The majority of trades are made by traders hoping that prices will increase. They make some in anticipation of a price decline. Unfortunately, this is frequently the case, and the price barely moves. Wouldn’t it be fantastic to make money even when the markets were stagnant? You can. This is the elegance of options and, more significantly, of the iron condor strategy.
So, in today’s blog, let us discuss how to do options trading with the iron condor strategy:
What is Iron Condor Strategy?
Iron condor strategies are an excellent way to generate steady income, although they require some learning time and complexity. Some highly successful traders only employ iron condors. What exactly is an iron condor, then?
There are two perspectives on it. The first is as a pair of short and long strangles at the outside strikes. The other perspective is to think of it as two credit spreads: a call credit spread above the market and a put credit spread below the market.
The iron condor gets its name from these two “wings”. The formal definition calls for consecutive strike prices with the same month expiration; however, these can be located quite far from where the market is currently.
What is the Long Iron Condor Options Strategy?
Long Iron Condor Options Strategy involves selling a lower strike put, buying a lower-middle strike put, purchasing a higher middle strike call, and then selling a higher strike call.
One should note that each option traded under this strategy should belong to the same underlying and have the same expiration.
Usually, the lower strike and lower-middle strike puts are OTM puts, whereas the higher middle strike and the higher strike calls are OTM calls.
Let us discuss how the Long Iron Condor Options Strategy works:
How does it work?
1. Outlook
The outlook for this strategy is neutral on direction but bullish on volatility.
2. Strategy
This strategy involves-
- Short 1 lower Strike Put
- Long 1 Lower Middle Strike Put
- Long 1 Higher Middle Strike Call
- Short 1 Higher Strike Call
3. Maximum loss/risk
The maximum loss is limited to the extent of the net premium paid.
4. Profit
The profit equals to lower-middle strike price-lower strike price-net premium paid.
5. Breakeven stock price at expiration
This strategy has 2 breakeven points:
- Lower Middle Strike Price-Net Premium Paid
- Higher Middle Strike Price+ Net Premium Paid
6. Payoff Diagram
Below is the payoff diagram for this strategy-
You can also read our blog on 12 Common Option Trading Strategies Every Trader Should Know
What is Short Iron Condor Options Strategy?
A short iron condor spread is a four-part trading strategy that consists of a bear call spread, and a bull put spread where the short put’s strike price is lower than the short call’s strike price. The same day is the expiration date for each choice.
How does it work?
1. Outlook
The outlook for this strategy is neutral on direction but bullish on volatility.
2. Strategy
This strategy involves-
- Short 1 lower Strike Put
- Long 1 Lower Middle Strike Put
- Long 1 Higher Middle Strike Call
- Short 1 Higher Strike Call
3. Maximum Loss
The maximum risk is equal to the difference between the strike prices of the bull put spread (or bear call spread) less the net credit received.
4. Profit
The maximum profit potential is equal to the net credit received less commissions, and this profit is realized if the stock price is equal to or between the strike prices of the short options at expiration.
5. Breakeven stock price at expiration
There are two breakeven points. The lower breakeven point is the stock price equal to the strike price of the short put minus the net credit received. The upper breakeven point is the stock price equal to the strike price of the short call plus the net credit received.
6. Payoff Diagram
Below is the payoff diagram for this strategy-
Bottomline
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Happy Investing!
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