Today we are discussing the best ETFs for iron condors.
Many options traders will trade iron condors on large indices such as SPX and RUT because they are liquid and diversified assets.
But suppose you are just learning and feel their trade size is too large.
Or perhaps you took only a small slice of your assets to open up a small account for trading purposes.
Contents
IWM
IWM, the ETF that tracks the Russell 2000 index, is priced at one-tenth the size of the RUT index.
ETFs are Exchange Traded Funds that are traded on stock exchanges, similar to individual stocks.
They are designed to track the performance of a specific index, such as a stock index, bond index, commodity index, or basket of assets.
ETFs offer investors an opportunity to gain exposure to a diversified portfolio of assets without buying each individual security separately.
In a previous article, we showed an example of an iron condor on IWM, where a two-lot iron condor has a max risk of less than $1000.
If you want to trade even smaller, you can drop that down to one contract and have a max risk of only $500 per trade.
If you had a $25,000 account and did not want anyone trade to risk more than 2% of your account size (per the 2% rule), this iron condor would fit this requirement.
Because 2% of $25,000 is $500. You can loosen this requirement if you have a mental stop loss on the trade.
If, for example, you say that you would exit the trade if you lost more than 15% of the margin, then you would exit this trade when your loss gets to 15% of $500 or $75.
In that case, you can justify saying that your max loss in the trade is $100 (give it a $25 buffer) instead of $500, assuming you can follow your exit loss rule.
SPY
SPY is the ETF that tracks the S&P 500 index.
It is slightly larger than IWM. But both are good places to start.
SPY and IWM are both liquid and diversified assets.
Unlike their corresponding indices, ETFs are not cash settled.
You can get assigned shares of ETFs.
This risk is low if you exit the condor at least one week before expiration. And if you keep the short options out of the money.
QQQ
QQQ is the ETF that tracks the Nasdaq. Like the IWM and SPY, it too has a 4-star liquidity rating as ranked by TastyTrade, which gives a rating from 1-star to 4-star, with 4-star being the most liquid.
DIA
The DIA is the ETF that tracks the Dow Jones. It is less liquid, with a 3-star rating, but it is still acceptable.
TLT
If you want to trade iron condors on less correlated assets to the overall market, you can trade on the TLT, the ETF tracking treasury bonds.
GLD
GLD is the ETF for gold.
As iron condor traders, we don’t like the underlying assets to move in price too much.
GLD has a 60-month beta of 0.15.
Anything with a beta less than 1 means it moves less than the S&P 500.
HYG
HYG is the ETF for high-yield corporate bonds.
One of the benefits of ETFs over individual stocks is that the former is less subject to individual stock event risk.
If you trade an iron condor on an individual stock, the underlying stock can make a large price move due to an earnings announcement, product announcements, or unpredictable CEO announcements.
XLE
If you are trading multiple iron condors at the same time, you might want to diversify your iron condors across different asset classes.
XLE is the energy sector ETF.
XLK
We like to use ETFs that have a price greater than $50.
That is why XLF (the financial sector ETF) and SLV (the silver ETF) are not on our list.
Their price per share is too low, so we have to use too many contracts.
XLK is the technology ETF, currently priced above the $100 mark.
EFA
For exposure to equities outside of the United States and Canada, the EFA comprises large, and mid-capitalization developed market equities, excluding the U.S. and Canada.
Conclusion
There you have it. Ten liquid ETFs in which you can trade iron condors.
We hope you enjoyed this article on the ten best etfs for iron condors.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
