The Iron Condor Strategy is becoming very popular, and is certainly profitable. It is more risky than credit spread trading, so be careful to pay attention to your trade!

The best way to understand the Iron Condor Strategy is to think in terms of selling two credit spreads — bear call credit spread sold simultaneously with a bull put credit spread, on the same underlying stock. Even though most brokers will allow you to sell both as a single trade, the best way to manage the trade is to think in terms of two trades. The iron condor option strategy is a neutral strategy that is best in a non-trending market, and can be more profitable than credit spread trading.

First, the cautions. Even though iron condor trading is very profitable, and can easily return more than 10% per month on margin, it does have a higher risk-reward ratio than credit spreads. If it tanks, it can hurt! In addition, it is a bit more expensive than credit spread trading, because it involves selling four options, not just two. However, if your broker allows you to trade the position as a single trade, the difference is not too huge. So, here are some tips that will help you trade safely and profitably:

• Manage your trade actively, thinking in terms of two credit spread trades;
• Set up your trade with a combined probability of success of at least 80%;
• Trade on major index products, such as DIA, SPY or IWM. These are good because they do not whip saw as quickly as single stocks, they have a huge trading volume, and give reasonable profits.

TOP TIP: You can view an outstanding (free) video that outlines the Iron Condor Strategy by clicking on the link.

How to Trade an Iron Condor

You can enter an Iron Condor Trade simply by selling two credit spreads. Simultaneously sell a Bear-Call Spread and Bull-Put Spread. You will receive credit for both spreads, which is why this is quite a popular trading technique.

Example:

XYZ is trading at $100 per share.

Sell a 85/80 Bull Put Credit Spread

BUY July 80 Put for $0.15

Net Credit = $0.20

Sell a 110/115 Bear Call Spread

BUY July 115 Call for $0.20

SELL July 110 Call for $0.50

Net Credit = $0.30

Total Net Credit for the Iron Condor = $0.20 + $0.30 = $0.50

The trade will remain profitable as long as the price of the underlying stock remains within the price range between the two spreads. As long as the stock price remains within this range, you can leave the trade until it expires worthless (and then you get to keep the profit that you made when you sold the position). Alternatively, as time decay takes its effect on the prices of the options, you can buy back the trade for a cheaper price than you sold, and secure your profit.

TOP TIP: The Iron Condor 101 Trading Simulator is an amazing piece of software that you can use to make thousands of practice iron condor trades on real historical data. You even learn first hand some basic techniques used to repair trades that ‘go wrong’, and still make a profit (Note: advanced repair techniques will be included in later editions of the game). Practice makes perfect — it certainly revolutionised my trading experience. Read my Review

The graph below illustrates the trading profile of an iron condor. It is limit risk, and limited profit, but as long as the underlying stock remains between the two breakeven points, your profit is secure.

For tips on how to use the Iron Condor strategy, including when to trade, how to get the best probability for success, and how to manage the trade, follow this link: Trading Iron Condors