You may have heard someone talk about an Options strategy where you can profit no matter which direction the market goes in. Yes, that means it can go up, down or sideways and you still make a profit on your Options play.
With a strategy that is paramount to your success as an Options trader.
What is an iron condor?
An iron condor is comprised of four separate Options positions. In essence, you are creating a bull put spread and a bear credit spread. To refresh your memory, these are:
bull put spread is used when a price rise is expected. According to Investopedia, it is “constructed by purchasing one put option while simultaneously selling another put option with a higher strike price.” A
bear call spread is used when a price decline is expected. According to Investopedia, “it is achieved by selling call options at a specific strike price while also buying the same number of calls, but at a higher strike price.”
Why are iron condors so popular among traders?
First of all, you can profit in an up, down or sideways market as we’ve already mentioned. And second of all, you can adjust them on-the-fly. Which means you can adjust your positions based on the market positions as they play out (more on this later).
Thing you must be cautious of with iron condors.
Easy to mistime entry. It can be very easy to enter an iron condor just when “things seem right”, but are actually far from optimal. You see, iron condors work best when prices consolidate. The thing is most traders wait until they start to see a price pullback. The issue with this is that by the time it’s consolidated and they enter the trade, price is ready to go for a jump again! Why’s that? It’s seen that price only consolidates for so long. By waiting until you’ve seen it consolidate for a bit, well, it’s too late by then!
Complicated entry into broker. Depending on how familiar you are with your broker and this new strategy, it can take some time getting used to entering these into your broker.
A new strategy. If this is your first time hearing about iron condors or you’ve never traded one before, make sure you exercise caution! As with any new strategy, it’s a much better idea to test it on a simulation to get used to it before you put your hard earned money on the line.
When are they best used?
Iron condors tend to profit the most in sideways markets. This is when price is consolidating (i.e. stagnating or dropping slightly). In fact, you profit the most when the price doesn’t move at all.
Since you want the price to stay within a certain range, as you would expect, iron condors are not ideal for markets that are prone to huge price jumps.
What if there are lots of price jumps?
Although, there are techniques for entering into iron condors without fully exposing yourself to these jumps. Namely, you only enter one side of the iron condor – the side opposite to which you think the price will trend or is already heavily trending in.
Most people new to iron condors assume that both sides of it must be entered at the same time. But it’s not true!
In fact, you’re missing out on a huge advantage of iron condors by doing this. Though, you must be careful when entering both ends at the same time. If you’re wrong, you can be caught flatfooted if you aren’t trained to manage your iron condor on-the-fly.
This article is not intended or considered to be investment advice and you should seek Professional Advice to consider if this type of investment fits with your investment strategy.
Used correctly, iron condors can increase your profit potential exponentially while also reducing your risk significantly. Our Elite Legacy Education trainers will introduce you to options basics and explain how you can control a stock for a fraction of its price, profit from stock you don't own, and make money when the price of a stock is barely moving at all.
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