but also a very important one as you will be reducing your risk and get your trade back on track.

Move 4: Deploy more capital

When to do it? There will be situations when you have deployed only part of your capital following which the IV goes up resulting in both the PE and CE values going up significantly. You can deploy more capital and collect a higher premium than when the IV was lower.
IV going up is a problem for an option seller but if there is more capital to be deployed, then it’s an opportunity for a seller.
This move will reduce your MTM losses and increase your potential profits by averaging.

Move 5: Exiting the trade

The most important move is to cut your losses when your stop loss is hit or when there is a major macroeconomic event.
This will make sure you that you will preserve your capital.

Situations where SIC will fail

IV or Vix increases

After deploying your entire capital, if the IV increases, it will be difficult to manage the trade and it will most likely end in a loss if there are more than 1 days left to expiry.
To reduce the chances of this happening, make sure you do not deploy your entire capital before the day prior to expiry.
Currently, I deploy 1/3rd capital on Friday. Deploy the 2nd 1/3rd on Monday 2nd half or whenever the IV increases. Deploy the final part on Wednesday morning or if the IV increases again.
If you are exceeding your risk limits or deploy the entire capital, make sure you don’t have more than 1 day till expiry. Because the longer you have to stay, the higher the chances of losses.

Volatile swings on the day of Expiry

If there are huge swings on the day of expiry, for example, the market goes up by 1% and falls down by 1.5% again, it will be very difficult to adjust the trades.
This is because the premiums will have decayed and each adjustment(move 1 and move 3) will cost you a lot more money. So it is difficult to come out with a profit.
This is a situation where following the SICW risk indicator diligently pays off.
It is best to exit the trade before the day of expiry if the target profit is reached.

Adapting to various Market conditions

Bull or sideways market

In such markets, there will be a slow and steady uptick and Vix will be usually be lower. As a consequence, you can go with a smaller SICW to get a good return.

The reason being, the variance of the market decreases so it is less likely to breach the delta limits you have set yourself to avoid huge losses due to the bell curve nature of gamma.

Bear market

In such markets, there will be rapid moves up and down which will result in the Vix rising up. This means the premiums will be higher. So you have to go with a larger SICW so that your stop loss is not hit before the expiry.

The reason being, the variance of the market increases so it is more likely to breach the delta limits. Also when the vix goes up, the gamma effect gets amplified so I reduce the delta limits. For example, if my delta limits in a bull market were 0.1 and 0.2 I change them to 0.08 and 0.17.

Final Checklist

Have your stop loss and profit target in place before getting into a trade.
Check the Vix and accordingly adapt the SICW and delta limit for adjustment.
Have a rough capital deployment schedule so that you capture any volatility spikes. Do not deploy the entire capital especially in low Vix periods.
Be mentally prepared to exit the trade when things go against you.

It is difficult to make money even after knowing the theory due to the emotions involved during the live market. Unfortunately, practice is the only way to get better at it. You will have to experiment with this framework to find the parameters that best suit your risk appetite. Let me know in the comments if you did not fully understand anything.

Disclaimer: I am not a licensed investment advisor. Any trades you take are completely at your discretion and I am not responsible for the losses and profits.