The Iron Condor Stock Option Strategy

The Iron Condor Option strategy creates profit and balances risk at the same time. An Iron Condor is composed of four parts or legs: 2 Calls and 2 Puts. It is the creative way one structures the trade that provides the profitability and the balanced risk.

The diagram below shows how the Iron Condor trading strategy is structured. In this example, the stock is currently trading at $15. We are creating two credit Spreads: a Bear Call Spread and a Bull Put Spread. The Call side of the trade consists of selling the January 17.50 Call for $.50 and buying the January 20 Call for $.25, netting a credit of $.25 per contract.

On the Put side of the trade we sold the January 12.50 Put for $.60 and purchased the January 10 Put for $.35, giving us a credit of $.25 as well. The total potential profit of the trade is $.50 per contract minus commissions.

IRON CONDOR

As you can see the Iron condor trading strategy is composed of four Options that all expire in the same month. The goal of the trade is for the stock to stay within the 5 point range from 12.50 to 17.50. If it does that, then all the Options expire worthless and the all of the profit goes in your pocket. The stocks or Index Options we are searching for are those that are not moving and are range-bound. Channeling stocks are great candidates. Search for stocks or contracts that have at least three points where support and resistance have touched horizontal lines drawn across those points on a daily chart. With a little practice, your eye will begin to pick up those candidates for an Iron Condor trade.

An important question for the Iron Condor strategy is: "What do you do if your profit range gets violated?" During the course of this trading strategy, it is not uncommon for the stock or contract to exceed the Profit Zone. Often, the security will come right back inside the zone after a violation. Interpreting whether it will come back to the Profit Zone is a matter of experience and art. If the violation is more than one standard deviation from the mean price of the support and resistance channel, the probability is that the security is breaking out.

Risk is limited in this strategy because the trade can only go against you in one direction. If the underlying security breaks out Long, then the Put side of the trade is unaffected. Likewise, if the security breaks down, the Call side is unaffected. If the Call side of the trade looks like the short Call will expire in-the-money (ITM), then you will want to buy back the Call. Otherwise, the Call would be exercised and you would be required to provide an equal number of shares of stock at that Strike Price. You will probably take a loss on the Call you buy back.

Are you experienced enough to know another major weakness of this strategy that we haven't discussed?

The Options Concepts course, Trading Stock Options the Easy Way, teaches two safer variations of the Iron Condor strategy that show you how to generate monthly cash flow through a variety of adjustment tactics and how to reduce your risk at the outset of the trade. Click here to learn more about Trading Stock Options the Easy Way.