How would you like to profit on a stock when you think it’s going to head sideways over the short term?
Or how would you like to turn a losing trade into a profitable one?
If so, then maybe an Iron Condor options strategy is for you.
And unlike other option buying strategies, selling an Iron Condor puts cash in your account right away.
Then if your trade works in your favor, you can keep all of that credit.
Now let’s go over how to use the iron condor strategy to make money in a wide market range plus a way to leg in to turn a loser into a winning trade.
Definition: An iron condor is an options strategy created with four options…two puts (one long and one short) and two calls (one long and one short). This strategy uses four strike prices, all with the same expiration date. The goal is to profit from low volatility in the underlying asset.
An iron condor is essentially just the combination of a bull put spread and a bear call spread.
And since each spread is a net credit, this trade is a net credit, and you are paid upfront for this position.
The goal is that the underlying doesn’t move much around the strikes you selected, and then the options expire worthless.
And when the stock didn’t move this would allow you to keep the money you earned from the iron condor position.
When To Utilize The Iron Condor
Typically, you want to put on an Iron Condor strategy when you think that the underlying asset is going to be range-bound or have a period of low volatility.
Note: Volatility is simply the term that describes how “active” a stock is. The faster a stock moves, then it’s considered to be more volatile compared to a stock that is slowly moving.
It’s generally best to stay away from stocks that have a higher IV reading when trading an iron condor.
Because the ideal situation in an iron condor is that the stock trades at about the same point it was when you opened the trade, to ensure all options expire worthless and you keep your max profit.
How Does An Iron Condor Work?
First, you want to identify the stock you are going to be trading and that a range-bound market is being projected for the near future.
Next, you want to start by selling an out-of-the-money call and put spread.
To do this, you have 4 simple trades to place
- Sell put below strike price
- Buy put further below strike price
- Sell call higher than strike price
- Buy call further above current strike price
It’s important to make sure that each option has the same expiration date, ideally 30-90 days until expiration.
Real Example Of Using Iron Condor Strategy
Let’s say the stock Amazon AMZN is trading $2482 per share. At this time, I don’t think the run up can continue and will expect that it moves sideways over the night few months.
Here is the potion that was created
- Aug ’20 $2600/2640 call spread for a debit of -$7.00
- Sold the Aug ’20 $2130/2090 put spread for $7.00
This position that was created was :
- Long Aug ’20 $2600/2640
- Short Aug ’20 $2130/209
And if the stock stays put, you will be able to keep your max profits based on the options profile.
Pros / Cons of an Iron Condor
- Limited risk – Your risk is limited because of using spreads. This means the long/short combination will cover you if the underlying skyrockets.
- Quick cash – One big advantage to a credit trading strategy is that you are able to collect cash right away.
- Significant losses are still a possibility when it comes to trading spreads.
- Limited Profits – you are capped to the max profits on the trade from your credit spread.
Now if you are in the mood for a limited risk / limited profit trading strategy, the one strategy that is hard to beat is the Iron Condor.
From risk mitigation to capitalizing on sideways markets, there is little that the Iron Condor can’t do that you will need to know
Now to get the iron condor to work for you