Using the Straddle to Set the Wings of the Iron Condor

Randall Liss

trading options, stock optionsAfter some violent swings as the market continues to digest the pronouncements of Big Bad Ben and the resulting Bond Panic, we very easily could settle back down and see some volatility come out of the market. If that is our premise, then an old favorite trade of mine is the Iron Condor.

To review, the Iron Condor is a combination of short an out of the money (OTM) put spread and an OTM call spread. Options profit-loss chart, iron condorIdeally you want the underlying to expire between strikes B & C and the whole position to expire worthless. The maximum profit is the premium received and the maximum loss is strike B minus strike A minus the net credit. And there are two break even points, strike B minus credit and strike C plus credit. Remember, strikes A/B and C/D must be equidistant. For the trade to be directionally neutral the underlying should be midway between strikes B and C.

The question remains, however, where, or how wide, to set strikes B & C. Rather than make a guess I like to let the market tell me in its wisdom of supply and demand where to set these wings. And that can be best determined by using the at the money (ATM) straddle. This ATM straddle gives us two measured move targets that we can use.

For example, let’s take the Russell 2000 (RUT). With RUT trading at this writing (June 25 at 11:07 CDT) at 956.50 the closest ATM straddle (and we’ll use July options) is the 955 which is trading at 41.50. This gives us two measured move targets, 996.50 and 913.50. The market is telling us this is where it believes the maximum range will be. So, we’ll use the 915 put (trading at 8.30) and the 995 call (4.30) as our short strikes and the 900 put (5.40)  and the 1010 call (3.10) as our long strikes.

That means we sell the 900/915 vertical put spread at 4 and the 995/1010 call vertical at 3.30. Anywhere between 915 and 995 we make 7.30. Over 995 or under 900 we lose 7.70. Our break evens are 907.70 and 1002.70.

Normally I don’t like trades that risk more than I can make (albeit slightly, in this case) but our range of profitability here is a full 95 points.

Once again, I am not recommending this (or any other) trade; this is simply a lesson related to straddles and iron condors. The lesson that I hope you take away with you is how to use the ATM straddle to create the measured move targets to use as your wings for the Iron Condor.

If I may end with a bit of shameless self-promotion… Andrew was kind enough to send me reader feedback of my first several columns, all of which was very positive (thank you!). If any of you out there would like detailed, personal options training, live, online, via email or over the phone, please go to my website ( for my rates and contact information.

Twitter: @RandallLiss

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.