We have recently found that closing an undefined risk trade when it is trading for over 2x the amount of credit that you received is a viable exit strategy. However, can this exit strategy be used for a defined risk spread as well, mainly an Iron Condor? Is there a way that we can structure these Iron Condors to make the strategy more effective?
Today, Tom Sosnoff and Tony Battista test closing an Iron Condor when it has reached a 2x credit received loss. First, they look at a 25 point wide Iron Condor in SPX. They test managing the trades at 50% of max profit, a loss of 2x the credit received, 50% of max profit or 2x the credit received or holding the trade to expiration. They find out that none of the strategies were profitable but by combining managing the winners and closing the losers at 2x, you had the lowest amount of losses.
Next, the guys take this one step further and look at 50 point wide Iron Condors. This strategy mirrors a strangle more closely. They find that when using at the same exit, the wider Iron Condors see the most profit when managing at 50% and closing when the loss is at 2x the credit. This reinforces that this strategy should be used for undefined risk trades and those defined risk strategies that attempt to mirror naked options!