Is there an optimum wing width for iron condors?
Sure, there’s, in response to the analysis group at Tastylive, which backtested over 1000 trials of iron condors from 2013 to 2024.
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The wing width measurement relies on the underlying property’ worth.
The bigger the asset, the bigger the wing width must be.
So, the Tastylive examine used 5 totally different underlyings of varied costs starting from $100 to $500 to make sure that the underlyings have related implied volatilities (IVs).
The standard iron condor used within the examine had quick strikes on the 16 delta and began out at 45 days until expiration (DTE) and was taken off when it reached 21 DTE.
For instance, an iron condor on XBI (biotech ETF) with a inventory worth of $93 could seem like this:
Shopping for the lengthy put on the strike worth of $75Selling the quick put on the strike worth of $85Selling the quick name on the strike worth of $102Buy the lengthy name on the strike worth of $112
This condor would have collected about $158 of credit score with $842 of max danger.
So, a danger to reward of 5.3.
The iron condor would have been taken off when it reached 21 days left within the commerce when the P&L graph would possibly seem like this:
Based on the modeling, if XBI stayed on the identical worth, the potential acquire at this level can be $115.
Based mostly on the capital prone to $842, that might be a couple of 13% max potential return.
Within the above instance, we used $10 huge wings.
The 75/85 put unfold is 10 factors huge, as is the 102/112 name unfold.
It is because the Tastylive examine discovered that $10 huge wings on $100 priced underlyings had been probably the most optimum.
Once they examined the $5 huge wings, the typical P&L was damaging.
Once they examined wider wings, the typical P&L was extra in greenback quantities, however the proportion return on capital was much less.
When the underlying measurement is bigger at $200 per share, the wing widths needed to enhance.
The $15 huge wings labored greatest with a median P&L of $14.50 and a return on capital of 27%.
When examined on the IWM ETF, this was the typical P&L they discovered:
$5 wing: -$12.79$10 wing: $1.02$15 wing: $14.52$20 wing: $20.78$25 wing: $24.39$30 wing: $26.92
Whereas the greenback revenue elevated because the wing was widened, the return on capital confirmed a U-shape curve, the place the $15 wing gave the most effective return on capital:
$5 wing: -5.83%$10 wing: 14.65%$15 wing: 26.97%$20 wing: 23.87%$25 wing: 21.78%
$30 wing: 18.94%
For a inventory like Visa (V) used within the examine, which is priced round $300, they discovered that $20 huge wings labored greatest.
The typical P&L was $25, with a 27% return on capital.
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Because the underlying worth will increase, the typical greenback earnings enhance as a result of extra capital needs to be used.
For Microsoft’s (MSFT) inventory, they discovered that the $25 huge wings labored greatest with a median return of $35, which is a 20% yield on capital used.
An instance condor on MSFT could seem like this:
Do not forget that the yield proportion and the look of the condor will change in several IV environments.
The above screenshots had been in a low VIX setting of 16.
Greater IVs would sometimes give higher yields and higher risk-to-reward.
The Tastylive examine spanned 12 years and would have coated a better vary of IVs.
An iron condor on QQQ (at barely over $500 per share) would require a capital utilization of $2500 for one contract if utilizing the optimum wing width of $30.
This can be too giant for smaller accounts.
So, the scale of the account must be taken into consideration when deciding on the scale of the underlying account.
Smaller or newer merchants could need to scale back the wing width to lower danger and scale back capital utilization per commerce.
Whereas reducing wing widths could also be sub-optimal, it was nonetheless worthwhile – besides once you lower the wing width an excessive amount of.
The examine discovered that reducing the wing width to 5-point huge could also be reducing it an excessive amount of.
The outcomes confirmed that the $5 wing had damaging P&Ls and was not worthwhile over the long term for any underlyings priced at $100 or above.
In our earlier XBI condor instance with the optimum $10 huge wings, we had a theta of three.3.
If we slim the wings of that condor to $5 huge wings, we solely have a theta of two.1.
This lower in theta could be the cause why the condor just isn’t capable of generate revenue.
Whenever you widen the wings, you enhance theta.
Theta is the income-generating engine of the iron condor.
The condor turns into extra environment friendly in producing cash when the lengthy and quick choices of the unfold are additional aside.
When the quick legs and the lengthy legs are too shut to one another, their opposing instructions trigger friction, which decreases effectivity.
Consider two steel plates getting in reverse instructions.
When positioned too shut, they trigger friction.
Elevated friction decreases the effectivity of the machine.
Some skilled merchants would commerce strangles, that are iron condors, with out the lengthy choices.
This fashion, they let the quick choices generate their full theta potential like a well-oiled machine, unencumbered by any lengthy protecting choices.
Nevertheless it comes at a better danger.
Growing the wing widths of the iron condor will increase their potential to generate revenue through bigger theta.
Nevertheless, growing the wing width additionally will increase danger.
Slender wings have small dangers however are unable to generate revenue nicely.
Broad wings have a greater potential to generate revenue, however they arrive with better danger and probably bigger drawdowns.
There’s an optimum the place you danger sufficient however not an excessive amount of.
The Tastylive examine discovered that for $100 underlyings, the optimum wing width is $10 huge.
For each $100 enhance within the underlying measurement, enhance the wing width by $5.
We hope you loved this text on the optimum wing width for iron condors.
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Disclaimer: The data above is for instructional functions solely and shouldn’t be handled as funding recommendation. The technique offered wouldn’t be appropriate for buyers who usually are not acquainted with trade traded choices. Any readers on this technique ought to do their very own analysis and search recommendation from a licensed monetary adviser.
