Our goal in this trade is to setup at a 10 delta on the puts and calls. I’m going to set up first with verticals and then we’re going to get into it with just a single iron condor trade.
This is a good set up to do because you’re creating a very balanced iron condor on both sides. Which means 90 chance of success on the puts 90 chance of success on the calls.
Together, that creates the 80 chance of success. Otherwise, if you got 90 chance of success, it would have to be just that single side. So taking a look at this trade screen on Shopify.
What you will do is take a look at your trade grid here.
This is your trade, all products. Let’s go into the 60 days.
Could you do it at 30 days, 10 delta? Could you do it at 40 days? Yes, you could. We have our calls over on the left.
Our put side is over on the right.
Put side
I’m going to first start out with the put side.
How do I get a 10 delta? Well first thing you have to understand is, how do I find the delta? To find the delta, I have to switch this by clicking this area right here.
Now that switches it.
Some people like to do is look at probabilities and they might switch it to probabilities in the money. So that’s going to be very similar to your delta. If I go ahead and let’s say reduce some of these strikes. So I’ve got a negative delta on the put side. You can see I’ve got a negative 0.04 that means a 4 delta.
In our case, we’re looking for a 10 delta. Then I’ll buy my protection a little bit further out. So here’s what I do. I’m going to sell and it’ll be a vertical.
Now I’ll go ahead and analyze that trade.
In our case what I’m going to do is go in on my protection.
So I’ve got a 530 and a 520 that gives me a 10 delta. That’s 90 chance of success! Now if I add another vertical, let’s say we add another one on this end that’ll be also 90%
But together since I got 10% on this sides. That’s what creates that 80% in the middle.
I’m not really worried about this at the top. I’m not worried about this gray zones here. I’m looking at the deltas — that’s the key. Here I’ve got my 10 delta set up on the on the put side.
Call side
I can do the same thing as I go into the call side. So take a look these numbers will look very similar.
I’ve got a 0.38 delta with a about a 29% probability in the money. They’re going to be close. They’re not identical but you could also use probability in the money but delta is just more specific. So go ahead and focus on the delta. I’ll do the same thing, I’ll sell a vertical.
So I’ve got my 10 delta there is my 20 point difference.
Now I’ve got a 10 delta on both sides and that’s the setup. Why is the 10 delta on the put side worth more than 10 delta on the call side? It’s simple, people get more panicked on the put side or they get more panicked when stocks sell off.
So that’s why it’s worth just a lot more. In our case, we’ve got a 10 delta on both sides that creates kind of a little bit of a interesting balance. I can do this also as a single trade. Let’s say if we go to the SPX, and go to 59 days out.
You can see there’s a ton of 10 deltas. Which means if you go to a more percentage value of it, this is more like 10.8 or 10.9. So there is more values to it just in the same way that there’s probabilities here.
As we go here, I might sell an iron condor.
I’ll go to about 2430 on the puts and I’ll buy my protection maybe at you know 20 points out. I’ll go on the calls at 3250. The one I’m short is my 10 delta. So as I analyze this trade, you can see with the SPX, I get much more of a normal situation versus the Shopify.
This is the typical way.
You will see 10 delta on both sides. You’ll have a tiny based on a negative vega. You’ll have a little bit of negative delta here as well.
That’s pretty good.
Usually, when you have a negative vega, you’ll want a little negative delta.
So in our case, this looks like a good balance situation because as prices fall volatility will hurt me a bit but the deltas will help me a bit. So that’s a 10 delta setup here on our trade.
If you notice this price slice you keep moving this affects your profit and loss here.
If you move it that’ll change your profit and loss. So make sure it’s unlocked. That’ll be the real live price and that’s what these hashtags represent there as well.
That’ll be the current price.
That’s the basic understanding of this kind of curvature this graph and setting up a 10 delta spread when it comes to looking at an iron condor.
I hope you found this video helpful and insightful and gave you some things to think about as you set up these 10 delta spreads.
Could you set up a 10 delta on one side and a 5 or 15 delta on the other side? Absolutely.
Could you do two contracts on one end and one on the other? Absolutely.
But that’s starting to get a little more creative.
So for the time being, if you’re just looking for a 10 delta construction that’s the way we would approach it.
