Iron Condor Strategy
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The iron condor strategy is used by option traders ideally in non trending situations. The spread takes advantage of theta decay in options – as the day progress moving towards expiration day, all options are losing value – and in the case of the iron condor strategy – as long as the ‘sold’ strikes of the trade are placed well out of harms way (of the underlying reaching or ‘breaching’ them) these trades can usually expire worthless allowing the iron condor trader to keep the entire premium received.
Iron Condors are built from 2 individual credit spreads – one on either side – once again, placed as far out of harms reach (of the underlying touching or moving through them) as possible while still bringing in a respectable credit.
Placed above the stocks current price is a bear call credit spread – usually positioned at least one standard deviation away from the underlyings current value. Below the iron condor investor places a bull put spread credit spread – also usually at least one standard deviation away from the stocks current trading price.
During the duration of the trade, the underlying can fluctuate around just as long as it doesn’t do so too wildly – and just as long as it remains within the predetermined ‘range’ created by the sold credit spreads on either side.
This type of option spread can carry with it an extremely high probability of winning as in most months the underlying, if chosen correctly, should not too far away from it’s current position. In the months where the underlying DOES begin to move too far, too fast – the trader managing these positions should have an adjustment plan in place to contain and cut short losses – which can be significant with these types of trades due to the high probability of winning / poor risk to reward set ups. However, if one does understand the proper way to manage and adjust the iron condor trade during it’s few seldom months per year – this type of trading can be extremely rewarding.
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