Bullshit Free Guide to Iron Condors - Options trading IQ

position. However, if the Flash Crash occurs very close to expiry, the hedge provides much less protection. Also, you need to be aware that this is all pretty
subjective in terms of using a +20% increase in implied volatility, but hopefully these payoff diagrams have helped to illustrate the idea a little.
You will notice that I am also spending roughly 10% of my monthly income on my insurance costs, similar to the rationale for the VIX Calls. Let’s move on to the
second choice of hedging using longer dated out‐of‐the‐money puts.
2) Buy long dated puts as a constant hedge ‐ This is a good idea if you know you are going to be placing Iron Condors each month and in more or less the
same number of contracts. The advantages are that you only have to enter your hedge once (less transaction fees) and you suffer less from time decay
than if you were buying your hedge each month. You could look to buy 12 months out and then roll it once there is only 3‐4 months left until expiry.
This way the full effects of time decay are not suffered. The disadvantages are that if the index has a huge rally, your puts can lose a lot very quickly as
they are now even further out‐of‐the‐money. Once they move further OTM, they will not provide much protection and you may be required to roll them
up higher which will involve more costs. The other disadvantage is that it will cost a lot of capital to buy long dated puts on the indexes. As an example,
today is May 1 st , 2012 and RUT is trading at 828. To buy 1 Mar 14 th , 2013 (May 2013 options are not available yet) 575 put will cost around $1,650 and
the bid / ask spread is very wide (15.10 – 17.90).
Let’s look at the same Iron Condor above, but using 1 Mar 14 th , 2013 put as a hedge:
Date: May 1, 2012
RUT: 828.92
Sell 10 May 17 th 770 Puts @1.85
Buy 10 May 17 th 760 Puts @1.30
Sell 10 May 17 th 870 Calls @ 1.05
Buy 10 May 17 th 880 Calls @ 0.55
NET Credit = $1,050
Now we’ll add in our hedge:
Buy 1 Mar 14 th , 2013 575 Puts @ 16.50
HEDGE COST = $1,650
TOTAL NET DEBIT = ‐$600. Notice that we are actually PAYING for the total trade. The idea is that you will amortize the hedge cost over 10 months, so you
should have paid for the hedge after approximately 1.5 months of selling Iron Condors. Let’s have a look at the payoff diagram for this one and note the
differences between long dated and monthly options to hedge:
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