![]() Using this trade setup as an example, the net credit is $100 therefore, the maximum profit is $100. Under the following circumstances, the iron condor consists of: We will assume the trade was entered into on ABC stock, currently trading at $45 in January. ![]() Let’s look at a simple example of the iron condor in action. It can only be used during periods when a decrease in the volatility of the underlying stock is expected. ![]() The main disadvantages of using an iron condor include: While there are minimal disadvantages to using the iron condor, it is essential to be aware of them in order to set realistic expectations and use them successfully. Iron condors do not require a significant amount of capitalĭisadvantages of Iron Condor Options Strategy.Consistent returns due to the higher probability of success.The ability to profit if the market moves up or down.Why is this a popular trading strategy for conservative option traders? Advantages of Iron Condor Options Strategy However, before expiration, the contracts within an iron condor can be closed to protect gains or minimize losses. If the stock price stays between the short options, the contracts will be worthless at expiration, and the credit received will be kept for maximum profit. minimal movement in the price of the underlying stock.Iron condors primarily depend on three things: Purchasing additional option spreads to protect profits or minimize losses.Rolling some of the contracts on the threatened side to a future date.Adding more contracts to the non-threatened side of the iron condor.Common changes include but are not limited to: However, this will also lower the overall amount of profit.Ĭhanges can also be made during an iron condor if the market moves in a way that aggressively threatens your profits. Initial changes can be made when creating an iron condor to maximize the chances of being profitable, like increasing the distance between the short strike prices. Making Changes to the StrategyĬhanging an iron condor strategy is not uncommon. If you received a $5.00 credit when opening an iron condor, the break-even point would be $5.00 below the short put strike and $5.00 above the short call strike. The break-even point for an iron condor is relatively easy to calculate. It is created by selling a call credit spread and a put credit spread, both with the same expiration date and both out-of-the-money. The initial setup of an iron condor is simple. Stocks with an earnings call within the next 30 - 40 days should be avoided due to the potential of volatility increasing during the trading period.įurthermore, entering an iron condor when the volatility index (VIX) is high - for example, above 23.5 - has historically provided both higher and more consistent profits. Large market cap stocks are perfect to use because the price is less likely to be manipulated. Iron condors are great for monthly options with 30 - 40 days to expiration.Ī conservative target should be a profit of $0.50 - $0.75 per contract. This strategy is a multi-leg neutral trading strategy in which the risk is predefined, and the profit potential is limited within a single trade but consistent over multiple trades.įor a better overall understanding, let’s take a deeper look at the details of an iron condor. The strategy got its name because the graph reflecting the various profit and loss points looks like a large bird, like a condor. ![]() What is Iron Condor Options Strategy?Īn iron condor is an options trading strategy consisting of selling an out-of-the-money call spread and an out-of-the-money put spread, all with the same expiration date and width between strike prices. If you’re new to options trading, or have spent time away from it, we recommend brushing up on options trading fundamentals with this guide. In this article, we’ll break down the iron condor strategy, along with its advantages and disadvantages, to help you decide if it's the next best strategy for you to implement.Įditor’s Note: This article includes options trading terminology and strategies. We’re talking about the iron condor strategy. There is one low-risk strategy that when used correctly can generate consistent returns and doesn’t require an unreasonable amount of time to manage. How can you know which one is best for you? Whether you are a new or experienced options trader, there are several strategies for you to utilize.
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