Iron Condors Have Built in Hard Stops

by condoroptions.com

We’ve actually made this point before, but it bears repeating: iron condors have hard stops already built in. They’re called “long strikes.” So risk management is incredibly easy when you’re trading condors - it’s simply a question of determining how much capital you’re prepared to lose on any one position, and then selecting the appropriate number of contracts for your trade. Then fire and forget.

You don’t need to set some arbitrary mental point at which you’ll exit the trade at a later date; you certainly don’t need to panic the moment the underlying touches the short strike of one side of your position. Andy Swan makes a similar point about not using stops on his blog, and we would emphasize the fact that the probability of an underlying touching one of your short strikes will always be higher than the probability of that underlying expiring in the money, which means that if you bail out every time your short strikes get violated, you’re just setting yourself up for a lot of churn.

Some people feel uncomfortable with the idea of letting a trade hit its maximum loss point, or with not adjusting a trade that looks like it’s in trouble. But those are just symptoms of deficient risk management. If you’re only allocating 1% (or less) of your capital to any given position, then you can afford to let the statistics play themselves out, without worrying much about the final outcome in any one particular case.

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