Iron Condor Options

Iron Condor Options

5 min read

Iron condor options are a neutral options trading strategy. This is a great strategy to make money during 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. In order to keep the entire credit, you want price to expire between the two short strikes by expiration. Many of 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 a lot of time and decreased implied volatility. Usually you need the price movement volatility brings. In this case low volatility is a good thing.  

Iron condor options are another one of the many options trading strategies out there. 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; 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 being able to make money in any market; bullish, bearish or sideways. Trading shares when the market is sideways is pretty difficult to do.

Hence how iron condor options trading came to be. It is a way to profit when the market is neutral and cannot chose a direction.

This is an options trading strategy that requires study and practice. Purchasing 4 options contracts. In essence, can look at it as buying vertical spreads. A bull put spread and a bear call spread to be clear.

The 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 4 strike prices. Strike A buys the put. While 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.

If price isn’t in the middle then the play has a direction. 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 actually 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 there’s an iron condor option in most options chains.

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 price is between strike B and C then the implied volatility needs to decrease. If price is more towards strike A or D then you need volatility to increase.

The increase in volatility makes the value of your option go higher. It doesn’t effect strikes B and C so it’s cheaper to close your your position.

Iron Condor Options

Limited Risk

Iron condor options have limited risk. Hence the appeal. It also has limited profit which can be a draw back to some. The profit you make from an iron condor is the net credit you receive to place the trade.

Again the max profit you can get is when price is between the B and C strike at the time of expiration. Hence the need for only small price movements.

One thing to know about the iron condor is the max loss is going to be more than the max 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 more 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.

Do Iron Condors Really Work?

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.

Bottom Line

Iron condor options are a way to make money when 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 of small price moves.

Test your knowledge and take our options trading course.

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