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Iron condor: The safe trading strategy

An iron condor is one of the most popular trading strategies because it is less risky. Though one cannot expect higher profits compared to riskier trading options, one does not have to expect a great loss either.

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An iron condor is a type of option trading strategy with four different contracts—selling two options and buying two options—but works as a single trade. It involves two put spreads (bear) and two call spreads (bull). It is typically traded as out-of-the-money options because they have lower premiums compared to at-the-money options. There are different variations as to one person want to trade this. You can mix at-the-money options with out-of-the-money options.

This would work in your favor if the specific stock you traded maintain its price in a certain range before all the option expires. The expiration dates may vary—you could choose to expire the trade in a matter of days, or you could choose even a month or two. But the longer the expiration date is, the higher the value of the trade. This is considered as a neutral trade, as you are rooting for the stock to be neither bullish nor bearish.

Trading iron condor could be perfect for new or under-capitalized traders as it does not require a high capital.

How an iron condor trading works

Iron condor trading starts by selling to open out-of-the-money put and selling to open out-of-the-money call. The put option is the stock price lower than the current market price of the stock, while the call option is the stock price higher than the current price of the stock. Both should have the same expiration date. You would want the stock price to stay within the strikes of the put and call you are selling.

For the second part, you would have to buy an open out-of-the-money put and call. Just remember that the put and call spreads should have an equal width. For instance, you are selling 55 puts and buying 65 puts, both for a certain price. The call that you are selling could be anywhere above the current stock price, which is at 75, for example. You could sell 85 puts for a specific cost. In order to match the put spread, you should buy 95 calls for a definite value. This creates a safety window for you, as for the example mentioned, the put and call options are 10 points apart.

iron condor trading

Wider strike prices could point traders to a higher profit. (Source)

Risk

Though the spreads should be equal, it does not entirely mean that the strikes you are selling should remain the same. You could go for wider strike prices as this could mean higher credit (higher profit). But this could also indicate an increase in the maximum potential loss. But the good thing is that no matter how far the prices go out of your safe range, you would always have the same amount of potential loss. In the end, it is still less risky than other types of trading.

Reward

The trader could earn the maximum profit if the price of the stock remained within the range of the call and put that you are selling. The maximum profit you could get is the net credit you received when you get into the trade—the price of the put and the call you sold.

With the ongoing tariff war between two of the biggest economies in the world, you could say that stock trading is in a volatile position. But with an option strategy like an iron condor, you could still utilize trading to earn more profits.

Arturo Garcia is a Peruvian-Filipino financial journalist. He is a self-confessed football fan. He started out as a political writer for a local daily in Peru, but now focuses on tech and business. Arturo studied Economics at Unibersidad de Lima and currently lives at an apartment in Salinas Valley, Northern California, exactly 725 meters from John Steinbeck’s hometown.

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