What is an Iron Condor?

An iron condor is a type of options trading strategy (Delta neutral strategy) where you combine options contracts (Calls and Puts) into one position. The name comes from the shape it makes on a profit/loss graph. As you can see below it has a maximum profit (limited profit potential) and loss (a maximum risk). 

The is one of the most used options strategies and is often used in the stock market and the potential profits are equal to the maximum credit received when selling each Vertical Spread (Call and Put).

A variation of this strategy is called the iron butterfly because it resembles the wings of a butterfly and where the short option's strike prices are equal to both Call and Put Vertical spreads.

I have also developed a blog article on how to safely trade this options strategy. Better to read it before you start trading Iron Condors. I am trading this strategy in a different way using my own developed techniques: The Pro Iron Condor.

 

An iron condor position is a type of options trading strategy where you sell a bear Call Spread and sell a bull Put Vertical spread. You do this because it allows you to profit from both a large gain and loss in the underlying asset. This strategy is a limited risk of the fact that there is no way of guaranteeing that all options will end up being worth nothing (this means options prices at expiration will be null - as all the options involved are out-of-the-money). There is also no way to know how much each strike price will move relative to the next closest strike price. However, if the underlying stock price movement is between the middle two strikes, you make money. This is the maximum profit potential.

You should also consider the breakeven prices that are midpoints of each short vertical, as seen in the picture below. 

 

Iron Condor payoff diagram:

 

The term "iron condor" refers to a strategy where you buy stocks during a bull run and sell them during a bearish period. This is similar to shorting stocks, except it doesn't involve borrowing money. Instead, you use borrowed shares to make bets against the stock price. If the stock goes up, you profit; if it falls, you lose less than what you paid for the shares.

In theory, this sounds like a good idea. But there are risks involved. For example, if the stock drops too far, you could end up losing everything. And even though the strategy isn't technically illegal, some brokers won't allow it because they don't want to risk being sued.

 

The max profit of an Iron Condor is the total amount of the credit received when selling each Vertical Spread. Tighter Iron Condors will have higher credit.

The width of the largest spread (if spread widths are different), less credit received is the max loss. Since we are collecting a credit up front and we want our options to expire worthless, we are betting against the underlying current price moving past either spread by the expiration of our contracts.

 

The iron condor and iron butterfly both use options trading, but they differ in how they approach it. An iron condor strategy involves buying one option and selling another, whereas an iron butterfly strategy buys one option and sells another simultaneously. In both cases, the goal is to make money off small moves in the underlying stock price. But what makes the iron condor different from the iron butterfly? Let’s take a look.

Both strategies offer protection against big movements in either direction, but because the Iron Condor has a wider range of potential outcomes, it may have a higher probability of profit. The Maximum Profit is higher but at a lower probability (peak).

Iron butterfly and iron condor are trading strategies that are very similar in that they both involve selling Credit Spreads. There is risk associated with these types of trades because you don't know what to where the current price of the underlying will do in the future. You could buy Apple today and it could go down tomorrow. This makes it hard to predict where the underlying securities will end up.

Both strategies are credit-based, which means you pay a premium to enter the trade. If you want to use one of these strategies, you must understand how margin works. Margin allows traders to borrow funds against their account balance. When you open a position, you are required to put up collateral. Once the position reaches a certain size, you'll be required to deposit additional funds into your account.

The Greeks for both strategies are delta neutral, long theta, short vega, and short gamma.

An iron butterfly gives you protection against losses while giving you the potential to make more profit than an iron condor strategy, although at a lower probability. 

The key difference between an iron butterfly and an iron condor is that the former protects against losses while the latter does not when positioned correctly. If the stock price goes up, the condor loses money. But the butterfly doesn't care about whether the stock price rises or falls. Instead, it just makes sure that you don't lose money. This is valid if it is not taken into expiration in case the market price moves far from the short options. 

In terms of profitability, an iron butterfly is always worth less than an iron condor because. However, the butterfly is still profitable because it gives you protection against losses.

If the market moves down, both contracts lose value, but the iron butterfly loses less value than the iron condor.

 
Time decay (measured by Theta) occurs when prices move towards the strike price. In an iron condor, the trader makes money from time decay.

Iron condor spreads profits from time erosion. In an iron condor spread, you purchase one contract of the long position and simultaneously sell one contract of the short position. Both contracts expire at the same time, meaning both positions lose value over time. However, since the short position loses value faster than the long position, you make money from the difference in values.

 

How to adjust Iron Condors when the price moves against

Iron Condor is an option strategy that involves open positions in stocks that are expected to not change too much their current stock price in the next few days, weeks, months, etc. 

The problem with iron condors is that they can become very expensive. To avoid losing too much money, you need to know how to adjust your positions when the market moves against you. This is where the concept of volatility trading comes into play. Volatility refers to the degree of change in prices over a given period of time. Some assets move less than others. For example, the S&P 500 Index might fluctuate by 0.5% each day while gold changes by about 2%.

 

Below you have 4 adjustment strategies that are possible:

1. Roll Up Put Vertical Spread after stock goes up (and Roll up Call Vertical spread, too);

2. Roll Forward (in time) both Put and Call Vertical Spreads to capture more premium;

3. Change the width (difference between strikes) of one side to deliver an unbalanced Iron Condor;

4. Add more contracts on one side (Call or Put) to create an unbalanced Iron Condor.

Iron Condors are an easy and convenient way to make money trading options. But consistent performance is key to building a profitable strategy. I can show you in my Pro Iron Condor strategy course how to master this strategy. You'll learn about a different way to manage and the best environment to open Iron Condor trades.

 

Iron Condors are a type Credit Spread strategy that uses options to generate income while having a limited risk (or having a maximum risk), but also limited profit. This strategy is based on the idea that there is a difference between volatility and price movements and it is expected the current stock price will not move too much. Volatility refers to how much the underlying asset fluctuates over a given period of time. Price movement, however, refers to the actual change in the value of the security over a given period of time.

The key to success with Iron Condors is identifying those stocks that move less often than others. When one stock moves up or down, it tends to affect the entire index. If you find a stock whose price changes very little compared to the rest of the index, you can use that stock as a base to trade the index. A rise in Volatility will hurt the structure because this is a Vega positive strategy.

To identify potential candidates for an iron condor, look for stocks that have higher implied volatility. These will give you an edge regarding Implied Volatility as it tends to come back to its average. 

To identify potential candidates for an iron condor, look for stocks that have higher implied volatility. These will give you an edge.

Do not trade Iron Condors without reading this article.