Lesson Overview

Iron Condors

Iron condors are one of our most reliable and favorite options strategies. A combination of selling a credit put spread and credit call spread these birds profit from the stock remaining range bound and a drop in implied volatility.

In order to make these high probability trade we suggest selling the short strikes on either side at the 1 SD level (or 15% prob ITM level). This will create approximately a 70% chance of success trade long-term.

As with other credit spread trades you'll want to close these trades at a 50% of max profit target to maximize your win rate.

More Discussion

Was This Helpful? Add Comments/Questions

  • Pete Dela Cruz Jr

    Closing this trade at 50%. Is this means if I collected premium of 1$ then I have to close this trade when it return the premium of 50c.

    • Correct.

      • Pete Dela Cruz Jr

        Thanks a lot Kirk. I am new in your plot form and trying to learn it.

      • No problem that’s what I’m here for.

  • Stephen J Bubb Sr

    I am new here not a large portfolio, so I would want something with a lower risk factor. The iron condors seem like a good choice for limited risk. My question is am I selling both the calls and the puts, buying one selling the other or buying them both your tutorial doesn’t really seem to say.
    thanks for your time
    Stephen

    • Yes it’s a great strategy for getting started. Yes you are selling basically a credit spread on each side – so selling both calls and puts and then going out further and buying calls and puts BEYOND where you sold the short strikes.

      • Stephen J Bubb Sr

        thanks for getting back to me quickly
        Stephen

  • Actually with earnings trades you just want to exit them right after the market opens (post-earnings) for whatever profit you have. There’s no set profit target for those since we aim to hopefully collect the full premium on exit.

  • Not if you already have “protection” in place. Likewise with covered calls for example, you have to buy the stock first, then sell the naked call because it’s covered by the stock.

  • Nope not true – you could still exercise your long strike to cancel out the effect of the shares therefore keeping your max loss intact.

  • Thor

    So if I thought that the trade price might go up I could bracket the condor slightly bullish to cover my though

Show Video Transcript +

In this video tutorial, we’re going to go over the payoff diagram and also what a typical trade might look like in the market for the iron condor. Now, a lot of people love the iron condor, and so do we.

It’s a great market neutral options strategy that you can employ anytime the market gets a little bit sideways and starts trading in a sideways fashion.

Right here on your screen is the payoff diagram for the iron condor, and you can see that has two legs or two sides to it, and you can think about these two sides as two separate credit spreads that are coming together.

You can see that we have the stock price here on the horizontal line. Here's a stock price of 35, of 40, of 45, 50 and 55, and then on this vertical line, we have our profit or loss at expiration.

You can see that the iron condor is a strategy that’s based on selling options and collecting a premium upfront for the trading month and then hoping that those options expire worthless at the end of the expiration cycle, allowing us to keep that full profit.

The beautiful thing about iron condors is that they do have a limited risk feature, so if the market does go a little crazy, we won’t lose a lot of money, and you won’t be stuck with this huge loss.

Here's what would happen if the stock were to trade or were to close right at 35 and we had this particular setup of iron condor. You’d see here that if the stock closed at 35 that we’d lose $300, and if it closed anywhere below 35, we’d lose $300.

And this is on this particular payoff diagram. It may be different for our option trades. Now, you can see here that if the stock were to trade higher than 55, then we would lose that same amount of money, that same $300.

But if the stock were to close anywhere between these values, so let's say anywhere between $40 and $50, then we would keep our $200 premium.

You can think of this as bracketing the market, as determining two areas, an upper boundary and a lower boundary of where the market will not trade, and then profit ourselves and position ourselves to make money on where the market will trade sideways.

Let’s take a look at a chart and see what this might look like in a current market environment. Okay. Here, we have a chart of just a general stock that we picked out no particular time, no symbol, and you can see that the stock is trading right around $45 just like our previous example.

If we wanted to bracket this market, we could trade an option down here at 40 and create one-half of the iron condor here at 40 and then create the other half of the iron condor way up at 50.

And you can see that this stock may have a little bit of sideways action left to it. It’s had a good run-up here and could be in for some sideways and lightly volatile type trading. As long as a stock stays above 40 and below 50 on the high side, then we get to keep our entire premium.

And you can see why everyone love the iron condor strategy because it is such a great market neutral strategy. You don’t have to guess and hope and pray that the stock rallies or falls.

It just has to stay within this wide range for you to keep your premium. This has been the video tutorial for the iron condors. As always, if you have any questions, please contact or email us.

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