trading Iron Condors Made Easy

by | Oct 14, 2013 | Financial Services

trading Iron Condors is usually considered the ideal approach for conservative income investors who are looking to extract profit from the stock market without having to forecast market direction.

Typically, this lower risk options strategy benefits income investors because credit spreads – which Iron Condors are a subset of – turn the unrelenting time decay feature of options to the investor’s advantage. This, and the fact that Iron Condors can profit no matter which way the market goes, are the main reasons Iron Condors statistically greatly outperform outright “long” or “short” positions in out-of-the-money.

Note that the public typically buys outright calls or puts based on their outlook regarding market direction, even though the statistics are quite grim for this “buying options” approach to investing. It’s the folks who sell them those options (e.g. credit spread and Iron Condor investors) who scoop up some of the losses the outright buyers incur.

However, as with any investment endeavor, if you are going to be involved in trading Iron Condors you definitely need to know what you are doing, i.e. knowledge is indeed power!

Understanding Iron Condor Option Credit Spreads

An Iron Condor is made up of 2 specific credit spreads: a call spread (bearish) and a put spread (bullish) on the same underlying stock, ETF or Index.  The objective of the investor is to select these two spreads each month within parameters that greatly increase their likelihood of successfully producing an income stream reliably month after month – and to do so within the constraint of low, definable risk.

The key, then, are those parameters that matter in identifying the best Iron Condor candidates each month: minimum distance of the underlying from the chosen Iron Condor spreads, acceptable amount of premium income offered, favorable margin requirement, maximum acceptable delta (measures statistical likelihood of success), and risk management techniques to further protect the position until options expiration day.

Before committing a single penny to the market, make sure that you fully understand how to select the highest-probability Iron Condor candidates and to manage the resulting positions. Do your homework, and be sure to house your account with an options-friendly brokerage.   The latter is particularly critical when it comes to Iron Condors, because the way a brokerage firm handles the margin requirement can cut your profits in half if the firm is not “options-friendly!”


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