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I am reading a small book on the proper use of Iron Condors (link). I do not use these strategies as I have had a very hard time being profitable on them. This book mentions some strategies to creating an Iron Condor I didn't consider.

I am trying to understand the following statement:

Selecting short strikes at a particular level of delta exposure allows the width of the iron condor to change automatically with changes to Implied Volatility.

I understand how IV effects the price of options - however I am confused at the use of the term "automatically adjust". Isn't the width of an Iron Condor fixed at the difference between the two short strikes? How does selecting say, the 40 delta strikes, help the Iron Condor deal with Implied Volatility? The author implies this is some sort of automatic risk factoring being done. It seems too good to be true, which means I am missing something here.

I'm interested not only in an explanation but perhaps some mathematical treatment to this as well. I find this very interesting.

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  • $\begingroup$ The essence of quantitative trading is defining a trade and then doing it over and over for months or years. If you define the trade in terms of Delta ("I always use 0.40 delta strike") then you find that when IV is low, such as in 2017, you use certain strikes, when volatility picked up as in 2018 you used different strikes and now in early 2019 that iv came down you are back to using strikes placed like the ones you used in 2017. Once the trade is under way, it does not adjust, but what adjusts is the parameters of the next trade you will do when this one is over. $\endgroup$ – noob2 May 12 at 21:01
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    $\begingroup$ @noob2 So by fixing delta, you make it systematic. I see now the way it adjusts is how you said - if you always define a spread like this in terms of delta the body will be wider in times of higher volatility, and smaller in times of lower volatility. This comes from the asymmetric payoff profile of options. In times of higher volatility a fixed delta will select the farther OTM strikes because the IV indicates a higher chance of reaching those points. The reverse is true for low volatility environments. Is this the right way to think about this? $\endgroup$ – CL40 May 12 at 23:17
  • $\begingroup$ I think you explained it well. $\endgroup$ – noob2 May 13 at 1:15

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