These are the rules used when trading iron condors and any similar options spreads. Note these rules are strategic pointers that have proven useful.
Entry
Always enter a position at least 4-6 weeks prior to expiration. Negative gamma risk outweighs positive theta risk at less than 3 weeks.
Look for a probability of success around 70-85%.
Never enter or exit a position the Wednesday, Thursday, or Friday of expiration week if possible. Market makers tighten the bid/ask spreads during these times.
Range is determined based on risk.
Exit
Exit by price not by time. Prior to entering any position exit points for both profit and loss are determined. Once the predetermined exit point has been reached, exit. At no time should an exit occur later than 4 calendar days (not trading days) before expiration, regardless of profit or loss.
Rule of Thirds
The market does not require placement trades all at once. If you are going to put on two positions in a given month take an initial step, let the market do whatever it wants for a few days, and then initiate the second position.
Choose the Market
Don’t trade iron condors on non-index products. The reason for this is that individual stocks will be subject to sudden price movement from events both expected (i.e. earnings, industry reports) and unexpected (i.e. management changes, big competitor success). The danger with these events is that they create binary situations, e.g. earnings are coming out on a volatile stock, either a good or bad report could push the price outside the range of the trade, leaving us with a loser overnight. Using index products reduces this risk. Event risks to indexes are market-external events (i.e. economic reports, geopolitical events).
The most liquid and actively traded indexes include S&P 5000 (SPX), Russell 2000 (RUT), and NASDAQ (NDX).
US Treasury Bonds and Notes provide high premium, high liquidity, and low volatility. These include the 30 Year US Treasury bond (/ZB) and 10 Year US Treasury note (/ZN).
These markets give greater flexibility, reduce slippage, and faster execution.