The iron condor. This strategy profits when the stock or index being used does NOT make significant moves. Typically, it goes without saying, options traders are trying to leverage market movement. Many times - and maybe most of the times - there is not a lot of movement and the underlying just trades in a range, leaving the options being traded to expire with no value on expiration day. These types of trading range markets are ideally suited for the iron condor option trading strategy.
A way to think of the iron condor strategy is to consider it as trading a short strangle combined with the purchase of a long strangle. When you buy a put option below where the underlying is trading and then buy a call option above where the underlying is trading at, it is called a 'strangle'. The premiums a trader can expect to take from a strangle position will be less than a straddle due to the fact that the options being sold are some distance away from 'at the money'. Another way you can look at the iron condor strategy is to think of it as two credit spreads placed at the same time - a put credit spread and a call credit spread. The trade has purchased calls and put options above and below the short options to protect from a large unforeseen movement in the underlying.
Pretend that you purchase the 1280 SPX and you buy the august call at the level for a credit of two hundred - and right at the same time you buy the august put options for about $4.65. If you are working with an options friendly broker - the required margin will be the difference between the two strikes - or the difference in the spread. In this pretend scenario, in order to do this spread one would need somewhere around $1320.00.
The calculation would be:
Thirteen hundred eighty at about two hundred forty five.
Thirteen hundred fifty five at four dollars and fifty cents.
What this shows is that that the credit you bring in is about two dollars.
($15 - $2 = $13) x 1 spread x 100 units = $1,300
Now, if the stock being used in this example closes below where the short options were sold - a great return can be made as the trader can keep the entire premium credit that was brought in at the start of the trade.
This example described is one of the wings of the iron condor spread trade - and it is the call spread side of the trade. To finish off the iron condor completely, you would need to add another credit spread - a put credit spread - down below.
The iron condor performs great in the right market conditions and there are option income traders who use this strategy exclusively to generate a monthly income. But just like any investment strategy - there are potential pitfalls one needs to be aware of.
Some important things to consider when trading the iron condor is knowing which underlying to utilize - along with understanding when and how to properly place, adjust and exit the position. Managing and adjusting these trades are a major part of experiencing success with this type of trading. It is possible that this trade can produce big time losses if you don't take the time to completely learn and understand this trade and if you don't create a trading plan that you are willing to follow. Ask me how I know!
A way to think of the iron condor strategy is to consider it as trading a short strangle combined with the purchase of a long strangle. When you buy a put option below where the underlying is trading and then buy a call option above where the underlying is trading at, it is called a 'strangle'. The premiums a trader can expect to take from a strangle position will be less than a straddle due to the fact that the options being sold are some distance away from 'at the money'. Another way you can look at the iron condor strategy is to think of it as two credit spreads placed at the same time - a put credit spread and a call credit spread. The trade has purchased calls and put options above and below the short options to protect from a large unforeseen movement in the underlying.
Pretend that you purchase the 1280 SPX and you buy the august call at the level for a credit of two hundred - and right at the same time you buy the august put options for about $4.65. If you are working with an options friendly broker - the required margin will be the difference between the two strikes - or the difference in the spread. In this pretend scenario, in order to do this spread one would need somewhere around $1320.00.
The calculation would be:
Thirteen hundred eighty at about two hundred forty five.
Thirteen hundred fifty five at four dollars and fifty cents.
What this shows is that that the credit you bring in is about two dollars.
($15 - $2 = $13) x 1 spread x 100 units = $1,300
Now, if the stock being used in this example closes below where the short options were sold - a great return can be made as the trader can keep the entire premium credit that was brought in at the start of the trade.
This example described is one of the wings of the iron condor spread trade - and it is the call spread side of the trade. To finish off the iron condor completely, you would need to add another credit spread - a put credit spread - down below.
The iron condor performs great in the right market conditions and there are option income traders who use this strategy exclusively to generate a monthly income. But just like any investment strategy - there are potential pitfalls one needs to be aware of.
Some important things to consider when trading the iron condor is knowing which underlying to utilize - along with understanding when and how to properly place, adjust and exit the position. Managing and adjusting these trades are a major part of experiencing success with this type of trading. It is possible that this trade can produce big time losses if you don't take the time to completely learn and understand this trade and if you don't create a trading plan that you are willing to follow. Ask me how I know!
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