What Is Iron Condor Trading All About?
Iron condors can be defined as a non directional trading strategy for options trading that has limited risk and limited profits. This strategy is designed to help the trader earn a smaller amount of limited profit when their underlying security is under low volatility. This strategy can also be considered as an apt amalgamation of the bear call spread and the bull put spread. In this trade, the trader uses the options that are likely to expire on the same month and using this, they come up with an iron condor as they sell the out of the money put at a lower strike in order to buy an out of the money put at an even lower strike. Likewise, they can also sell their out of the money call at a higher strike in order to buy another out of the money call, which will be at a strike price higher than the old one. This entire set of investment leads to a net credit with regard to put, in terms of trade.
Trade Configuration For Iron Condors
While trading with iron condors, you will have to ensure that you don’t take full loss at any point of time. If you pay attention to the trading pattern, you will notice that if you take full loss, the potential loss is going to be higher than the potential gain. You can avoid taking full loss by not doing anything and by letting your position expire naturally. But, at the same time, you should keep your full credit. However, if it so happens that the market is moving strongly in a specific direction or the other and if it happens to break through one or more of your strikes, then it would be a viable decision to exit that specific side of the position.
When it comes to trading iron condors, one of the most essential things to take care of is the timing. An optimal timeline for this trade would be around 50-60 days. It would definitely not be the intent of the trader to hold the stocks for that long, but that would still be a great starting point.
Usually an iron condor is sold when the implied volatility rank of the underlying asset is higher. This helps you in taking maximum advantage of the option premium. At the same time, it also means that you can collect maximum credits to make your iron condor worth a sale. However, while you do this, make sure that you place your strike prices far enough so that they do not really lose it like the money.
Most traders think of the shorter time frames as they enter this trade. It is taught to them that the speed of time decay increases as it comes closer to the date of expiration. Due to this reason, they feel that if the time decay is in their favor, trading on the weekly options is a viable decision. Here, gamma comes to play. Gamma refers to the pace at which things are moving. So the closer you happen to be with the date of expiration, the higher will be your gamma, which further implies more profits.
There are several ways to manage your risks while trading with an iron condor. One of them would be to sell your specific credit spread while you hold the opposite side. Another one here would be to escape the entire iron condor game. This, however, depends on how much time you have left before the options are likely to expire. You can also try rolling the losing side for a better out of the money strike. If you manage to do well on one side, you will have a strategy that will put probability and the option time premium for sale while keeping the implied volatility in your favor.
The basic option strategy for iron condor trading states that an option trader can gain profits from an insignificant move in the price structure of their underlying security or asset. While many traders are of the opinion that you either need a large upward or downward movement for making profits, it is also equally possible to make handsome profits even when the price of your asset does not move much far ahead.
The structure of iron condor trading might seem baffling at the beginning. But don’t this complex structure baffle or intimidate you from gaining better insights about this strong and incredible profitable trading method.