Today we will discuss why it is important to keep the Iron Condor front and center on your strategy list. We’ll discuss what it is and when and how to set it up. The Iron Condor will provide a lot of peace of mind when markets get out of control.
In my estimation, the Iron Condor is the best strategy beginners can use to use in volatile markets. We have that kind of market now and it may get more volatile as time goes by.
What is an Iron Condor?
An Iron Condor is a directionally neutral, defined risk strategy that profits from a stock trading in a range through the expiration of the options. It benefits from the passage of time and any decreases in implied volatility. We want to put on these trades when volatility is high. The higher the volatility the greater the premium we can receive. And given that IV is mean reverting, we put ourselves in a position of closing the trade when volatility and premium is lower
In a prior post I mentioned the four main factors a trader needs to consider when planning a trade. One of those factors is a directional assumption. Are you bullish, bearish, or neutral?
A trader with a neutral bias would use an Iron Condor
How to Set Up The trade
– Sell OTM Call Vertical Spread
– Sell OTM Put Vertical Spread
Max Profit: The maximum profit potential for an Iron Condor is the net credit received. Maximum profit is realized when the underlying settles between the short strikes of the trade at expiration.
How to Calculate Breakeven(s):
To figure the breakeven point on the upside we add the v=credit received to the short cal side and subtract the credit from the short put side.
– Upside: Short Call Strike + Credit Received
– Downside: Short Put Strike – Credit Received
We approach iron condors with similar entry tactics. We shoot for collecting 1/3rd the width of the strikes in premium upon trade entry. For example, if we have an iron condor with three point wide spreads, we will look to collect $1.00 for the trade. This gives us a probability of success around 67%, which is acceptable to us.
When do we close Iron Condors?
Much like other standard premium selling strategies, we close iron condors when we reach 50% of our max profit. This can increase our win rate over time, as we are taking risk off the table and locking in profits.
When do we manage Iron Condors?
We manage iron condors by adjusting the untested side, or profitable side of the spread. We look to roll the untested spread closer to the stock price to collect more premium. We can go as far as rolling our untested spread to the same short strike as our tested spread, which creates an iron fly.
As you can see, the Iron Condor is a straightforward strategy. It is best put on when your bias is neutral, and volatility is high. At entry, we know our max loss and max profit. Our breakeven points can be easily figured out.
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If you have any questions about this strategy, please add a comment at the bottom or send me an email at Dan@optionsactions.com