Iron Condor Mastery

Finally individual investors can receive education in the art of selling options.

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 disappointment will not hurt the position much. Plus these instruments are very large and very liquid.

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 your strikes.

2. Statistics. You can also use volatility and standard deviation formulas to determine which strikes to sell based on what probability of profit you want.

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 involved.

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.