What exactly is the iron condor? This is a trade that makes profit when the underlying market being used is range bound. Savvy option traders try to implement trades that are best suited for – and that take advantage of – whatever type of movements are occurring in the market. Many times – and maybe most of the times – there is not a lot of movement and the underlying just trades in a range, leaving the options being traded to expire with no value on expiration day. Iron condor traders love this type of market environment as it is the ideal situation to pull profits from the markets.
You can imagine the iron condor strategy trade as a purchased strangle and a sold strangle. A “strangle” is where a trader buys an an out-of-the-money call as well as an out-of-the-money put option. Strangles’ premiums are less than those of straddles due to the fact that the contracts are out of the money. A different way to imagine the iron condor option trading strategy is to think of it as 2 credit spreads – a bull put spread and a bear call spread. The wings are the long calls and puts that are placed on the outer edges of the entire trade.
Pretend that you purchase the 1280 SPX and you buy the august call at the level for a credit of two hundred – and right at the same time you buy the august put options for about $4.65. If you are working with an options friendly broker – the required margin will be the difference between the two strikes – or the difference in the spread. In this example you would need around thirteen hundred dollars or so for this spread trade.
Here is the calculation…
Thirteen hundred seventy at $2.50
Thirteen hundred fifty five at four dollars and fifty cents.
This means, your premium credit = 2.00
That’s fifteen dollars take away two dollars wich equals thirteen dollars – times one spread of 100 contracts equals about thirteen hundred dollars.
If the June market closes below 1355, you get a $200 credit (2.00 x 100 units) stays with you and you have a cool 15% profit.
The above is one wing of the iron condor, and it’s the call spread. To complete the entire iron condor, you would just add a put spread down below where the underlying is trading.
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 just like any investment strategy – there are potential pitfalls one needs to be aware of.
Some important things to consider when trading the iron condor is knowing which underlying to utilize – along with understanding when and how to properly place, adjust and exit the position. Especially the proper management and adjusting. If you don’t understand this strategy fully – or if you have a game plan that you will follow strictly – could be your downfall and wind up costing you significant losses. Try to guess how I know.
The author of the above article has several years of understanding dealing with iron condor adjustments, specifically option income trading. If you’re thinking about acquiring more information on this subject, then you are invited to the site IronCondorOptionTradingStrategy.com