Does The Iron Condor Really Work?
The iron condor strategy. This is a trade that makes profit when the underlying market being used is range bound. Typically, it goes without saying, options traders are trying to leverage market movement. However, many times the options being use expire worthless due to the fact that many times there is no significant movement in the market. With the iron condor options strategy (which is actually recognized and defined by the SEC), non-movement can be turned into a profit by the savvy trader.
A way to think of the iron condor strategy is to consider it as trading a short strangle combined with the purchase of a long strangle. When you buy a put option below where the underlying is trading and then buy a call option above where the underlying is trading at, it is called a 'strangle'. The premiums a trader can expect to take from a strangle position will be less than a straddle due to the fact that the options being sold are some distance away from 'at the money'. Many traders who use this strategy prefer to think of it as two credit spreads: a put spread below the market paired with a call spread above the market. The long calls or puts above and below where the short options are placed at are the wings.
Let's imagine that the SPX is at 1300 and you buy the June call option at 1370 for a premium of $2.50, and simultaneously you buy the June put option for $4.50. It's important to choose an options friendly broker to help keep your margin under control and in the long run provide better returns. In this pretend scenario, in order to do this spread one would need somewhere around $1320.00.
Here is how it looks:
1375 at $2.55
1350 at $4.00
That means that the premium that has been brought in is right around 2 dollars.
Here it is broken down - $15 dollars minus $2 dollars: $13 dollars - times 1 spread of one hundred contracts of the underlying = $1,350
If the underlying finishes the trading cycle below the sold options, the trader gets to keep the entire credit which can translate to a great return in a short period of time.
The above is one wing of the iron condor, and it's the call spread. To create the full fledged bird and your full iron condor options strategy, you would simply add a put spread in the same way.
Iron condors are great trades and be traded consistently with very profitable results - and some traders use this strategy as their only trading strategy to pull income from the markets. But it's not without its potential pitfalls and dangers.
Knowing which stock or index to use - as well as knowing how and when to properly place, exit, manage and adjust the iron condor is essential. Managing and adjusting these trades are a major part of experiencing success with this type of trading. It is possible that this trade can produce big time losses if you don't take the time to completely learn and understand this trade and if you don't create a trading plan that you are willing to follow. I know this from first hand experience.
A way to think of the iron condor strategy is to consider it as trading a short strangle combined with the purchase of a long strangle. When you buy a put option below where the underlying is trading and then buy a call option above where the underlying is trading at, it is called a 'strangle'. The premiums a trader can expect to take from a strangle position will be less than a straddle due to the fact that the options being sold are some distance away from 'at the money'. Many traders who use this strategy prefer to think of it as two credit spreads: a put spread below the market paired with a call spread above the market. The long calls or puts above and below where the short options are placed at are the wings.
Let's imagine that the SPX is at 1300 and you buy the June call option at 1370 for a premium of $2.50, and simultaneously you buy the June put option for $4.50. It's important to choose an options friendly broker to help keep your margin under control and in the long run provide better returns. In this pretend scenario, in order to do this spread one would need somewhere around $1320.00.
Here is how it looks:
1375 at $2.55
1350 at $4.00
That means that the premium that has been brought in is right around 2 dollars.
Here it is broken down - $15 dollars minus $2 dollars: $13 dollars - times 1 spread of one hundred contracts of the underlying = $1,350
If the underlying finishes the trading cycle below the sold options, the trader gets to keep the entire credit which can translate to a great return in a short period of time.
The above is one wing of the iron condor, and it's the call spread. To create the full fledged bird and your full iron condor options strategy, you would simply add a put spread in the same way.
Iron condors are great trades and be traded consistently with very profitable results - and some traders use this strategy as their only trading strategy to pull income from the markets. But it's not without its potential pitfalls and dangers.
Knowing which stock or index to use - as well as knowing how and when to properly place, exit, manage and adjust the iron condor is essential. Managing and adjusting these trades are a major part of experiencing success with this type of trading. It is possible that this trade can produce big time losses if you don't take the time to completely learn and understand this trade and if you don't create a trading plan that you are willing to follow. I know this from first hand experience.
About the Author:
The author of the above article has several years of understanding dealing with weekly options, specifically trading iron condors. If you are thinking about acquiring additional information on this topic, then you're welcomed to the site IronCondorOptionTradingStrategy.com