Thursday, January 12th, 2017

IRON CONDOR- WHATS AN IRON CONDOR ?


IRON CONDOR is an option strategy used by professional traders and is a purely income generation tool. Iron condor is named as such because it carries protection and a guaranteed outcome with a high probability of success. IRON CONDOR Spread is the combination of a bullish vertical credit spread and a bearish vertical credit spread on the same underlying stock or index. A trader therefore is able to get 2 credits to his account and put up just one margin on one side of the trade. Depending on how the credit spreads are constructed, option traders will potentially be able to obtain twice the premium over a single position. The trade makes money primarily via time decay. Because the investor is a premium seller, time decay ( know as theta ) works in your favor and therefore a sideways or neutral market works the best.

An IRON CONDOR makes the most money when the underlying remains in between the short strikes chosen and expires worthless without having to be closed by the trader. Since an IRON CONDOR involves 2 credit spreads there are 2 break even points. As long as the stock or underlying asset stays below these two break even points a trader benefits from time decay and enjoys a healthy return within 30- 60 days. Most professional traders, Institutional traders, and retail traders, use this this index credit spread option strategy to generate consistent monthly income.

IRON CONDOR is essentially a delta neutral strategy. Its also called direction less trading. Meaning the direction of the market is not of concern to the trader. The delta of the trade is usually very small or negligent. But that does not mean if the underlying starts moving our trade will stay delta neutral, since adjustments may become necessary. Typically an IRON CONDOR is constructed with at least one Standard deviation away from price of the underlying. That gives significant probabilities for the trade to be successful. Before getting into new positions, you should look for positions that have an extremely high percentage of profitability.

I usually select IRON CONDORS with a probability of success somewhere above 90% or more in my own trading. To be successful this trade has to have a wide range and let the time decay erode option premiums. Lets look at the risk and reward of a given trade . Given below is a typical trade in our subscription based trading provide to our subscribers.

RUT IRON CONDOR TRADE EXAMPLE

Lets say today RUT Index is trading at 700 and we have 30 days to next month’s expiration. A typical IRON CONDOR trade will look like this.

SELL NOVEMBER 750 CALLS

BUY NOVEMBER  760 CALLS  Net credit = $ 1.00 

SELL NOVEMBER  600 PUTS

BUY NOVEMBER 590  PUTS   Net credit = $ 1.20   

Total credits = $ 2.20

The risk on the trade is the difference between the strikes which is 10 points -minus the credit taken of $2.20 which is equal to $7.80. What does that mean ? It means you stand to benefit and make $2.20 and stand to lose $7.80 in the worst case scenario. Is this something exciting? You may ask this question I stand to lose $7.80 and make $2.20 in the next 30 days? What you should be asking here, however ,what is the probability of success of this trade? If there is a 85% probability  that price may not reach our short strikes 750 on the call side and 600 on the put side, than its very possible that we shall be able to make good profits on the trade.

The risk/ reward ratio in this trade is not what an investor is looking for but the high probability of success of the outcome. Nothing works better as a tool in income generation as this Index credit spread option trading strategy does. If the short strikes are farther out from the price lesser is the amount of risk and higher the probabilities of success.

After an IRON CONDOR is placed and the play is established, increasing implied volatility is the real enemy from experience. An increase in implied volatility will increase the prices of short or sold options, so if you chose to close your position, it will be more expensive to buy them back prior to expiration. Hence as traders we watch the hidden dimensions of the trade known as volatility, that can make a difference between success or failure.

To conclude, IRON CONDORS, therefore are the most powerful Index option credit spread trading strategies, employed by a variety of traders and institutions, market makers and retail traders. Many professionals rely on IRON CONDORS for consistent incomes month after month and they make quite handsome amounts of profits.

Comments

9 Responses to “IRON CONDOR- WHATS AN IRON CONDOR ?”
  1. Trading strategies for non-professional traders is what I am investigating. Your site is very helpful in this area. I guess the whole point revolves around whether it is advisable for non-pro traders to attempt anything other than simply buying calls and puts. I suppose it all comes down to education – it may be better to go for a safe strategy with limited risks and returns, rather than a single trade which is easy to do but carries more risk.

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