What exactly is the iron condor? This is typically a range bound trade - where profits are made when the underlying being used is not making volatile moves one way or the other. Usually option trading investors use trading techniques that best leverage current market conditions. However, many times the options being use expire worthless due to the fact that many times there is no significant movement in the market. These types of trading range markets are ideally suited for the iron condor option trading strategy.
The iron condor trade is simply a short strangle sold on an underlying with another long strangle (where the strike prices are placed further out). 'Strangles' can be both bought and sold and it is a trade where both a put and a call option is purchased some distance away from where the underlying is trading at. Strangles' premiums are less than those of straddles due to the fact that the contracts are out of 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. Your paired positions are the condor's wings.
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. Assuming that you've selected an options-friendly broker, all that you'll need for your required maintenance margin is an amount of assets or cash to cover the strike prices' difference less the premium credit. In this pretend scenario, in order to do this spread one would need somewhere around $1320.00.
This is what it would look like:
1370 @ 2.50
1360 at $4.55
What this shows is that that the credit you bring in is about two dollars.
That's fifteen dollars take away two dollars wich equals thirteen dollars - times one spread of 100 contracts equals about thirteen hundred dollars.
If the underlying finishes the trading cycle below the sold options, the trader gets to keep the entire credit which can translate to a great return in a short period of time.
This is the call side spread of the iron condor trade we are referring to. To create the full fledged bird and your full iron condor options strategy, you would simply add a put spread in the same way.
The iron condor options strategy works beautifully when you know what you're doing and there are options traders who use it almost exclusively. But it's not without its potential pitfalls and dangers.
Some of the essential elements to trade the iron condor strategy effectively is to understand how to pick the underlying - knowing how to enter, exit and adjust properly - and knowing when to get out of the trade if the position starts to go bad. Especially the proper management and adjusting. 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!
The iron condor trade is simply a short strangle sold on an underlying with another long strangle (where the strike prices are placed further out). 'Strangles' can be both bought and sold and it is a trade where both a put and a call option is purchased some distance away from where the underlying is trading at. Strangles' premiums are less than those of straddles due to the fact that the contracts are out of 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. Your paired positions are the condor's wings.
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. Assuming that you've selected an options-friendly broker, all that you'll need for your required maintenance margin is an amount of assets or cash to cover the strike prices' difference less the premium credit. In this pretend scenario, in order to do this spread one would need somewhere around $1320.00.
This is what it would look like:
1370 @ 2.50
1360 at $4.55
What this shows is that that the credit you bring in is about two dollars.
That's fifteen dollars take away two dollars wich equals thirteen dollars - times one spread of 100 contracts equals about thirteen hundred dollars.
If the underlying finishes the trading cycle below the sold options, the trader gets to keep the entire credit which can translate to a great return in a short period of time.
This is the call side spread of the iron condor trade we are referring to. To create the full fledged bird and your full iron condor options strategy, you would simply add a put spread in the same way.
The iron condor options strategy works beautifully when you know what you're doing and there are options traders who use it almost exclusively. But it's not without its potential pitfalls and dangers.
Some of the essential elements to trade the iron condor strategy effectively is to understand how to pick the underlying - knowing how to enter, exit and adjust properly - and knowing when to get out of the trade if the position starts to go bad. Especially the proper management and adjusting. 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!
About the Author:
Learn more about the iron condor . Stop by Ten Nino's site where you can discover all about how to trade the iron condor system for reliable monthly income.