A Note for the Serious Investor:
The material that follows is written for high-net-worth and accredited investors who are serious about understanding the use of commodity options in a professionally managed portfolio. Futures and options involve substantial risk of loss, are not suitable for all investors, and only risk capital should be used. This article is for educational purposes only and is not a recommendation to buy, sell, or hold any specific futures contract, option, spread, or commodity position.
In doing some initial research for this piece, I did a bit of internet surfing over a weekend to see what kind of option “knowledge” is being peddled to the public these days.
The good news is, there is some fairly accurate and good information from reputable sources available to you. The bad news is, you really have to dig for it, and you’ll have to sift through plenty of incomplete or promotional material to get to it.
For instance, much of the information I found on options had to do with stock or stock index options. This rang particularly true when I was investigating one of the more widely used option selling strategies known to experienced option writers – the famous Iron Condor.
Consider these two common ideas about iron condors that, in my view, are incomplete when viewed only through the stock option lens:
Common statement: The underlying asset is often one of the broad-based market indexes, such as SPX, NDX or RUT, and some investors use iron condors on individual stocks or smaller indexes. Incomplete because: That discussion often leaves out commodities entirely. Yet commodity markets can offer a very different set of opportunities and risks for deploying the Condor.
Common statement: When you own an iron condor, the goal is usually for the underlying index or security to remain in a relatively narrow trading range from the time you open the position until the options expire. Incomplete because: That is often how the strategy is discussed in stocks. In commodities, depending on the market, strike selection, volatility, time to expiration, and available premiums, an iron condor may allow for a wider trading range. That does not make the trade risk-free, and it does not mean wide-range placement will always be available.
If you’re new to options, you’re about to discover a strategy that may have a place in a properly structured option selling portfolio. If you are not new to options, and have experience with writing condors, you’re about to see how the strategy can look different when applied to commodities.
It’s called “Iron” for a Reason
As a portfolio manager, I have had the opportunity to speak with high-net-worth investors from around the world – both on a Manager to Client basis and on a colleague-to-colleague basis. I have met investors who have focused heavily on S&P option condors as a primary income-oriented strategy. Some have used that approach successfully for periods of time.
I’ve also known traders who suffered substantial losses, especially when a major market move went against a concentrated strategy. When you’re limited to one market and one strategy, one macro wave can make a pretty big splash. Thus while personally, I respect the overall approach, I prefer a more diversified one myself.
That does not take away from the potential usefulness of the Iron Condor when it is used with proper risk controls.
Its called Iron for a reason. For the most part, it attempts to put a defined structure around your position that can be difficult, although certainly not impossible, for the market to penetrate.
Iron condors are named after a bird, but properly structured, they are built more Like a Tank.
What is an Iron Condor?
In The Complete Guide to Option Selling 3rd Edition, you will not see the Condor mentioned by name. But in Chapter 9, Recommended Spreads: The Few and the Proud, you’ll see both of its component parts mentioned. Those are the vertical spread and the strangle.
The strangle is an option selling strategy of selling a put below the market and a call above the market. If the options expire with the underlying anywhere between the two short strikes, the seller generally keeps the premium from both options, less transaction costs. The position still carries risk, including the possibility of substantial loss if the market moves sharply beyond either short strike. The put and call may help offset certain risks, but they do not eliminate risk.
A vertical spread is a form of credit spread with options. To sell a bearish vertical call spread, a trader sells a closer to the money call at a higher premium, and then buys a deeper out of the money call at a lower premium. If both options expire out of the money, the trader keeps the difference in premium between the two options, less transaction costs. The purpose of a vertical spread is to define the maximum risk of that spread at entry, subject to execution, liquidity, and other trading costs. You can also employ this strategy on the put side of the market if you are bullish.
The Condor is simply a matter of combining these two strategies into one. Thus, you would write a strangle, a put and a call in the same market, and then protect each side by buying a deeper out of the money call and a deeper out of the money put. This gives you a vertical credit spread on both sides of the market. This allows you to pursue the risk-balancing characteristics of a strangle while defining the maximum risk on each side through the purchased options.
Confused yet? No worries. The example below illustrates how an Iron Condor in commodities can be structured.
The Condor in Flight – Commodities
The best way to understand an Iron Condor in commodities is through example. The one below illustrates a hypothetical condor in the gold market.
(Note: The following is for hypothetical example purposes only. No representation is made that OptionSpreaders.com recommends such a trade, that current premiums are reflective of the ones used in the example, or that any similar trade would be profitable. The example includes assumed transaction costs. Actual commission, exchange fees, execution prices, margin requirements, and carrying costs may differ and should be updated before use.)
Example: Iron Condor In Crude Oil
December 2025 Crude Oil
In March, an option seller believes crude oil may remain in the same broad trading range it has held for the past year. He wishes to collect premium from both sides of the market, but wishes to do it through a defined-risk spread structure. He elects to use the Iron Condor.
