Should you be legging into iron condors?
Generally, I do no try to leg into iron condors. I place the trade all at once. Trying to be “tricky” by placing the put side at the lows and and the call
side at the highs usually doesn’t work. What happens is that you’ll give up nickels and dimes trying to chase a couple pennies.
To see what I mean, take your equity and try to guess where it will be in the next 5 minutes: higher, lower, or flat.
Seriously. Pick an equity, look at clock, write down your prediction and wait 5 minutes.
I suspect that you will find that you are not very good at making those guesses. (If you were good at it – and it is not just luck – you would be a
good day trader. And I have never met a successful day trader.)
I will leg into an iron condor when it is an adjustment to another trade. For example, if I placed a bull put spread and my sentiment now is neutral. I
might add a bear call spread adjusting the bull put into an iron condor.
Sometimes, it is difficult to get filled on an iron condor. This is something that you do not necessarily see when you are paper trading. When you paper
trade, you typically get filled at the “mid” price between the bid and the ask prices. However, in real money trading, you may have to take a lower credit
to get filled. In those cases, it might make sense to place the bull put and bear call trades separately.
However, I would add a word of caution. If you are having difficulty getting filled on an iron condor, it could be a sign that it is a low liquidity
equity. For those sorts of equities, the market makers have more power to widen the bid and the ask spreads. That gives them more profit and you less
favorable fill prices – at both your entry and exit.
Early in my trading career, I recall a couple situations where all of my profits were consumed by the bid ask spreads.
So, after you have done your due diligence; determined the perfect strategy; and then go to place it, you find that you cannot get filled at your target
entry. You have two choices: 1) take a less favorable position to get in, or 2) pass on the trade.
This can be a tough lesson to learn because it might mean that you need to give up on trading that equity entirely.
I have learned to look at the bid ask spreads early and then pass on the equity if it is not tradable. (Go here to learn more about the bid ask spread and how to pick a good options chain.
The bottom line is: once I’ve determined the strategy and defined my primary and secondary exits, I execute it. There’s no place for trying to be “cute” or
“tricky” when it comes to trading.
Finally, keep in mind that you should be paper trading until you have mastered the concepts. Using real money can be hazardous to your account.