The Iron Condor is considered an advanced option
trading strategy. It is considered advanced because
it uses more than just 2 options. The condor is
made up of 4 different options and thus the trader
must be aware of all four options and their prices.
Once you trade a few condors, it becomes easier.
But for those that have never traded condors before
it can be confusing.
I like to think of the iron condor as two credit
spreads. One with Calls and one with Puts. Have
both of them on at the same time and you have
an Iron Condor. If already you trade credit spreads,
you already know how to trade condors. You can
increase your potential your return without needing
any more margin.
Basically the Iron Condor puts a box around a
stock. As long as the stock price stays within
the box, the condor does well. If the stock goes
outside the box, the condor losses money.
There are many variations of the Condor. Based
on the strike prices you choose you can set it
up to be aggressive or conservative. The closer
your strikes are to the money the more credit
you will receive when you enter the trade but
the more risky the trade is. The higher the chance
of a positive trade, the less the actual amount
of credit. Less risk: less reward.
You can even increase your probability of profit
by adjusting your condor position when it gets
into trouble. This statement will be argued against
by some traders who say that the iron condor is
a trade that should not be adjusted. But I feel
that every trade should have proper money management
and adjustment techniques so that no one trade
wipes you out.
If you sign up for my FREE
Option Selling Course I will show you some examples
of Iron Condor trades along with adjustments.
To sign up just fill out your name and email in
the sign up form at the Top, Right of this page.
But let's go over a simple
example of a Condor.
As of the close on 3/20/2012 the price per share
of Apple stock was $605.96. Let's say we think
Apple is going to trade between 550 and 650 for
the next 31 days. To make an iron condor we would
sell a Call credit spread and Put credit spread.
Sell to Open 1 April 650 Call
Buy to Open 1 April 660 Call
Sell to Open 1 April 550 Put
Buy to Open 1 April 540 Put
In the above example, we sold a call with a 650
strike price and bought one at the 660 strike
price. So if AAPL stays below 650, this part of
the trade wins. If AAPL goes above 650, the 660
Calls protects us and limits our loss.
I also sold a 550 Put and bought a 540 Put. If
AAPL stays above 550, this part of the trade wins.
So with this trade I want AAPL to stay between
550 and 650. It can move up and down in its box.
That's fine, just stay in the box.
Everyday that goes by, the options lose value.
That means the sold options are worth less and
the trade is positive. When the options lose enough
value I can exit the trade by buying back the
iron condor or just let it expire worthless.
I trade Iron Condors every
month. Become a member today to get access to
my site and my current trades. You can also see
my past trades and how I adjusted them when I
had to. Find out more about becoming a member.
Pricing A Condor
Let's add some prices to our earlier example.
Sell to Open 1 April 650 Call at 9.55 credit
Buy to Open 1 April 660 Call at 7.47 debit
Sell to Open 1 April 550 Put at 5.65 credit
Buy to Open 1 April 540 Put at 4.27 debit
These are real prices at the close on 3/20/2012
with 31 days to expiration.
So how much can we make?
Calls (9.55 minus 7.47) = 2.08
Puts (5.65 minus 4.27) = 1.38
We can make a total of 3.46 credit which translates
to $346 dollars.
How much can we lose?
The margin for this trade is the difference between
the strikes minus the credit. Since the strikes
are 10 points apart that is $1,000. Remember each
option is 100 shares and the option prices are
per share. Our credit is $346. So the margin we
would have to have in our account to do this trade
is $654. That is also the maximum we could lose
on this trade.
If we take the credit and divide by the margin/max
loss we get our potential return on investment.
346/654 = 52%.
With this high a potential return, our probability
of the trade expiring is 60.45%. If we wanted
a higher probability of expiring we would have
to move our strikes out farther from the money.
So instead of selling the 550 and the 650, we
could sell the 525 and the 675. That will result
in less credit (profit), but a higher chance of
the trade expiring worthless.
Entering the Iron Condor
Most option traders I know do Iron Condors on
Indexes and ETFs. Like RUT, SPX, IWM, SPY, DIA,
XLE, and others. This is done because there is
less to worry about. Bad news for one company
will not hurt the position much. An earnings surprise
or dissapointment will not hurt the position much.
Plus these instruments are very large and very
There are two way to know which strike prices
to choose for your condor.
1. Technical analysis. If you are a chartist
and determine support/resistance/ and retracements
levels you can use this information to determine
2. Statistics. You can also use volatility and
standard deviation formulas to determine which
strikes to sell based on what probability of profit
I myself like the statistics method, because
I have found that technicals work except when
they don't and I would rather not rely on them
that much. Plus the statistical method is easier
- it's almost formulaic.
Adjusting the Iron Condor
Adjustments are what separate the traders from
the dabblers. There are hundreds of ways to adjust
a condor and each trader has his/her own favorites.
I have a couple techniques I like to use. But
it is hard to know how you will adjust before
it is time to adjust.
For example, if you get into an iron condor in
GOOG today, and the price of the stock goes from
400 to 450 tomorrow. That's over a 10% move in
one day. With a move like that I would use one
technique for adjustment.
On the other hand if it takes GOOG three weeks
to go from 400 to 450, I can adjust in a different
way or maybe not at all.
The adjustment and the adjustment points vary
based on the implied volatility of the options
The Biggest Problem With The Iron Condor
The most common complaint new traders have is
that you can lose a lot of money in the iron condor.
Since you are risking a lot more money than you
stand to make even one bad month can wipe out
several months of profits.
And that would be true, if you let that happen.
But if you are like me, and treat trading as a
business and not a substitute for Vegas, then
you would not let your position lose the max loss.
As part of my money management rules, I have
a max loss that I would be willing to take on
any trade. Once I reach my max loss, (which is
much less than the maximum I could lose on the
trade), I get out. I never want to lose more in
one month than I can make in a month or two.
As soon as I get in a trade, I have a plan on
how much I am willing to lose. As long as I do
not hit that amount, I can stay in the trade.
I trade Iron Condors every
month. Become a member to get access to my site
and my current trades. You can also see my past
trades. Join Me Today.
To learn more about Iron Condors
sign up for my FREE Option Selling Course. To
sign up just fill out your name and email in the
sign up form at the Top, Right of this page.