The Iron Condor Option Strategy is a trading strategy that can be used in several different situations. Most successful traders utilize some form of this strategy regularly to increase their profits and limit their risk.
In this article we are going to cover :
What Is An Iron Condor?
What Are The Benefits Of Using An Iron Condor Strategy?
When To Use An Iron Condor Strategy
What Are The Risks With Iron Condors?
How To Place An Iron Condor Trade
Let’s start by defining a Iron Condor.
What Is An Iron Condor?
An Iron Condor is a directionally neutral, defined risk strategy that profits from a stock trading in a range through the expiration of the options. It benefits from the passage of time and any decreases in implied volatility.
It is constructed by holding one long put and one short put with different strike prices, and also holding one long call and one short call with different strike prices.
The different strike prices will create 4 different “legs” or option contracts.
Directional Assumption: Neutral
Setup:
– Sell OTM Call Vertical Spread
– Sell OTM Put Vertical Spread
Ideal Implied Volatility Environment : High
Max Profit: The maximum profit potential for an Iron Condor is the net credit received. Maximum profit is realized when the underlying settles between the short strikes of the trade at expiration.
How to Calculate Breakeven(s):
– Upside: Short Call Strike + Credit Received
– Downside: Short Put Strike – Credit Received
What is the Best Approach When Selling Iron Condors?
We shoot for collecting 1/3rd the width of the strikes in premium upon trade entry. For example, if we have an iron condor with 3-point wide spreads, we will look to collect $1.00 for the trade. This gives us a probability of success around 67%, which is acceptable to us.
What are The Benefits of an Iron Condor?
There are a few of key benefits of the Iron Condor Option Strategy.
The first benefit is that it’s a defined risk strategy. You know exactly how much you’re going to lose before you even place the trade. This is important because it allows you to manage your risk on each and every trade.
Another key benefit is that it can be used in almost any market condition. Whether the market is moving up, down, or sideways, the Iron Condor Option Strategy can be used to profit.
Another benefit is that it benefits from the passage of time and any decrease in implied volatility. So you benefit by collecting premium from time decay.
Lastly, Iron Condors are great for IRA accounts since they are defined risk and use very little buying power.
When is the Best Time to Use an Iron Condor?
Iron Condors are best put on in high volatility environments. This is because the increased volatility will increase the premiums you receive for selling the options. This allows the short strikes to be set wider as well to allow for more movement in the stock price while still being profitable.
We want the stock price to stay within a range when putting on an iron condor. For this reason, I like to put them on after a large move down in the stock. This is because the reason for move is already priced in and it likely won’t continue to go down (as long as it is a short-term reason). At the same time, due to the reason for the move down, it is not likely going to rebound right away and rocket back up. In this type of situation, the volatility is likely going to still be pretty high so a good premium can often be collected.
How do we Manage Iron Condors?
We manage iron condors by adjusting the untested side, or profitable side of the spread. In order to do this, we roll the untested spread closer to the stock price to collect more premium. We can go as far as rolling our untested spread to the same short strike as our tested spread, which creates an iron fly.
When do we close Iron Condors?
Much like other standard premium-selling strategies, we close iron condors when we reach 50% of our max profit. This can increase our win rate over time, as we are taking risk off the table and locking in profits.
How do we put on an Iron Condor?
And we will show you using a real example on the TastyWorks Option Trading Platform.
Selling an Iron Condor Example
To better understand how to sell a Short Put Vertical Spread, let’s look at an example.
We are going to sell an Iron Condor in Square since it has a high IVR of 68 and it is a good stock that has been hit and is trading in a range. We will use the TastyWorks Trade platform. By the way, I’ll put the link in the notes below if you want to open an account and get the free stock promotion. It is the option trade platform that I use most of the time and I think it’s the best for trading options.
So we are going to go to the trade tab and punch in the ticker SQ up above. I like to use the curve mode so that I can visually see the profit zone in green.
We go to the strategy tab and select Short Iron Condor. The TastyWorks platform will automatically set you up to sell a Short Iron Condor.
In this case the stock is at $118. We sell the 95/85 put spread and and 140/150 call spread. For doing this, we are collect $335 which is 1/3 the width of the $10 (really $1000) spread. We are placing the trade with 32 Days To Expiration.
The BP effect which is buying power we are using is $665. So it is a cost-efficient way of investing since are using $665 and collecting $335.
Now if you look at the green area which is the P&L at expiration, we see the max profit is the $335 which is the amount we collected upfront. As long as the stock stays between the 95 and 140 short strikes we keep the max profit.
We don’t start losing money until the stock moves to around $91.65 or above 143.35. So if the stock stays where it is at or even moves a little we are still profitable.
Conclusion
Iron Condors are a great strategy to use when we are non-directional on a stock and want to limit our risk. You can collect high premiums and they don’t use a lot of buying power.
Always do your research and consider your investment goals before you begin trading stock options. For more stock and financial information, please check out our other resources at OptionsFinanceProfits.com.
