Iron Condor Spread Option Trading Mini Course
Iron Condor Option Trading
In this multi-part mini course, I plan on explaining the major facets of the Iron Condor Option Trade. First I will go over the iron condor spread basics of the trade, the philosophy, the risk, putting the trade on, and possible adjustments
Part 1: Iron Condor Spread Basics
The iron condor is an option trading strategy that uses two credit spreads.
The strategy is simple: Sell credit spreads out of the money: both puts and calls thus creating a “box”. As long as the underlying, stock, etf, or index stays within this box, the trade makes money. Since you are selling options the trade results in a credit, and this credit is the maximum amount you can make on your iron condor trade.
When you place an iron condor trade, you will be selling the condor. In most circles this is considered a short iron condor. I myself do not know too many traders that trade long iron condors, mainly because in a long iron condor you want the stock to move a lot and if you feel a stock is going to make a large move, there are other option strategies that can make you more money. So I will focus on the short iron condor.
When you trade an iron condor, you want the underlying not to move very much. The biggest threat of the iron condor is a large move in one direction, especially if it is early in the trade. The condor is a slow trade, meaning that it takes time for the options to decay and lose value.
Iron condor strategy guide
The iron condor is also considered a very conservative trade because you can set it up to have a very high probability of profit. The iron condors I trade are in the 75-80% probability of profit range. And since the underlyings that I choose do not move much, I do not need to spend much time monitoring my position.
Let’s look at an iron condor example. Let’s say I trade a condor spread on IBM. If IBM stock is selling at 100, I might short the following iron condor:
- Sell the 115 Calls, Buy the 120 Calls.
- Sell the 85 Puts, Buy the 80 Puts.
This trade creates a box that puts my expiration breakeven points at roughly 85 and 115. As long as IBM stays within those prices, my iron condor example will make money.
If I have this trade on, I can check IBM’s price movement 1-3 times a day. As long as it is not near an adjustment point, I don’t have to do anything.
The Lazy Trade
Put it on, watch it once or twice during the day, and that’s it. Entering the trade takes less than ten minutes when you know what you are doing, adjusting it takes just as long if you have a trading plan, and exiting the trade can be as easy as doing nothing and letting the options expire worthless or exiting the trade (which is the same as entering but easier).
The Benefits of the Iron Condor
- High Probability of Profit
- High monthly return on investment: 8-15% a month
- You can do the same trade month after month on the same underlying. You do not need to “wait for a set-up”.
- Easily adjusted so you can save your trade if it goes against you.
- Takes very little of your time.
- Can be done anywhere in the world with access to the internet.
The Negatives of the Iron Condor
- Since the reward is high, the risk can also be high. An iron condor trader can risk $9 to make $1. He will win most months. But even one loss of $9 will wipe out several months of gains.
- The trade takes time and patience. A trader has to wait for the options to lose value.
- The iron condor is not the best trade in very volatile markets.
Let’s continue to Part Two: http://optiongenius.com/blog/iron-condor-option-trading-mini-course-part-two/
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Great series on Iron Condor spreads, thanks Allen!
Mr. Sama – I very much enjoyed reading your “…Condor Option Spread Trading Course”. It reinforced a lot of the lessons that I’ve learned the hard way in over 20 years of options trading. In the last couple of years, I too have determined that the safest way to collect premium on a monthly basis is a probability-based living condor that adjusts to market conditions. I no longer call it an iron condor, because the word “iron” suggests rigidity and inflexibility — traits which can be dangerous to a trader’s account. My results have been pretty good since I figured this out — up over 100% in 2009 and over 20% YTD in 2010. And I sleep very soundly at night. Continued success in your trading and in your mission to help others to become financially successful.
While this is a great explanation of the Iron Condor it seems to be lacking in only one area. You make mention of “Easily adjusted so you can save your trade if it goes against you.” BUT you failed in that you gave no explanation as to how to make this adjustment. Do I go to the underlying Option and then buy a ton of options in the direction it is going when it is going wrong?
There are numerous adjustments that can be made. My philosophy is that you cannot really decide in advance which one you are going to use. There is no one adjustment that works in all situations. It depends on many factors like how long you have been in the trade, how fast the underlying is moving, was there a volatility increase or decrease, how much time left to expiration, your current profit and loss, can you add capital to the trade, and more.
What you describe is not something i would do. The underlying could easily move back the other way and your long options will then lose.
Can you give just one example of a adjustment?
I cover this a little in the following lessons. But also if you sign up for the email course, (upper right portion of this page) I go over actual trades and the adjustments that were performed.
Just some terminology clarification. My own sense from reading your and other writing on options is that “iron” positions (condors or butterflies) consist of a combination of calls and puts where straight (non-iron) positions consist of a single type of option — all calls or all puts.
For example, an iron condor on strikes 80, 85, 115, and 120 consists of long 80 puts, short 85 puts, short 115 calls and long 120 calls. (Same number of contracts for all strikes.) I THINK a “non-iron” put condor with the same profit profile would consist of short 80 puts, long 85 puts, long 115 puts, and short 120 puts. (Same number of contracts for all strikes.)
Is this correct? And if so, what is the advantage of an “iron” position (puts and calls) over a non-iron one (all puts or all calls)? Is it that with the non-iron position, you’re simply more exposed to exercise of one or more options?
An iron position is both puts and calls. You can have a simple condor that is just puts or just calls.
I think most traders prefer the iron because it is easier to manage. If you are dealing with too many options in the same trade they step on top of one another. I mean that the quantities can get unbalanced and it is hard to remember why you have 12 longs and only 8 shorts.
I don’t think I know any traders that use simple condors. Otherwise I would ask to get their opinion. The iron condor is so universal that when writing many times I dont use the word iron and just call them condors. Sorry if that confused you.
Appreciate the mini course and the overview of how the iron condor works and how it can be effectively used!
Will attemppt to put together a few for paper-trading experience!
what really bothers me is that if I keeping on doing position adjusting; the commission fee will be high
If you are worried about the commissions you are at the wrong broker. Even if you adjust 2-3 times, your commissions should still be less than 5-10% of the total amount you can make.
I’m a little confused. on the Iron Condor. What’s the most
that you can loose. Is it the spread between the buy and sell calls and or puts Plus the credit you received?
Iron Condor is terrible strategy. Not only your potential risk is much higher than your potential profit that risk can materialize virtually overnight and wipe you out.
Moreover, IC is not a “monthly, set it and forget it” trade. It need high implied volatility that is about to collapse to perform best. In today’s market (2013) this is rarely a case.
Also, 10% a month is a return on risk but risking more than 10% of your account value on any particular strategy is a recipe for disaster. So, the realistic ROI of this strategy is 1%/month on the total account value while having a chance of 9% loss and that chance it a lot greater than 20% (or whatever probability calculator says)
Sorry my friend, but just because you do not know how to trade the condor, does not make it a bad strategy.
There are traders making money with all types of strategies. Condors do not need high volatility or a change in volatility at all. They work in low vol environments as well.
If there was no one out there making condors work, then I would agree with you. But I know many many traders who trade condors and are doing very well and have done well for years.