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Option Spread Strategies

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Of all the various option spread strategies, the iron condor strategy is one of the most popular, the most talked about, the most used – and possibly the most misunderstood.

When many retail traders first start dabbling in options trading before long they come across the iron condor spread – either from an online ad, a live seminar, an option trading friend or neighbor – or an online advisory service touting it as the greatest thing since sliced bread.

And don’t get me wrong – the iron condor IS a great trade – and all those stories and claims of making 5 to 10 percent monthly returns without having to even look at market – and how the odds are so much in their favor – and how it is just like becoming the ‘house’ instead of the gambler – yes – all that is true too – but there is something that is being left out of these various conversations and claims which potentially causes the new option trader to misunderstand this strategy from the beginning and to start trading it with the wrong expectations.

While it is true that the iron condor and the credit spread strategies offer high probabilities of winning – in some cases as high as 80 and 90 percent – what usually isn’t talked about is the risk to reward ratio of these trades – which can be as high as 10 to 1.  Many times in order to achieve the 80 to 90 percent probability trade that they are always talking about – that trade will have a 10 to risk risk to reward ratio – meaning that the trader is risking 10 dollars to make just 1. This is not a very good risk to reward ratio. In fact it is awful.

When you do the math, you will find that even with the wonderful 80 to 90 probability of winning trade – it would only take 1 loss to completely wipe out the 8 to 9 wins you are expecting to make through the year – and perhaps even MORE.

Which is why it is so important to fully understand these option spread strategies and when and how to properly manage them when things go wrong – which they certainly will – believe you me. However, once you DO know how to properly manage the ‘problem’ months that will come along – this trade really can be the great trade that they all talk about. But if you are just getting into this game – be aware.

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