The iron condor strategy. It's a way of attempting to profit from the options contracts market when the market does NOT move. 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. 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.
The iron condor trade is simply a short strangle sold on an underlying with another long strangle (where the strike prices are placed further out). 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'. When you sell a straddle - quite a bit of premium credit can be brought into the account as you are selling options that are right 'at the money' - opposed to when you sell a strangle the premiums are quite less since you are selling options that are farther away. 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 trade has purchased calls and put options above and below the short options to protect from a large unforeseen movement in the underlying.
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. 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 the calculation...
1370 @ 2.50
1355 @ 4.50
What this shows is that that the credit you bring in is about two dollars.
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 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.
This example described is one of the wings of the iron condor spread trade - and it is the call spread side of the trade. To create the full fledged bird and your full iron condor options strategy, you would simply add a put spread in the same way.
The iron condor options strategy works beautifully when you know what you're doing and there are options traders who use it almost exclusively. Of course, however, there are potential risks with this strategy - just like any trading strategy.
Some of the essential elements to trade the iron condor strategy effectively is to understand how to pick the underlying - knowing how to enter, exit and adjust properly - and knowing when to get out of the trade if the position starts to go bad. 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. How do you think I know this?
The iron condor trade is simply a short strangle sold on an underlying with another long strangle (where the strike prices are placed further out). 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'. When you sell a straddle - quite a bit of premium credit can be brought into the account as you are selling options that are right 'at the money' - opposed to when you sell a strangle the premiums are quite less since you are selling options that are farther away. 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 trade has purchased calls and put options above and below the short options to protect from a large unforeseen movement in the underlying.
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. 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 the calculation...
1370 @ 2.50
1355 @ 4.50
What this shows is that that the credit you bring in is about two dollars.
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 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.
This example described is one of the wings of the iron condor spread trade - and it is the call spread side of the trade. To create the full fledged bird and your full iron condor options strategy, you would simply add a put spread in the same way.
The iron condor options strategy works beautifully when you know what you're doing and there are options traders who use it almost exclusively. Of course, however, there are potential risks with this strategy - just like any trading strategy.
Some of the essential elements to trade the iron condor strategy effectively is to understand how to pick the underlying - knowing how to enter, exit and adjust properly - and knowing when to get out of the trade if the position starts to go bad. 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. How do you think I know this?
About the Author:
Ted 'The Spread is an option selling addict - fiery unusually with trading the iron condor . Visit iron condor website to see his super duper clear cut method of playing this option strategy for dependable returns - and added terrific option income 'stuff'.
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