Mouse Ear Iron Condors


This is a guest post by my good friend Gavin McMaster of www.OptionsTradingIQ.com. Gavin specializes in Iron Condors, and in this post, he has a great suggestion for an “enhanced” Iron Condor – Its enhanced at both the short strikes, on the Call side as well as the Put side. These additions look like “mouse ears”, and the strategy is called “Mouse ear Iron Condor”.


My take –

1)     It’s a great strategy to decrease your risk at the short strike points. This could potentially avoid any future adjustments, which may be more expensive.

2)     The other way you could put this trade on is to wait for the stock to move in one direction before you put the “mouse ears” on. The mouse ear will cost you more, but then you may not have to put both mouse ears. You can save on the debit on one side, but you’ll pay more for the other side.


Which is better – it depends when you put the adjustment. If you wait too long, then the mouse ear is going to cost too much. If you put it too soon, you’ll save money but you may see a whipsaw. Options trading is always a compromise…


Check it out and would welcome your thoughts on this strategy.


I don’t know about you, but this low volatility environment has really got me down. Every time I look at a new iron condor trade, I think to myself, “Wow, those short strikes are pretty close to the market”.

As condors are inherently short Vega, low volatility environments can be especially risky for iron condor traders. A quick spike in volatility can put your condor under pressure very early in the trade and make it difficult to adjust and end with a profit.

In addition to a volatility spike, a sustained rally, with very few pullbacks can slowly eat away at your iron condor, until you are forced to take a loss or look for an unattractive adjustment opportunity. The problem with adjusting the call side in this environment is that with volatility so low, the typical methods of rolling up and / or out are unattractive at best and precarious at worst. With volatility so low, you simply cannot generate enough premium to make the roll worthwhile.

So, what are we to do?

You could stop trading and wait for high volatility to return, but who among us is able to sit idle for 3-4 months?

You could try new strategies, but that is also fraught with danger if you don’t have the necessary experience and expertise.

What if there was a better way to trade iron condors in low volatility environments? Well, there is, and despite the funny name, they are a great way to trade condors during low volatility periods. Let’s take a look at a “Mouse Ear” iron condor.



I like to think of a mouse ear iron condor as a lower risk, lower return version of a condor. BUT, it also has the added benefit of a significant “profit tent” around the short strike.

No longer do you have to fear a stock moving towards your short strike, with a mouse ear, you actually welcome it! (note: As long as it doesn’t occur too early in the trade)

Mouse ears may look complicated, but they are actually very easy to set up, albeit a little commission intensive. This type of trade will also significantly reduce your Vega exposure which is exactly what you want when the VIX is near a 6 year low.


Here is how the trade is setup:



March 26, 2013



Mouse Ear Iron Condor – RUT


Current Price:



Trade Set Up:

Sell 10 RUT Apr 18th, 980 CALLS, Buy 10 RUT Apr 18th 990 CALLS for $0.90 ($900)

Sell 10 RUT Apr 18th, 910 PUTS, Buy 10 RUT Apr 18th 900 PUTS for $1.00 ($1,000)



$1,900 Net Credit for the iron condor.


Total Capital at Risk:



Potential Return:



Now add the ears:

Buy 3 RUT Apr 18th, 970 CALLS, Sell 3 RUT Apr 18th 980 CALLS for $1.90 ($570)

Buy 3 RUT Apr 18th, 920 PUTS, Sell 3 RUT Apr 18th 910 PUTS for $1.70 ($510)



-$1,080 Net Debit for the ears.

$820 total premium received.


Total Capital at Risk:



Potential Return:

13.27% up to a theoretically possible (although highly unlikely) 61.81%


You can see above that by adding a debit spread just in front of the short strikes gives the payoff graph the appearance of having “ears”.  I’ve used a ratio of 3 debit spreads for every 10 iron condors, but you can play around with the numbers and see what works for you. You might prefer to only trade 2 debit spreads, or even just 1.

Even though this strategy has a potential for a higher return if the underlying expires in the profit zone, you should be aware that it will be fairly unlikely as the profit zone is quite small. It might happen a couple of times per year, but certainly not every month. Keep in mind also that you are trading 6 different strikes instead of 4, so slippage and commissions could eat into the return.

The main benefit of a mouse ear condor is that you will lessen the damage in the event of a sharp market move. You can see this via the different greeks.



Below you see the setup for the iron condor. Delta is slightly negative and you will notice that Vega is -265.



 Now, let’s take a look at the mouse ear iron condor. Delta is now closer to neutral and Vega is -165 as opposed to -265.  That’s a 62% reduction in Vega exposure when compared to the standard iron condor.

So you can see that a mouse ear iron condor has a lower exposure to Vega while also providing an opportunity for extra profit if the stock closes within one of the “ears” at expiration. Why not give one a try in this low volatility environment, but remember to paper trade first!


To learn more about iron condors, visit my blog at www.optionstradingiq.com or check out my Kindle book “Bullsh*t Free Guide to Iron Condors”.

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