The Iron Condor - The Options Trading Strategy

Photo by Nicholas Cappello on Unsplash

Today’s traders can choose from a variety of options trading strategies. Some of these are riskier than others. And there are some strategies for limiting the risk in a trade. One such low-risk strategy is the iron condor. It is a trading strategy that allows you to profit from low volatility market conditions. Nowadays, the iron condor is employed in algo-trading platforms to offer traders one-touch solutions.

Let’s learn more about the iron condor option strategy.

Meaning of Iron Condor

An iron condor is an options strategy that consists of two puts (one long and one short) and two calls (one long and one short) and four strike prices with the same expiration date. The iron condor makes the most money when the underlying asset closes between the middle strike prices at expiration. In other words, the primary objective is to profit from low volatility in the underlying asset.

The iron condor has an identical payoff as a standard condor spread, but it employs both calls and puts rather than just calls or only puts. The condor and the iron condor are both extensions of the butterfly spread and the iron butterfly.

Here’s how to build an iron condor,

– Sell an out-of-the-money put

– Sell an out-of-the-money call

– Purchase another out-of-the-money put 

– Purchase another out-of-the-money call

As you can notice, the iron condor method involves four trading legs. This four-part method includes a bear put spread and a bull call spread. The strike price of the long put is lower than the strike price of the long call in this case.

The options that are further Out of The Money, known as the wings, are both long positions. Since both of these options are further out of the money, their premiums are lower than the premiums for the two written options, resulting in a net credit to the account when the trade is executed.

It is possible to make the strategy lean bullish or bearish by using different strike prices. For example, if both of the middle strike prices are higher than the current price of the underlying asset, the trader anticipates a small increase in its price by expiration. In any case, the trade still has a limited reward and a limited risk.

Making Profits/Losses Using Iron Condor

The maximum profit for an iron condor is equal to the premium, or credit received for establishing the four-leg options position.

The maximum loss is also restricted. The maximum loss is equal to the difference between the long and short call strikes, or the long and short put strikes. Reduce the loss by the net credits received, but then add commissions to calculate the total loss for the trade.

If the trade goes above the long call strike, which is higher than the sold call strike, or below the long put strike, which is lower than the sold put strike, the maximum loss occurs.

The iron condor option strategy is particularly well suited for experienced traders who have been trading for a long time. Also, the iron condor strategy works best when volatility is low because you want all four of your options to expire worthlessly. You’ll be able to profit from the trade this way. This strategy’s tipping point is between the two inner strike prices. If you’re a beginner looking to execute the iron condor strategy, it’s best to understand the basic concepts, because it involves four legs of the trade. You must also make educated trading decisions here because it is critical to execute this strategy only when market conditions are ideal.

Disclaimer: There are potential risks relating to trading and investing and you should not trade with money that you cannot afford to lose however, for those that educate themselves and adopt appropriate risk management strategies, the potential update can be significant. Please note that all opinions, research, analysis, and other information are provided as general market commentary and not as specific investment advice.

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