Date: March 10, 2025
Trade: Selling December WTI 90/100 Vertical Call Credit Spread – Selling December WTI 45/35 Vertical Put Credit Spread
Execution: Sells the 90 call for $1,000 gross premium and buys the 100 call for a $400 cost. Sells the 45 put for $1,000 gross premium and buys the 35 put for a $400 cost. Gross credit is $600 on the call side and $600 on the put side, or $1,200 total before transaction costs. Assuming $35 per option contract round turn, exchange fees of approximately $2 each, and four option contracts, assumed transaction costs are $148. Net premium after assumed transaction costs is $1,052.
Net Potential Profit: $1,052 after assumed transaction costs, if all four options expire worthless.
Margin Requirement: $1,500 illustrative initial margin requirement. Margin requirements are set by the exchange and/or FCM and may change. Margin is not the same as maximum risk.
Risk: The maximum risk is defined by the width of either vertical spread, less the total premium collected, plus transaction costs. In this example, the spread width is $10,000. Using the $1,200 gross credit and $148 assumed transaction costs, the estimated maximum loss is $8,948 if either side settles fully in the money at expiration. Losses may also occur before expiration if the position is closed, adjusted, assigned, or if market conditions reduce liquidity.
Profit Scenario: If WTI Crude Oil is anywhere between $90 and $45 per barrel on expiration day, all of the options expire worthless. The seller keeps the $1,052 net premium after assumed transaction costs. This is the best-case outcome for the example, not a projection or guarantee.
What are the Benefits of Positioning this Way?
- Premium vs. Margin Ratio – Depending on the market, volatility, strike selection, and time to expiration, iron condors may offer an attractive premium-to-margin relationship. Exchanges and FCMs may recognize the built-in spread structure and assign lower initial margin requirements than a comparable uncovered option position. Margin can change and should not be confused with maximum risk.
- Staying Power – In some cases, you may be able to hold an iron condor unless one of the short strikes is threatened or moves in the money. This means the market may be able to move through a relatively wide range before the position requires action. That range is not guaranteed, and the position still requires monitoring because of…
- Heavy Duty Risk Protection – Should the underlying market move to a point where it threatens one of the short strikes, the holder of the Condor may be able to exit or adjust at a smaller loss than an uncovered short option position. Why? Because although a near strike is threatened and its value may be increasing, the protective long option may offset part of that loss. But do not forget the credit spread on the other side of the market. Those options may be decaying from the same move that is threatening your strike. Thus, you can have two parts of the structure helping while one part is losing. In an extreme move, poor execution, or illiquid market, this can still result in a substantial loss. The loss may accrue more slowly than with an uncovered short option, but it is still a real loss risk.
The Condor Like You’ve Never Seen It
If you’ve only seen condors applied to stock options, commodities can offer a different manner of applying them. In fact, some of the common assumptions about writing Condors with stock options may not apply in the same way. These include:
- Substantially Wider Profit Zones – The availability of deep out of the money strikes in certain commodity options can open up wider potential profit zones for condor sellers. The common assumption of only narrow profit zones does not always apply, although available strikes, premiums, volatility, and liquidity vary by market.
- Premium Potential: Lower initial margin requirements and higher premiums available in some commodity options can offer investors a different return profile per trade. This does not mean returns are assured, and it does not mean the risk is low. Rule of high margin requirement vs premium collected may not apply in the same way.
- Diversification: Commodity option sellers have the ability to diversify over several different markets such as coffee, sugar, wheat, gold or crude oil. These markets may be influenced by different supply, demand, weather, currency, interest rate, and geopolitical factors. This is different from an S&P condor trader, or even an individual stock option seller, who may be concentrated in equity market exposure. Rule of being stuck in one singular market does not have to apply.
Covered credit spreads are a preferred strategy in our managed portfolios. However, for investors deploying iron condors on their own, they can at times be cumbersome to implement. They can also be slow moving, so you need patience. Should you choose to fly with the condor in commodities, you may be using a defined-risk option spread strategy with meaningful premium potential, but also meaningful risk that must be understood before trading.
In the world of online option hype, the iron condor is one strategy that deserves serious study. But if you really want to see how this bird spreads its wings, commodities may be where it looks the most different.
(If you’re interested in learning more about using iron condors in a commodities portfolio, be sure to watch for our video tutorial on writing Iron Condors – coming to the blog this month.)
Risk Disclosure: Trading futures and options on futures involves substantial risk of loss and is not suitable for all investors. Certain option-writing strategies, particularly uncovered positions, may involve substantial or potentially unlimited losses. Adverse market movements may also result in increased margin requirements and the need to deposit additional funds. OptionSpreaders.com primarily utilizes spread-based strategies intended to offset or limit certain risks, but spreads do not eliminate the possibility of substantial loss. Investors should carefully consider whether these strategies are appropriate in light of their financial condition, investment objectives and ability to bear risk. Past performance is not necessarily indicative of future results.
