Iron condor options are a neutral options trading strategy. This is a great strategy to make money in range-bound markets. It’s a selling strategy that combines the selling of two credit spreads. The selling of a call credit spread and put credit spread. You want the price to expire between the two short strikes by expiration to keep the entire credit. Many traders look to close their position at 50% of profit.
Iron condor options are neutral in direction. In other words, they’re not bullish or bearish. This strategy works best when a stock is trading sideways. The risk is more defined, and profits come from the trading range. The iron condor trading strategy works best when there’s much time and decreased implied volatility. Usually, you need the price movement volatility brings. In this case, low volatility is a good thing.
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What Are Iron Condor Options?
Iron condor options are another one of the many options trading strategies. Options trading has multiple ways to make money that are both risky and risk-limiting. Iron condors are an advanced strategy.
Options give the right but not the obligation to buy (call) or sell (put) a stock at a specified price (strike price). Read our post on put and call options explained.
Options contracts have expiration dates; they cannot hold them forever.
However, there is a way to hold them long-term. Typically, there are expiration dates up to two years out. Options trading can be trial and error in the beginning. This is why it is so important to practice.
Options trading is all about making money in any market: bullish, bearish, or sideways. Trading shares when the market is sideways is pretty difficult to do.
Hence, iron condor options trading came into being. It is a way to profit when the market is neutral and cannot choose a direction.
This options trading strategy requires study and practice—purchasing four options contracts. In essence, we can look at it as buying vertical spreads. A bull put spread and a bear call spread to be clear.
Iron Condor Options Strategy
Iron condor options are made up of 4 contracts. They’re all out of the money strike prices. Out of the money means the call strike is higher than the market, and the put is lower than the market.
Have four strike prices. Strike A buys the put. At the same time, strike B sells the put. Strike C sells a call, and strike D buys a call.
Remember that all four strikes need to have the same expiration date. Usually, you want the stock to trade between strikes B and C.
The play has a direction if the price isn’t in the middle. Iron condor options trading success relies on a neutral direction.
In other words, an iron condor is created when you sell a lower strike OTM put (A), buy an even lower strike OTM put (B), sell a higher strike OTM call (C), and buy another even higher strike OTM call (D).
Again, if this sounds confusing, it’s easy. It just takes practice. Once you get the hang of it, you’ll be off and running, making money in a sideways market.
Are you looking at the strategy and wondering if you can remember all that? The good news is that most option chains have an iron condor option.
It automatically loads iron condors that you can trade. There, you can look at open interest and implied volatility. Implied volatility plays a pretty big role with iron condors.
If you’ve purchased an iron condor where the price is between strike B and C, the implied volatility must decrease. If the price is more towards strike A or D, you need volatility to increase.
The increase in volatility makes the value of your option go higher. It doesn’t affect strikes B and C, so closing your position is cheaper.
Iron Condor Options Example
This is an example of an iron condor on an options chain of $NVDA. The highlighted area shows the different strikes. On the chain, you’ll see implied volatility and open interest.
Limited Risk
Iron condor options have limited risk. Hence the appeal. It also has limited profit, which can be a drawback to some. The profit you make from an iron condor is the net credit you receive to place the trade.
Again, the maximum profit you can get is when the price is between the B and C strike at the expiration time. Hence, there is a need for only small price movements.
One thing to know about the iron condor is that the maximum loss will be more than the maximum profit. Nevertheless, the risk is still lower than a naked call or put.
If the stock you’re trading an iron condor on suddenly has a significant move up or down, you’ll lose more than you would have made in profits. These strategies are here for you to be able to try trading stock options for a living.
The limited risk helps protect your brokerage account; use the Ichimoku cloud to see how narrow your trading range would be.
Final Thoughts
Iron condor options are a way to make money when the price is not moving much, such as when the underlying stock is consolidating. These do not need a significant move up or down to make a profit. Strategies, such as the iron condor, are there for when the market is trading sideways. These help make the trader able to profit from small price moves.
Test your knowledge and take our options trading course.
Frequently Asked Questions
Iron condors are a profitable options trading strategy during range-bound markets.
Iron condors fail for multiple reasons. The first is that the spread was not wide enough. The second reason it failed because the trader didn't collect enough credit.
The purpose of an iron condor is to collect a premium as an options seller when the price of a security is in a range-bound market.
They work best in range-bound markets. If a stock moves heavily in either direction, then would be better off with other strategies, such as naked options or debit spreads.
