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Directional Risk: Iron Condors

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

In a perfect world, option positions would decay with no directional risk. However, this isn’t the case in reality as underlying prices move. This led us to ask, how much directional risk do we incur for varying strategies?

The Study:
  • SPY
  • 45 Days to Expiration
  • 2005 – Present
  • Recorded the Non-Movement Occurrences Where the Stock Price is Less Than 0.5% Away from the Original Stock Price at Order Entry
  • Compared:
    • 20 Delta Strangles
    • 20 Delta Iron Condors with $1, $5, $10 Wide Wings
Results:

When compared to varying width iron condors, strangles yield the highest percentage return while tight iron condors have the lowest return compared to their theoretical return. Additionally, when we manage the trade at 21 DTE we significantly reduce the directional risk. By managing at 21 DTE we significantly control the losses attributed to directional risk for strangles and all width iron condors.

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